<PAGE>
FORM 10-Q
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, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ___ to ___
Commission file number 1-4881
AVON PRODUCTS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-0544597
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1345 Avenue of the Americas, New York, N.Y. 10105-0196
-------------------------------------------------------
(Address of principal executive offices)
(212) 282-5000
-----------------
(Telephone Number)
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 ___
The number of shares of Common Stock (par value $.25) outstanding at
July 31, 1998 was 131,688,894.
<PAGE>2
Table of Contents
Part I. Financial Information
Page
Numbers
-------
Item 1. Financial Statements
Consolidated Statement of Operations
Three Months Ended June 30, 1998 and
June 30, 1997............................................ 3
Six Months Ended June 30, 1998 and
June 30, 1997............................................ 4
Consolidated Balance Sheet
June 30, 1998 and December 31, 1997 ...................... 5
Consolidated Statement of Cash Flows
Six Months Ended June 30, 1998 and
June 30, 1997........................................... 6
Notes to Consolidated Financial Statements.................. 7-12
Item 2. Management's Discussion and Analysis of the
Results of Operations and Financial Condition............. 13-24
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.......................... 25
Signatures......................................................... 26
2
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PART I. FINANCIAL INFORMATION
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In millions, except per share data)
Three months ended
June 30
------------------
1998 1997
---- ----
(unaudited)
Net sales........................................... $1,247.2 $1,225.0
Costs, expenses and other:
Cost of sales....................................... 465.6 476.1
Marketing, distribution and
administrative expenses........................... 603.0 591.9
Interest expense.................................... 9.9 10.8
Interest income..................................... (5.9) (3.1)
Other expense (income), net......................... 1.0 (1.2)
-------- --------
Total costs, expenses and other..................... 1,073.6 1,074.5
-------- --------
Income before taxes and minority interest........... 173.6 150.5
Income taxes........................................ 63.9 55.7
-------- --------
Income before minority interest..................... 109.7 94.8
Minority interest................................... 1.7 .4
-------- --------
Net income.......................................... $ 111.4 $ 95.2
======== ========
Earnings per share:
Basic ........................................... $ .85 $ .72
======== ========
Diluted.......................................... $ .84 $ .71
======== ========
See Note 10 for information on effective stock split.
The accompanying notes are an integral part of these statements.
3
<PAGE>4
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In millions, except per share data)
Six months ended
June 30
----------------
1998 1997
---- ----
(unaudited)
Net sales........................................... $2,430.6 $2,312.6
Costs, expenses and other:
Cost of sales....................................... 968.7 917.7
Marketing, distribution and
administrative expenses........................... 1,229.1 1,164.8
Special charge...................................... 70.5 -
Interest expense.................................... 19.4 20.4
Interest income..................................... (8.2) (5.4)
Other expense, net.................................. 4.1 1.6
-------- --------
Total costs, expenses and other..................... 2,283.6 2,099.1
-------- --------
Income before taxes and minority interest........... 147.0 213.5
Income taxes........................................ 70.0 79.0
-------- --------
Income before minority interest..................... 77.0 134.5
Minority interest................................... 3.4 2.0
-------- --------
Net income.......................................... $ 80.4 $ 136.5
======== ========
Earnings per share:
Basic ........................................... $ .61 $ 1.03
======== ========
Diluted.......................................... $ .60 $ 1.02
======== ========
See Note 10 for information on effective stock split.
The accompanying notes are an integral part of these statements.
4
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AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
(In millions)
June 30 December 31
1998 1997
---- ----
(unaudited)
ASSETS
Current assets:
Cash and equivalents............................. $ 88.0 $ 141.9
Accounts receivable.............................. 468.1 444.8
Inventories...................................... 588.3 564.8
Prepaid expenses and other....................... 218.5 192.5
-------- --------
Total current assets............................. 1,362.9 1,344.0
-------- --------
Property, plant and equipment, at cost............. 1,303.0 1,281.6
Less accumulated depreciation.................... 699.9 670.6
-------- --------
603.1 611.0
-------- --------
Other assets..................................... 363.7 317.9
-------- --------
Total assets..................................... $2,329.7 $2,272.9
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Debt maturing within one year.................... $ 238.2 $ 132.1
Accounts payable................................. 341.3 476.0
Accrued compensation............................. 122.9 111.3
Other accrued liabilities........................ 301.0 268.9
Sales and other taxes............................ 98.7 101.0
Income taxes..................................... 263.7 266.6
-------- --------
Total current liabilities........................ 1,365.8 1,355.9
-------- --------
Long-term debt................................... 201.3 102.2
Employee benefit plans........................... 378.6 367.6
Deferred income taxes............................ 28.9 31.2
Other liabilities................................ 128.0 131.0
Shareholders' equity:
Common stock..................................... 43.8 43.7
Additional paid-in capital....................... 750.1 733.1
Retained earnings................................ 651.7 660.9
Accumulated comprehensive income................. (288.0) (270.3)
Treasury stock, at cost.......................... (930.5) (882.4)
-------- --------
Total shareholders' equity....................... 227.1 285.0
-------- --------
Total liabilities and shareholders' equity....... $2,329.7 $2,272.9
======== ========
See Note 10 for information on effective stock split.
The accompanying notes are an integral part of these statements.
5
<PAGE>6
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
Six months ended
June 30
------------------
1998 1997
---- ----
(unaudited)
Cash flows from operating activities:
Net income............................................. $ 80.4 $136.5
Adjustments to reconcile net income to net cash
used by operating activities:
Special and non-recurring charges....................... 81.9 --
Depreciation and amortization........................... 34.0 33.5
Provision for doubtful accounts......................... 43.0 38.0
Translation (gains) losses.............................. (.4) .6
Deferred income taxes................................... (11.0) (13.6)
Other................................................... 2.5 5.4
Changes in assets and liabilities:
Accounts receivable................................... (79.7) (53.6)
Inventories........................................... (75.5) (88.6)
Prepaid expenses and other............................ (19.8) (19.2)
Accounts payable and accrued liabilities.............. (107.1) (142.8)
Income and other taxes................................ (1.1) (13.7)
Noncurrent assets and liabilities..................... (13.3) (9.1)
------ ------
Net cash used by operating activities................... (66.1) (126.6)
------ ------
Cash flows from investing activities:
Capital expenditures.................................... (73.8) (74.6)
Disposal of assets...................................... 5.8 2.8
Other investing activities.............................. (.4) (8.0)
------ ------
Net cash used by investing activities................... (68.4) (79.8)
------ ------
Cash flows from financing activities:
Cash dividends.......................................... (91.0) (84.9)
Debt, net (maturities of three months or less).......... 163.9 290.6
Proceeds from short-term debt........................... 46.7 -
Retirement of short-term debt........................... (103.6) (12.5)
Proceeds from long-term debt............................ 100.0 -
Retirement of long-term debt............................ (.4) (.5)
Repurchase of common stock.............................. (48.7) (62.6)
Proceeds from exercise of stock options................. 12.3 18.0
------ ------
Net cash provided by financing activities............... 79.2 148.1
------ ------
Effect of exchange rate changes on cash and equivalents. 1.4 (9.8)
------ ------
Net decrease in cash and equivalents.................... (53.9) (68.1)
Cash and equivalents beginning of period................ 141.9 184.5
------ ------
Cash and equivalents end of period...................... $ 88.0 $116.4
====== ======
The accompanying notes are an integral part of these statements.
