<PAGE>
CONFORMED COPY
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from_____to_____
Commission file number 1-4881
AVON PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
New York 13-0544597
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1345 Avenue of the Americas, New York, N.Y. 10105-0196
(New address of principal executive offices)
(212) 282-5000
(Telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common stock (par value $.25) New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [ ].
The aggregate market value of Common Stock (par value $.25) held
by non-affiliates at January 31, 1999 was $9.7 billion.
The number of shares of Common Stock (par value $.25) outstanding
at January 31, 1999 was 261,901,384.
Documents Incorporated by Reference
Parts I and II Portions of the 1998 Annual Report to Shareholders.
Part III Portions of the Proxy Statement for the 1999 Annual
Meeting of Shareholders.
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PART I
ITEM 1. BUSINESS
Certain statements in this report which are not historical facts or
information are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including, but not
limited to, the information set forth herein. Such forward-looking
statements involve known and unknown risks, uncertainties and other
factors which may cause the actual results, levels of activity,
performance or achievement of Avon Products, Inc. ("Avon" or the
"Company"), or industry results, to be materially different from any
future results, levels of activity, performance or achievement expressed
or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions;
the ability of the Company to implement its business strategy; the
Company's access to financing and its management of foreign currency
risks; the Company's ability to successfully identify new business
opportunities; the Company's ability to attract and retain key
executives; the Company's ability to achieve anticipated cost savings and
profitability targets; the impact of substantial currency exchange
devaluations in the Company's principal foreign markets; changes in the
industry; competition; the effect of regulatory and legal restrictions
imposed by foreign governments; the effect of regulatory and legal
proceedings and other factors as discussed in Item 1 of this Form 10-K.
As a result of the foregoing and other factors, no assurance can be given
as to the future results and achievements of the Company. Neither the
Company nor any other person assumes responsibility for the accuracy and
completeness of these statements.
General
The Company is one of the world's leading manufacturers and
marketers of beauty and related products, which include cosmetics,
fragrance and toiletries (CFT); gift and decorative; apparel; and fashion
jewelry and accessories. Avon commenced operations in 1886 and was
incorporated in the State of New York on January 27, 1916. Avon's
business is comprised of one industry segment, direct selling, with
worldwide operations. The Company's reportable segments are based on
geographic operations. Financial information relating to the reportable
segments is incorporated by reference to the analysis of net sales and
operating profit by geographic area, and to Note 11 of the Notes to the
Consolidated Financial Statements, on pages 32 and 57, respectively, in
Avon's 1998 Annual Report to Shareholders.
Business Process Redesign
On October 23, 1997, the Company announced that it raised its long-
term growth targets for sales and earnings per share and that it expects
to record special charges in connection with a major business redesign
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program. Commencing in 1998, the long-term target for sales growth has
been raised to 8-10% compounded annually, and its target for earnings
per share growth has been raised to 16-18% annually. Previously, the
Company targeted long-term sales growth of 6-8% and long-term earnings
per share growth of 13-15%. The higher targets come largely as a result
of initiatives currently underway and others under review intended to
reduce costs by up to $400.0 million a year by 2000, with approximately
$200.0 million of the savings being reinvested concurrently in
advertising and marketing programs to boost sales. In the first quarter
of 1998, the Company recorded $108.4 million pretax of such one-time charges
($84.2 million after tax, or $.32 per share on a basic and diluted basis) in
connection with the business process redesign program. Slightly more
than half of the total pretax charges in the first quarter were to be
cash related with payments in 1998 and 1999. In the third quarter of
1998, the Company recorded additional special charges for business
redesign efforts totaling $46.0 million pretax ($38.6 million after tax, or
$.14 per share on a basic and diluted basis). Approximately 70% of the third
quarter pretax charges were to be cash related with payments in 1998 and
At December 31, 1998, the remaining liability balance was $28.5 million
and relates primarily to severance costs that will be paid during 1999.
The Company expects to record additional one-time charges in 1999 as
plans are finalized.
Global Business Strategy
Business Process Redesign programs will continue to free
resources to fund strategic growth initiatives and drive earnings.
Organizationally, the Company will also continue to leverage economies
of scale in critical functional areas in order to fully resource these
strategies. Avon's global strategies are primarily focused on the
following key growth initiatives:
International Expansion
Avon is one of the most widely recognized brand names in the
world. The Company is particularly well positioned to capitalize on
growth in new international markets due to high demand for quality
products, underdeveloped retail infrastructures and relatively
attractive earnings opportunity for women. The Company presently has
operations in 45 countries outside the U.S. and its products are
distributed in 89 more, for coverage in 135 markets and it continues
to expand into new markets. The Company has entered 19 new markets
since 1990, including Russia and China and rapidly emerging nations
throughout Central Europe, and is currently evaluating several other
markets in Eastern Europe and Asia Pacific.