6
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AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
1. ACCOUNTING POLICIES
The accompanying Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
contained in Avon's 1997 Annual Report to Shareholders. The interim statements
are unaudited but include all adjustments, which consisted of only normal
recurring accruals, 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.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("FAS") No. 130 "Reporting Comprehensive Income." FAS
No. 130 requires disclosure of comprehensive income in interim periods and
additional disclosures of the components of comprehensive income on an annual
basis. Comprehensive income includes all changes in equity during a period
except those resulting from investments by and distributions to the Company's
stockholders. The components of comprehensive income are included in Note 7.
Effective January 1, 1998, the Company adopted AICPA Statement of
Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP No. 98-1 requires certain costs
in connection with developing or obtaining internal-use software to be
capitalized that previously would have been expensed as incurred. The
adoption of SOP No. 98-1 did not have a material impact on the Company's
results of operation, financial position, or cash flows.
In June 1998, the Financial Accounting Standards Board issued FAS No.
133, Accounting for Derivative Instruments and Hedging Activities. FAS No.
133 is effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999 (January 1, 2000 for the Company). FAS No. 133 requires that
all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction. For fair-value hedge
transactions in which the Company is hedging changes in the fair value of an
asset, liability, or firm commitment, changes in the fair value of the
derivative instrument are included in the income statement along with the
offsetting changes in the hedged item's fair value. For cash-flow hedge
transactions, in which the Company is hedging the variability of cash flows
related to a variable-rate asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be reported in
other comprehensive income. The gains and losses on the derivative instrument
that are reported in other comprehensive income will be reclassified to
earnings in the periods in which earnings are impacted by the variability of
the cash flows of the hedged item. The ineffective portion of all of the
hedges will be recognized in current-period earnings. The Company has not yet
determined the impact that the adoption of FAS No. 133 will have on its
earnings or statement of financial position.
7
<PAGE>8
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
2. INFORMATION RELATING TO THE STATEMENT OF CASH FLOWS
"Net cash used by operating activities" includes the following cash
payments for interest and income taxes:
Six months ended
June 30
------------------
1998 1997
---- ----
Interest............................................ $18.9 $14.1
Income taxes, net of refunds received............... 82.0 95.2
3. EARNINGS PER SHARE
Basic earnings per share ("EPS") are computed by dividing net income by
the weighted-average number of shares outstanding during the year. Diluted
earnings per share are calculated to give effect to all potentially dilutive
common shares that were outstanding during the year.
For the three and six months ended June 30, 1998 and 1997, the number of
shares used in the computation of basic and diluted earnings per share are as
follows:
Three Months ended Six Months ended
June 30 June 30
------------------ ----------------
1998 1997 1998 1997
------ ------ ------ ------
Basic EPS 131.78 132.26 131.78 132.57
Weighted-average shares
Incremental shares from
conversion of:
Stock options 1.58 1.14 1.38 1.18
------ ------ ------ ------
Diluted EPS
Adjusted weighted-
average shares 133.36 133.40 133.16 133.75
During the first six months of 1998, the Company purchased 716,169 shares of
common stock for $48.7 compared to approximately 1,100,000 shares purchased
for $62.6 during the first six months of 1997. The cumulative number of
shares repurchased under the three-year stock repurchase program which ended
in February 1997 was approximately 12,664,000 shares for a total cost of
approximately $424.4. Under a new repurchase program, which began in February
1997, the Company repurchased approximately 2,555,000 shares
8
<PAGE>9
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
at a total cost of approximately $158.1 as of June 30, 1998. Under this new
program, the Company may buy back up to $500.0 of its currently outstanding
common stock through open market purchases over a period of up to three to
five years.
4. INVENTORIES
June 30 December 31
1998 1997
---- ----
Raw materials................ $155.6 $147.4
Finished goods............... 432.7 417.4
------ ------
$588.3 $564.8
5. DIVIDENDS
Cash dividends paid per share of common stock were $.34 and $.68 for the
three and six months ended June 30, 1998, respectively, and $.315 and $.63 for
the corresponding 1997 period. On February 17, 1998, the Company increased
the annual dividend rate to $1.36 from $1.26.
6. CONTINGENCIES
Various lawsuits and claims (asserted and unasserted), arising in the
ordinary course of business or related to businesses previously sold, are
pending or threatened against Avon.
In 1991, a class action suit was initiated against Avon on behalf of
certain classes of holders of Avon's Preferred Equity-Redemption Cumulative
Stock ("PERCS"). This lawsuit alleges various contract and securities law
claims relating to the PERCS (which were fully redeemed that year). Avon has
rejected the assertions in this case, believes it has meritorious defenses to
the claims and is vigorously contesting this lawsuit.
In the opinion of Avon's management, based on its review of the
information available at this time, the difference, if any, between the total
cost of resolving such contingencies and reserves recorded by Avon at June 30,
1998 should not have a material adverse impact on Avon's consolidated
financial position, results of operations, or cash flows.
9
<PAGE>10
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
7. COMPREHENSIVE INCOME
For the three and six months ended June 30, 1998 and 1997, the components
of comprehensive income are, as follows:
Three Months ended Six Months ended
June 30 June 30
------------------ ----------------
1998 1997 1998 1997
------ ----- ------ ------
Net income $111.4 $95.2 $80.4 $136.5
Other comprehensive (loss)
income:
Change in equity due to
foreign currency
translation and
transaction adjustments (13.8) .3 (17.7) (9.5)
------ ----- ------ ------
Comprehensive income $ 97.6 $95.5 $62.7 $127.0
8. SPECIAL AND NON-RECURRING CHARGES
In October 1997, the Company announced a worldwide re-engineering program
in order to streamline operations and improve profitability, through gross
margin improvement and expense reductions. The one-time charges associated
with this program totaled $108.4 pretax ($84.2 net of tax, or $.64 per share
on a basic and diluted basis) for the six months ended June 30, 1998.
10
<PAGE>11
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
Special and non-recurring charges by category of expenditures are, as follows:
Special Cost of Sales
Charge Charge Total
------- ------------- -----
Employee severance costs $51.0 $ 51.0
Inventories $37.9 37.9
Write-down of assets to net
realizable value 10.9 10.9
Other 8.6 8.6
----- ----- ------
$70.5 $37.9 $108.4
The write-down of assets relates to the closure of a Far East buying
office and manufacturing facilities in Puerto Rico and the Dominican Republic.
Additionally, as a result of on-going government restrictions, the Company has
decided to close certain branches and a regional office in China.
Inventory-related charges represent losses to write-down the carrying value
of non-strategic inventory, prior to disposal. The charge relates to the
closure of facilities, discontinuation of certain product lines, size-of-line
reductions and a change in strategy for product dispositions.
Employee severance costs are expenses, both domestic and international,
associated with the realignment of the Company's global operations. The
workforce will be reduced by approximately 2,200 employees, or 6% of the
total. Approximately one-half of the employees to be terminated relate to the
facility closures.
The liability balance at June 30, 1998 is as follows:
Special Cost of
Charge Sales Charge Total
------ ------------ -----
Provision $ 70.5 $37.9 $108.4
Cash Expenditures (26.5) (26.5)
Non-cash write-offs (12.4) (37.9) (50.3)
------ ----- ------
Balance at June 30, 1998 $ 31.6 - $ 31.6
The balance at June 30, 1998 relates primarily to employee severance costs
that will be paid during 1998 and 1999.
The Company expects to record additional charges in 1998 and early 1999 as
additional plans are finalized.
9. DEBT AND OTHER FINANCING ACTIVITIES
In May 1998, Avon issued $100.0 of bonds imbedded with option features
(the "bonds") for which the net proceeds were used to pay down commercial
paper borrowings. The bonds have a twenty-year maturity; however, after five
years, the bonds can be sold back to the Company at par or can be called at
11
<PAGE>12
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
par by the underwriter and resold to investors as fifteen-year debt. The
coupon rate on the bonds is 6.25% for the first five years, but will be
refinanced at market rates if the bonds are called in year five.
In connection with the bond issuance, Avon entered into a five-year
interest rate swap contract with a notional amount of $50.0 to effectively
convert fixed interest on a portion of the bonds to a variable interest rate,
based on LIBOR.
At June 30, 1998, the Company has entered into forward and option
contracts to purchase approximately 1,000,000 shares of Avon common stock at
an average rate of $75.57 as of June 30, 1998. The contracts mature over the
next three years and provide for share settlement to the Company.
Accordingly, no adjustment for subsequent changes in fair value has been
recognized.
10. SUBSEQUENT EVENTS
On July 22, 1998, the Company declared a two-for-one stock split in the
form of a 100% stock dividend to be issued to shareholders of record as of the
close of business on August 24, 1998. New stock certificates are expected to
be mailed to shareholders on or about September 11, 1998. No share or per
share data included in this report has been restated to reflect the stock
split.
Also, on July 22, 1998, the Company authorized an increase of $600.0 for
its current share repurchase program.
12
<PAGE>13
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
ITEM 2. Management's Discussion and Analysis of the Results of Operations
and Financial Condition
Results of Operations--Three Months Ended June 30, 1998 and 1997.
Consolidated
Avon's net income for the three months ended June 30, 1998 was $111.4, or
$.85 and $.84 per share on a basic and diluted basis, respectively, compared
with net income of $95.2, or $.72 and $.71 per share on a basic and diluted
basis, respectively, in 1997. Pretax income of $173.6 increased 15% due to
sales growth, a gross margin improvement and favorable net interest. In
addition, the increase in net income reflects a more favorable minority
interest impact in 1998 due mainly to the results in China.
Consolidated net sales for the three months ended June 30, 1998 of
$1,247.2 increased $22.2, or 2%, over the comparable period of the prior year.
The increase in sales was due to a 5% increase in U.S sales. International
sales were level with the prior year. Sales improvements in nearly all major
markets in the Americas and in Russia and Central Europe were offset by
declines in the Pacific region, primarily in Japan and China. Excluding the
impact of foreign currency exchange, consolidated net sales rose 8% over the
comparable period of the prior year.
Cost of sales as a percentage of net sales was 37.3% in the second
quarter of 1998 compared to 38.9% in the second quarter of 1997. The increase
in the gross margin of 1.6 points resulted from higher margins in the U.S.,
several major markets in the Americas, most significantly Brazil, the United
Kingdom, Philippines and Japan. The gross margin improvement in the U.S. was
attributable to a combination of continuing cost improvements, pricing
increases and reduced clearance activities. Brazil's gross margin improved
due to better vendor negotiations and cost reduction programs. A shift in
sales mix to higher-margin items resulted in improved margins in the United
Kingdom and Mexico while Venezuela's margin improvement resulted primarily
from improved pricing in their fashion business as well as business process
redesign efforts. In Japan, the higher gross margin resulted from product
cost savings initiatives in cosmetics, fragrance and toiletries ("CFT") as
well as strategic price increases. These improvements were partially offset
by a margin decline in China due to the temporary shut-down of operations for
much of the quarter.
13
<PAGE>14
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Marketing, distribution and administrative expenses of $603.0 increased
$11.1, or 2%, over the comparable period of 1997 and remained level as a
percentage of net sales at 48.3%. The increase in operating expenses was
primarily in the U.S. and Brazil due mainly to sales growth as well as
increased advertising and recognition expenses in Brazil. These increases were
partially offset by lower expenses in the Pacific primarily due to lower sales
and the impact of currency devaluations. Expense ratio improvements in Japan
and Germany due to ongoing expense reduction efforts, and in Brazil due to the
strong sales growth were offset by declines in Mexico which had higher
marketing expenses, including incentive programs. Increased advertising
efforts in Mexico have been focused on technologically advanced products and
corporate image. In addition, the expense ratio increased in Venezuela due to
higher administrative expenses as a result of the implementation of a new
labor law.
Interest expense of $9.9 decreased $.9 versus the comparable period of
1997 due to lower average domestic working capital borrowings.
Interest income of $5.9 increased $2.8 over the comparable period of 1997
primarily due to a Mexico tax refund claim.
Other expense (income), net, of $1.0 was $2.2 unfavorable to the
comparable period of last year primarily due to higher corporate non-operating
expenses.
U.S.
Net sales increased 5% and pretax income increased 14% compared with the
second quarter of 1997. A 4% increase in the average order size combined with
a 1% increase in the number of active Representatives contributed to the sales
increase. The sales increase resulted from increases in CFT, apparel, fashion
jewelry and accessories and home entertainment categories, partially offset by
a decline in the gift and decorative category. The continued growth of the
Avon Techniques hair care line launched in the third quarter of 1997, sales
increases in the Skin-So-Soft lines including Soft & Sensual and Suncare Plus
and growth in the Specialty Bath segment due to the launch of Naturals
Waterflowers contributed to the CFT improvement. Apparel sales were up
significantly reflecting increased sales of demonstration products and strong
performances of children's Barbie dress and accessories, ladies Pooh polo and
non-designer casual wear including the Exotic Island dress and sandal. The
growth in fashion jewelry and accessories reflects the success of the licensed
sport watches and higher sales of home entertainment products resulted
primarily from an additional three pages in the core brochure in 1998 and the
introduction of the Inspirational Treasures catalog. These improvements were
partially offset by the discontinuance of the Avon Home business.
14
<PAGE>15
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Pretax income increased 14% due to the improved sales and a favorable
gross margin driven by a combination of cost improvements, revised pricing
strategies and reduced clearance activity.
International
Net sales were level with the comparable period of 1997 and pretax income
increased 11%. Excluding the effect of foreign currency exchange, net sales
were up 9%.
The sales increase reflects growth in the Americas and Europe regions
partially offset by declines in the Pacific region. Sales growth in the
Americas was highlighted by significant increases in Brazil, and, to a lesser
extent, in Argentina, Puerto Rico and Mexico with these countries showing
strong growth in active Representatives. Brazil's strong sales growth was
driven by attractive pricing and successful new product launches supported by
improved customer service and product quality. In Europe, Russia and the
Central European markets reported strong sales increases highlighted by
continued double-digit growth in the number of active Representatives, units
and orders.
These higher sales were offset by sales declines in most major markets in
the Pacific caused by the continuing Asian currency and economic crisis. In
addition, governmental restrictions placed on all direct sellers in China
resulted in the shut-down of the Company's sales operations for most of the
quarter. Excluding China, local currency sales in the Pacific region would
have been about even with the prior year. The Philippines and Taiwan reported
strong increases in key business indicators, including customers served and
active Representatives during the quarter.
As of the beginning of June, the Company received Chinese governmental
approval to resume operations as a wholesale and retail business and became
operational again on June 15, 1998.
15
<PAGE>16
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
The 11% increase in pretax income primarily reflects increases in Brazil,
the United Kingdom and Japan as well as the countries in Central Europe. The
increase in Brazil resulted from the significant sales increase and a strong
gross margin improvement. Ongoing expense reduction programs and a shift in
the category mix towards higher margin products contributed to the pretax
income growth in the United Kingdom. The success of the Central European
markets is a direct result of the increasing size of the sales force and
operating margin improvements. Despite a weakening economy, Japan posted
margin and profit improvements as compared to 1997 resulting from cost
reduction strategies and business process redesign efforts. These results
were partially offset by the operational difficulties in China.
Results of Operations - Six Months Ended June 30, 1998 and 1997
Consolidated
Avon's net income for the six months ended June 30, 1998 of $80.4, or
$.61 and $.60 per share on a basic and diluted basis, respectively, decreased
41% from net income of $136.5, or $1.03 and $1.02 per share on a basic and
diluted basis, respectively, in 1997. Pretax income of $147.0 decreased 31%
from the prior year. Special and non-recurring charges were recorded in the
first quarter of 1998 for the Company's previously announced business process
redesign program. These charges totaled $108.4 pretax, which reduced net
income by $84.2 after tax, or $.64 per share on a basic and diluted basis.
The special charge of $70.5 is primarily related to employee severance
benefits as well as facility rationalizations in Puerto Rico, Dominican
Republic and China. In addition, $37.9 was charged to cost of sales for
inventory write-downs. The one-time charges represent the first part of an
estimated $200.0 total charge that will help the Company deliver the higher
sales and profit targets previously communicated. Before the charges, net
income for the six months ended June 30, 1998 of $164.6, or $1.25 and $1.24
per share on a basic and diluted basis, respectively, increased 21% and 22%,
respectively, from the comparable period in 1997. Pretax income, before the
charges, of $255.4 increased 20% over 1997 due to higher sales, an improved
gross margin and favorable net interest partially offset by a slightly higher
operating expense ratio and higher corporate non-operating expenses in 1998.
16
<PAGE>17
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Consolidated net sales for the six months ended June 30, 1998 of $2,430.6
increased $118.0, or 5%, over the comparable period of the prior year. The
increase in sales was due to a 5% increase in international and a 5% increase
in U.S. sales. The international sales improvement resulted from strong
growth in all major markets in the Americas, most significantly in Brazil,
Argentina and Mexico, as well as Russia, the United Kingdom and the Central
European Markets. These improvements were partially offset by sales declines
throughout the Pacific Region, most significantly in the Philippines, Japan
and China. Excluding the impact of foreign currency exchange, consolidated
net sales rose 12% over the comparable period of the prior year.
Cost of sales as a percentage of net sales was 39.9% in the first half of
1998 compared to 39.7% in the first half of 1997. Excluding the one-time
charge of $37.9, cost of sales as a percentage of sales was 38.3%. The
increase in the gross margin of 1.4 points resulted from higher margins in all
major markets in the Americas, most significantly in Brazil, the latter due to
actions taken to reduce inventory levels which had an unfavorable impact on
margins in 1997, and, to a lesser extent, in Mexico due to increased CFT sales
with higher margins. Venezuela's gross margin improved significantly as a
result of pricing strategies and business redesign efforts. The United
Kingdom and Germany reported strong margin improvements primarily as a result
of a shift in mix to selling higher margin products. The U.S. also reported a
favorable gross margin as compared to 1997 attributable to pricing strategies,
cost improvements and reduced clearance activity in the non-CFT categories.
These improvements were partially offset by margin declines in China due to
operational difficulties in 1998.
Marketing, distribution and administrative expenses of $1,229.1 increased
$64.3, or 6%, over the comparable period of 1997 and increased as a percentage
of net sales to 50.6% from 50.4%. The increase in operating expenses was
primarily in markets which have experienced strong sales growth, including all
major markets in the Americas, U.S. and Russia. These increases were
partially offset by lower expenses in the Pacific primarily due to lower sales
and the impact of currency devaluations. The overall increase in the expense
ratio was primarily due to higher expenses ratios in Mexico due to increased
marketing and promotional expenses associated with new product launches and in
Venezuela due to increased administrative expenses as a result of the
implementation of a new labor law. These increases were partially offset by
improvements throughout Europe and in Japan due to a continued active focus on
reducing operating expenses.
Interest expense of $19.4 decreased $1.0 from the comparable period of
1997 due to lower working capital borrowings in the U.S.
17
<PAGE>18
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Interest income of $8.2 increased $2.8 versus the comparable period of
1997 primarily due to a Mexico tax refund claim.
Other expense, net of $4.1, was $2.5 unfavorable to the comparable period
of last year primarily due to non-recurring corporate expenses.
Excluding the charges, the effective tax rate was 36.9% in the first half
of 1998 compared to 37.0% in 1997. The tax benefit on the one-time charges
was 22.3% due to the mix of countries and tax jurisdictions incurring the
charges.
U.S.
Net sales increased 5% and pretax income decreased 25% compared with the
first half of 1997. A 3% increase in the average order size along with a 2%
increase in the number of active Representatives contributed to the sales
increase. The sales increase resulted from increases in CFT, fashion jewelry
and accessories, apparel and home entertainment categories partially offset by
a decline in the gift and decorative category. The increase in the CFT
category was mainly due to the successful launch of the Diane Von Furstenburg
fragrance, Forest Lily, and the Far Away and Rare Gold gift with purchase
event, coupled with the successful launch of Avon's transfer resistant
technology lipstick and Avon Color's Spring Shade Collection. In addition,
the continued growth of the Avon Techniques hair care line and significant
increases in the Skin-So-Soft lines contributed to the CFT growth.
Accessories showed strong performance with the licensed Winnie the Pooh
carryalls and licensed Pooh and sports watches. Higher sales in the apparel
and home entertainment categories were primarily driven by an increase in the
sales of demonstration products purchased by Representatives, as well as the
launch of a collection of inspirational and religious products, children's
Barbie dress and accessories and non-designer casual wear. These increases
were partially offset by a decline in the gift and decorative category
primarily attributable to the phasing out of the Avon Home line and softer
Easter and Barbie sales.
Excluding the one-time charges, pretax income increased 13% due to the
improved sales and a favorable gross margin primarily driven by cost
improvements, revised pricing strategies and reduced clearance activity.
International
Net sales increased 5%, or 15% excluding the effect of foreign currency
exchange, over the comparable period of 1997 and pretax income decreased 9%.
18
<PAGE>19
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
The sales increase reflects double-digit growth in the Americas and
Europe regions partially offset by declines in the Pacific region. Sales
increases in the Americas were highlighted by significant growth in Brazil,
Argentina and Mexico with these countries showing growth in units, active
Representatives and orders. Mexico's sales increase resulted from the success
of new product launches such as Anew Night Force and Anew All-in-One, as well
as apparel and home line extensions with superior design and promotions.
Brazil's growth in sales was also driven by attractive pricing and successful
new product launches. Growth in units, orders and average order size drove
the sales increase in Argentina. In Europe, sales continued to rise
significantly in Russia due to increases in units, customers served and active
Representatives. Sales grew in the United Kingdom due to a higher average
order size in 1998.
These higher sales were partially offset by sales declines in most major
markets in the Pacific caused by the continuing Asian currency and economic
crisis. After years of strong economic growth throughout the Pacific, the
aftermath of the currency crisis is causing subdued economic growth as markets
struggle to enact economic reform programs. In addition, selling activities
in China were suspended for most of the second quarter of 1998 due to
governmental restrictions on direct-selling companies. Despite the above
difficulties, most markets in the Pacific showed double-digit growth in active
Representatives and strong growth in number of customers served. This is a
result of a strong focus on active recruitment to expand the Representative
base in the Pacific region. Excluding the effect of foreign currency
exchange, sales in the Pacific were up 1%.
Excluding the one-time charges, pretax income increased 22% over the
comparable period of 1997. The 22% increase in pretax income reflects
increases in all major markets in the Americas and Europe, most significantly
in Brazil, Mexico, the United Kingdom and Germany. In addition, while Japan's
sales decreased as compared to 1997, pretax income was significantly higher in
1998. The overall increase in pretax income over the prior year was due to
the sales increases discussed above and strong margin improvements in Brazil,
the United Kingdom, Germany and Mexico, previously discussed. Margins
improved the most significantly in Brazil due to declines in 1997 resulting
from actions taken to reduce inventory combined with cost reduction programs
in 1998. In addition, ongoing expense reductions in Europe contributed to the
increase in pretax income. Despite the weak economic conditions in the
Pacific, Japan's operating margin improved significantly as a result of cost
reduction strategies and business redesign efforts.
19
<PAGE>20
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Liquidity and Capital Resources
Cash Flows
Excluding changes in debt, there was a net decrease in cash of $260.5 in
the first half of 1998 compared with a decrease of $345.7 in the comparable
period of 1997. The $85.2 variance primarily reflects lower net cash used by
operations and investing activities and a more positive effect of foreign
currency exchange. The decrease in cash used by operations reflects the
conclusion of the three-year long term incentive plan which resulted in a cash
payment in the first quarter of 1997 and a higher net income in 1998 (adjusted
for the non-cash portion of the one-time charges). Cash used for investing
activities is lower in 1998 due to the acquisition of Discovery Toys, Inc. in
the first quarter of 1997.
During the first half of 1998, the Company purchased approximately
716,200 shares of common stock for $48.7 compared with $62.6 spent for the
repurchase of approximately 1,100,000 shares during the comparable period in
1997.
Capital Resources
Total debt increased $205.2 to $439.5 from $234.3 at December 31, 1997,
principally due to normal seasonal working capital requirements during the
first half of 1998 and to support the continuing stock buyback program. Total
debt of $439.5 at June 30, 1998 was $39.1 lower than total debt of $478.6 at
June 30, 1997. In addition, at June 30, 1998, and December 31, 1997, other
non-current liabilities include approximately $56.7 and $58.6, respectively,
related to securities lending activities.
At June 30, 1998, there were borrowings of $31.8 under the amended and
restated revolving credit and competitive advance facility agreement. This
agreement is also used to support the Company's commercial paper borrowings of
which $138.7 was outstanding at June 30, 1998.
At June 30, 1998, there were $10.0 of borrowings outstanding under
uncommitted lines of credit and there were no borrowings under the Company's
bankers' acceptance facilities.
In May 1998, Avon issued $100.0 of bonds imbedded with option features
(the "bonds") for which the net proceeds were used to pay down commercial
paper borrowings. The bonds have a twenty-year maturity; however, after five
years, the bonds can be sold back to the Company at par or can be called at
par by the underwriter and resold to investors as fifteen year debt. The
coupon rate on the bonds is 6.25% for the first five years, but will be
refinanced at market rates if the bonds are called in year five.
20
<PAGE>21
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
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.
Working Capital
As of June 30, 1998 and December 31, 1997, current liabilities exceeded
current assets by $2.9 and $11.9, respectively. The decrease of current
liabilities over current assets of $9.0 was mainly due to a decrease in
accounts payable and an increase in accounts receivable, inventories and
prepaids partially offset by an increase in net debt (debt less cash and
equivalents), as discussed in the Debt section.
Although current liabilities exceeded current assets at June 30, 1998,
management believes this is due to the Company's direct selling business
format which results in lower receivable and working capital levels as well as
the Company's practice of repurchasing shares with available cash. Avon's
liquidity results from its ability to generate significant cash flows from
operations and its ample unused borrowing capacity. Actions that would
eliminate the working capital deficit are not anticipated at this time.
Avon's credit agreements do not contain any provisions or requirements with
respect to working capital.
Financial Instruments and Risk Management Strategies
The Company operates globally, with manufacturing and distribution
facilities in various locations around the world. The Company may reduce its
exposure to fluctuations in interest rates and foreign exchange rates by
creating offsetting positions through the use of derivative financial
instruments. The Company currently does not use derivative financial
instruments for trading or speculative purposes, nor is the Company a party to
leveraged derivatives.
The Company periodically uses interest rate swaps to hedge portions of
interest payable on its debt. In addition, the Company may periodically
employ interest rate caps to reduce exposure, if any, to increases in variable
interest rates.
In connection with the bond issuance, as discussed in the Capital
Resources section, Avon entered into a five-year interest rate swap contract
with a notional amount of $50 million to effectively convert fixed interest on
a portion of the bonds to a variable interest rate, based on LIBOR.
21
<PAGE>22
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
The Company may periodically hedge foreign currency royalties, net
investments in foreign subsidiaries, firm purchase commitments and contractual
foreign currency cash flows or obligations, including third-party or
intercompany foreign currency transactions. The Company regularly monitors
its foreign currency exposures and ensures that hedge contract amounts do not
exceed the amounts of the underlying exposures.
At June 30, 1998, the Company held foreign currency forward contracts
with notional amounts totaling $200.5 and option contracts with notional
amounts totaling $64.8 to hedge foreign currency items. These contracts have
maturities in 1999. The Company also entered into certain foreign currency
forward contracts with notional amounts totaling $25.0 and option contracts
with notional amounts of $4.2 to economically hedge certain foreign currency
exposures, which do not qualify as hedging transactions under the current
accounting definitions and, accordingly, have been marked-to-market. The
mark-to-market adjustment on these contracts at June 30, 1998 was
insignificant. The Company's risk of loss on the options in the future is
limited to premiums paid, which are insignificant.
At June 30, 1998, the Company has entered into forward and option
contracts to purchase approximately 1,000,000 shares of Avon common stock at
an average rate of $75.57. The contracts mature over the next three years and
provide for share settlement to the Company. Accordingly, no adjustment for
subsequent changes in fair value has been recognized.
The Company attempts to minimize its credit exposure to counterparties by
entering into interest rate swap and cap contracts only with major
international financial institutions with "A" or higher credit ratings as
issued by Standard & Poor's Corporation. The Company's foreign currency and
interest rate derivatives are comprised of over-the-counter forward contracts
or options with major international financial institutions. Although the
Company's theoretical credit risk is the replacement cost at the then
estimated fair value of these instruments, management believes that the risk
of incurring losses is remote and that such losses, if any, would not be
material.
22
<PAGE>23
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Additional Information
On October 23, 1997, the Company announced that it had raised its long-
term growth targets for sales and earnings and that it expected to record
special charges in connection with a major re-engineering program. Commencing
in 1998, the long-term target for sales growth has been raised to 8-10%
compounded annually, and its target for earnings-per-share growth has been
raised to 16-18% annually. Previously, the Company targeted long-term sales
growth of 6-8% and long-term earnings-per-share growth of 13-15%. The higher
targets come largely as a result of initiatives currently underway and others
under review intended to reduce costs by up to $400.0 per year by 2000, with
$200.0 of the savings being reinvested concurrently in advertising and
marketing programs to boost sales. The Company expects to record special
charges of approximately $200.0 pretax to cover one-time costs associated with
the re-engineering program. In the first quarter of 1998, the Company
recorded $108.4 pretax of such one-time charges ($84.2 after tax, or $.64 per
share on a basic and diluted basis) in connection with the re-engineering
program. Slightly more than half of the total pretax charges in the quarter
were cash related and will be paid in 1998 and 1999. At June 30, 1998, the
remaining liability balance was $31.6 and relates primarily to severance costs
that will be paid during 1998 and 1999. The Company expects to record the
balance of one-time charges in 1998 and early 1999.
On April 21, 1998, the Chinese government issued a directive banning all
direct selling in China resulting in the shut-down of the Company's sales
operations for most of the second quarter. As of the beginning of June, the
Company received Chinese governmental approval to resume operations as a
wholesale and retail business and became operational again on June 15, 1998.
The Company said it intends to convert its approximately 75 branches into
retail outlets to serve customers.
Year 2000
Management has developed a worldwide program to prepare the Company's
computer systems and applications for the Year 2000. Based on a comprehensive
assessment of key systems, the Company has commenced a project plan to address
all necessary code changes, testing and implementation required to ensure Year
2000 compliance by December 31, 1999. Management does not expect the
incremental costs of making the required system modifications to have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
23
<PAGE>24
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this report which are not historical facts or
information are forward-looking statements, including, but not limited to, the
information set forth in "Other Information" herein. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, levels of activity, performance or
achievement of the Company, or industry results, to be materially different
from any future results, levels of activity, performance or achievement
expressed or implied by such forward-looking statements. Such factors
include, among others, the following: general economic and business
conditions; the ability of the Company to implement its business strategy; the
Company's access to financing and its management of foreign currency risks;
the Company's ability to successfully identify new business opportunities; the
Company's ability to attract and retain key executives; the Company's ability
to achieve anticipated cost savings and profitability targets; changes in the
industry; competition; the effect of regulatory and legal restrictions imposed
by foreign governments; the effect of regulatory and legal proceedings and
other factors discussed in Item 1 of the Company's 1997 Form 10-K. As a
result of the foregoing and other factors, no assurance can be given as to the
future results and achievements of the Company. Neither the Company nor any
other person assumes responsibility for the accuracy and completeness of these
statements.
24
<PAGE>25
AVON PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
------ -----------
10.1 --Stock Option Agreement between Avon and Charles
R.Perrin dated June 4, 1998.
10.2 --Stock Option Agreement between Avon and Andrea Jung
dated June 4, 1998.
27 --Financial Data Schedule.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the second quarter of
1998.
25
<PAGE>26
SIGNATURES
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 13, 1998 By /s/ JANICE MAROLDA
-------------------------------
Janice Marolda
Vice President,
Controller
Principal Accounting Officer
Signed both on behalf of the
registrant and as principal
accounting officer.
26
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For Quarter Ended June 30, 1998 Commission file number
1-4881
AVON PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
____________________________
EXHIBITS
<PAGE>
AVON PRODUCTS, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
10.1 --Stock Option Agreement between Avon and Charles R. Perrin dated June
4, 1998.
10.2 --Stock Option Agreement between Avon and Andrea Jung dated June 4,
1998.
27 --Financial Data Schedule.
AVON PRODUCTS, INC.
1993 STOCK INCENTIVE PLAN
STOCK OPTION AGREEMENT
______________________________
DATE OF GRANT: JUNE 4, 1998
1. Grant of Option. Pursuant to the provisions of its 1993 Stock
Incentive Plan (the Plan), Avon Products, Inc. (the Company), on the
above date has granted to Charles R. Perrin (the Optionee) the right
and option to purchase from the Company a total of 75,000 shares of
Common Stock of the Company at the exercise price of $80.3125 per share
(the Option). This Option is subject to the terms and conditions of
the Plan and those set forth in this Agreement. All capitalized terms
used herein shall have the meaning set forth in the Plan, unless the
context requires a different meaning.
2. Exercise of Option
(a) This Option shall be exercisable in full on and after June 4,
2004. It may be exercisable sooner, on and after June 4, 1999, however,
subject to the following conditions:
(i) One-half of the shares subject to the option may be exercisable
subsequent to the date at which the closing price of the
Company's Common Stock, as reported on the New York Stock
Exchange, first exceeds $100 for not less than 20 out of 30
consecutive trading days, and
(ii) All of the shares subject to the option may be exercisable
subsequent to the date at which the closing price of the
Company's Common Stock, as reported in the New York Stock
Exchange, first exceeds $120 for not less than 20 out of 30
consecutive trading days.
The above price targets will be appropriately adjusted to lower
amounts after the effective date of any stock split.
(b) In accordance with the Plan this entire Option shall be
immediately cashed out effective as of the date of any "Change
in Control", regardless of whether or not any portion is otherwise
exercisable. For this purpose, the "Change in Control Price" shall be
the higher of (i) the highest price paid for a share of Stock as reported
on the New York Stock Exchange Composite Tape during the 12 month period
ending with the effective date of Change in Control or (ii) the highest
cash tender offer price for a share of Stock during such period. In the
event that a tender offer for Stock consists of a combination of cash and
securities, the Change in Control Price calculated under (ii) would be
based solely on the cash price equivalent of such offer.
<PAGE>
(c) Shares may be purchased by giving the Company's Corporate
Secretary or Assistant Secretary written notice of exercise,
specifying the number of shares to be purchased. The notice of
exercise shall designate one of the following methods of purchase:
(i) tender to the Company of a check for the full exercise price of
the shares with respect to which such Option or portion thereof
is exercised, or
(ii) instructions to the Company to deliver all the shares being
exercised to a broker-dealer with whom an arrangement has been
made to deliver the full exercise price to the Company. The
Company may establish special terms and conditions for this
"cashless" exercise, and at any time may terminate availability
of this form of purchase.
3. Expiration of Option. The Option shall expire or terminate and
may not be exercised to any extent by the Optionee as of the first to
occur of the following events:
(a) The tenth anniversary of the Date of Grant, or such earlier
time as the Company may determine is necessary or appropriate in light of
applicable foreign tax laws; or
(b) The second anniversary of the date of the Optionee's
Termination of Employment by reason of death, Permanent Disability or
Retirement; or
(c) The Optionee's Termination of Employment for Cause (as defined
below); or
(d) The date that is ninety days after Termination of Employment of
the Optionee for a reason other than for Cause, death, Permanent
Disability or Retirement.
(e) The Optionee's violation of any non-disclosure or non-compete
covenant applicable to the Optionee as set forth in his or her severance
agreement, employment contract or any Company policy, regardless of
whether or not the Optionee has terminated employment due to Permanent
Disability or Retirement, provided that expiration of the Option may not
be effective prior to the date of Termination of Employment.
In the event of Termination of Employment because of death,
Permanent Disability or Retirement, the entire Option shall immediately
become exercisable as to all shares, notwithstanding Section 2(a) of this
Agreement. "Retirement" means retirement at or after attainment of age
55. "Permanent Disability" shall have the same meaning as that provided
by the Company's Long Term Disability Plan regardless of whether or not
the Optionee is covered by such plan.
<PAGE>
"Cause" shall have the same meaning as that provided by the Company
Severance Pay Plan applicable to the Optionee or his or her employment
contract, or severance agreement, if any. In addition, termination for
cause shall include any termination due to acts of dishonesty or gross
misconduct on the part of the Optionee which results, or is intended to
result, in damage to the Company's business reputation.
4. Tax Withholding. No distribution of shares may be made to the
Optionee until the Company has received all amounts required for federal,
state or local tax withholding. The method of discharging such
withholding obligation shall be elected with the notice of exercise and
may include (i) payment by check, or (ii) use of a 'cashless exercise'
using a broker-dealer in a manner similar to that described in Section
2(c)(ii) hereof. The method of withholding shall be subject to such
rules as the Company may adopt from time to time. It is recognized by
both parties that, based on current laws, the difference between the Fair
Market Value of the shares purchased by an option exercise and the
exercise price of such shares generally will constitute ordinary taxable
income for federal income and "Medicare" tax purposes and for most state
and local income tax purposes.
5. Notice. Any notices required to be given hereunder to the
Company shall be addressed to the Secretary or Assistant Secretary of the
Company at the Company's headquarters offices in New York City, New York.
Any notice required to be given hereunder to the Optionee shall be
addressed to the Optionee at his or her current address shown on the
Company's records. Notice shall be sent by mail, express delivery or, if
practical, by hand delivery.
6. Other Provisions. The provisions set forth in Section 5 of the
Plan are specifically incorporated by reference in this Agreement,
including but not limited to those pertaining to the following matters:
a. Changes in Capitalization; Merger; Liquidation
b. Right to Terminate Employment
c. Non-alienation of Benefits
d. Choice of Law
AVON PRODUCTS, INC.
/s/ Marcia L. Worthing
Marcia L. Worthing
Senior Vice President, Human
Resources and Corporate Affairs
/s/ Charles R. Perrin
Charles. Perrin
3
AVON PRODUCTS, INC.
1993 STOCK INCENTIVE PLAN
STOCK OPTION AGREEMENT
______________________________
DATE OF GRANT: JUNE 4, 1998
1. Grant of Option. Pursuant to the provisions of its 1993 Stock
Incentive Plan (the Plan), Avon Products, Inc. (the Company), on the
above date has granted to Andrea Jung (the Optionee) the right
and option to purchase from the Company a total of 30,300 shares of
Common Stock of the Company at the exercise price of $80.3125 per share
(the Option). This Option is subject to the terms and conditions of
the Plan and those set forth in this Agreement. All capitalized terms
used herein shall have the meaning set forth in the Plan, unless the
context requires a different meaning.
2. Exercise of Option
(a) This Option shall be exercisable in full on and after June 4,
2004. It may be exercisable sooner, on and after June 4, 1999, however,
subject to the following conditions:
(i) One-half of the shares subject to the option may be exercisable
subsequent to the date at which the closing price of the
Company's Common Stock, as reported on the New York Stock
Exchange, first exceeds $100 for not less than 20 out of 30
consecutive trading days, and
(ii) All of the shares subject to the option may be exercisable
subsequent to the date at which the closing price of the
Company's Common Stock, as reported in the New York Stock
Exchange, first exceeds $120 for not less than 20 out of 30
consecutive trading days.
The above price targets will be appropriately adjusted to lower
amounts after the effective date of any stock split.
(b) In accordance with the Plan this entire Option shall be
immediately cashed out effective as of the date of any "Change
in Control", regardless of whether or not any portion is otherwise
exercisable. For this purpose, the "Change in Control Price" shall be
the higher of (i) the highest price paid for a share of Stock as reported
on the New York Stock Exchange Composite Tape during the 12 month period
ending with the effective date of Change in Control or (ii) the highest
cash tender offer price for a share of Stock during such period. In the
event that a tender offer for Stock consists of a combination of cash and
securities, the Change in Control Price calculated under (ii) would be
based solely on the cash price equivalent of such offer.
<PAGE>
(c) Shares may be purchased by giving the Company's Corporate
Secretary or Assistant Secretary written notice of exercise,
specifying the number of shares to be purchased. The notice of
exercise shall designate one of the following methods of purchase:
(i) tender to the Company of a check for the full exercise price of
the shares with respect to which such Option or portion thereof
is exercised, or
(ii) instructions to the Company to deliver all the shares being
exercised to a broker-dealer with whom an arrangement has been
made to deliver the full exercise price to the Company. The
Company may establish special terms and conditions for this
"cashless" exercise, and at any time may terminate availability
of this form of purchase.
3. Expiration of Option. The Option shall expire or terminate and
may not be exercised to any extent by the Optionee as of the first to
occur of the following events:
(a) The tenth anniversary of the Date of Grant, or such earlier
time as the Company may determine is necessary or appropriate in light of
applicable foreign tax laws; or
(b) The second anniversary of the date of the Optionee's
Termination of Employment by reason of death, Permanent Disability or
Retirement; or
(c) The Optionee's Termination of Employment for Cause (as defined
below); or
(d) The date that is ninety days after Termination of Employment of
the Optionee for a reason other than for Cause, death, Permanent
Disability or Retirement.
(e) The Optionee's violation of any non-disclosure or non-compete
covenant applicable to the Optionee as set forth in his or her severance
agreement, employment contract or any Company policy, regardless of
whether or not the Optionee has terminated employment due to Permanent
Disability or Retirement, provided that expiration of the Option may not
be effective prior to the date of Termination of Employment.
In the event of Termination of Employment because of death,
Permanent Disability or Retirement, the entire Option shall immediately
become exercisable as to all shares, notwithstanding Section 2(a) of this
Agreement. "Retirement" means retirement at or after attainment of age
55. "Permanent Disability" shall have the same meaning as that provided
by the Company's Long Term Disability Plan regardless of whether or not
the Optionee is covered by such plan.
<PAGE>
"Cause" shall have the same meaning as that provided by the Company
Severance Pay Plan applicable to the Optionee or his or her employment
contract, or severance agreement, if any. In addition, termination for
cause shall include any termination due to acts of dishonesty or gross
misconduct on the part of the Optionee which results, or is intended to
result, in damage to the Company's business reputation.
4. Tax Withholding. No distribution of shares may be made to the
Optionee until the Company has received all amounts required for federal,
state or local tax withholding. The method of discharging such
withholding obligation shall be elected with the notice of exercise and
may include (i) payment by check, or (ii) use of a 'cashless exercise'
using a broker-dealer in a manner similar to that described in Section
2(c)(ii) hereof. The method of withholding shall be subject to such
rules as the Company may adopt from time to time. It is recognized by
both parties that, based on current laws, the difference between the Fair
Market Value of the shares purchased by an option exercise and the
exercise price of such shares generally will constitute ordinary taxable
income for federal income and "Medicare" tax purposes and for most state
and local income tax purposes.
5. Notice. Any notices required to be given hereunder to the
Company shall be addressed to the Secretary or Assistant Secretary of the
Company at the Company's headquarters offices in New York City, New York.
Any notice required to be given hereunder to the Optionee shall be
addressed to the Optionee at his or her current address shown on the
Company's records. Notice shall be sent by mail, express delivery or, if
practical, by hand delivery.
6. Other Provisions. The provisions set forth in Section 5 of the
Plan are specifically incorporated by reference in this Agreement,
including but not limited to those pertaining to the following matters:
a. Changes in Capitalization; Merger; Liquidation
b. Right to Terminate Employment
c. Non-alienation of Benefits
d. Choice of Law
AVON PRODUCTS, INC.
/s/ Marcia L. Worthing
Marcia L. Worthing
Senior Vice President, Human
Resources and Corporate Affairs
/s/ Andrea Jung
Andrea Jung
3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
Avon Products, Inc.
Financial Data Schedule
This schedule contains summary financial information extracted from the
Avon Products, Inc. financial statements as of June 30, 1998 and for the six
months then ended included in the Form 10-Q as of June 30, 1998 and is
qualified in its entirety by reference to such financial statements.
<MULTIPLIER> 1000000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<S> <C>
<CASH> 88
<SECURITIES> 0
<RECEIVABLES> 468
<ALLOWANCES> (32)
<INVENTORY> 588
<CURRENT-ASSETS> 1,363
<PP&E> 1,303
<DEPRECIATION> 700
<TOTAL-ASSETS> 2,330
<CURRENT-LIABILITIES> 1,366
<BONDS> 201
0
0
<COMMON> 44
<OTHER-SE> 183
<TOTAL-LIABILITY-AND-EQUITY> 2,330
<SALES> 2,431
<TOTAL-REVENUES> 2,431
<CGS> 969
<TOTAL-COSTS> 2,225
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 43
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> 147
<INCOME-TAX> 70
<INCOME-CONTINUING> 80
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80
<EPS-PRIMARY> .61
<EPS-DILUTED> .60
</TABLE>