Direct Selling Contemporization
The Company continues to revitalize its direct selling channel,
enabling the Company to reach women quickly and efficiently by
offering Representatives training, support and earnings opportunities.
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In addition to new leadership, sales training and communication
programs, the Company is planning to increase its leveraging of new
technology such as the Internet to improve customer service, offer
electronic ordering and provide Representatives ways to give instant
feedback. As the first major beauty company to enable consumer
purchases on line in 1997, the site now attracts 300,000 visitors per
month. Additionally, Avon annually produces more than 600 million
brochures in a dozen languages, utilizing common imagery and layouts
from a single global database to enhance global beauty image.
Avon's beauty strategy provides for product excellence in CFT
brands and the introduction of new products that complement this core
beauty business. In 1996 and 1997, the Company had outstanding
success with Barbie dolls, designed exclusively for Avon, making it
the Company's best selling gift product ever. The relationship with
Mattel, which supplies the Barbie dolls, was expanded in 1997 to
include additional products. This array of products, available
through the direct selling channel, increases earnings opportunities
and presents a consistent beauty image to consumers across a broad
product line.
Complementary Access and Image Enhancement
To accelerate growth in established industrial nations such as
the U.S., Western Europe and Japan, the Company has developed new
channels to reach more customers and improve access to its products
through Avon Beauty Centers and Express Centers in the U.S., toll-free
telephone numbers, direct mail and "on line" shopping via the internet
on Avon's web site, Avon.com. Avon Beauty Centers, located in urban
malls across the U.S., are designed to display an upscale beauty
image, showcase the Company's beauty brands and encourage customer
trial of product. Avon Express Centers also provide easy access to
products and allow Representatives to fill orders immediately, rather
than waiting for campaign deliveries. In 1999, Avon intends to
implement a more integrated Internet strategy to focus on improving
access and accelerating growth. These complementary access programs
will further increase Avon's brand awareness and drive global beauty
image.
Strategies to increase the number of "fixed locations" that sell
Avon products also help reach new customers in the Pacific Region.
For example, the Philippines, India and Indonesia use decentralized
branches and satellite stores to serve Representatives and customers.
Representatives come to a branch near their homes to place and pick up
product orders for their customers. The branches also create
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visibility for Avon with consumers and help build the Company's beauty
image. Additionally, in Malaysia, Avon has 145 franchised beauty
boutiques, which are staffed by franchise Representatives and located
in areas with high concentrations of Representatives. The boutiques
provide more direct and personal service to Representatives and their
customers.
The Company continues to update the image of its core beauty
products and its portfolio of global beauty brands. In the past four
years, CFT products have all undergone extensive upgrades in
packaging, imaging and formulations, consistent with the global brands
strategy. These contemporary products project a consistent, high
quality image in all markets and include brands such as Anew, Skin-So-
Soft, Avon Color, Far Away, Rare Gold, Natori, Millennia, Josie,
Starring, Avon Skin Care and Women of Earth. Global brands are
growing rapidly as a percentage of the Company's worldwide CFT
business and in 1998 and 1997, they accounted for 47% and 39%,
respectively, of core beauty sales. The development of global brands
has also enabled the Company to deliver a consistent beauty image
around the world, as well as improve margins through pricing and
supply chain efficiencies. Avon is also marketing a more vibrant
beauty image through increased advertising and research and
development spending and image-building programs focused on the
consumer.
In 1998, the Company's most dramatic move in image enhancement
came with the opening of the Avon Centre, a spa, salon and retail
store located in Trump Tower, New York City. The Avon Centre
emphasizes health and beauty and offers a selection of Avon beauty
products created exclusively for use at the Avon Centre.
Through these strategic initiatives designed to focus on high-
quality, affordable products, as well as convenience for the customer,
Avon is not only positioned for continued growth but also
strengthening its image.
Distribution
Avon's products are sold worldwide by approximately 2.8 million
Representatives, approximately 445,000 of whom are in the United
States. Almost all Representatives are women who sell on a part-time
basis. Representatives are independent contractors or independent
dealers, and are not agents or employees of Avon. Representatives
purchase products directly from Avon and sell them directly to their
customers.
The Company's products are sold to customers through a
combination of direct selling and marketing utilizing independent
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Representatives, Avon Beauty Centers, Express Centers in urban areas,
the mail, phone, fax or "on-line". Representatives go where the
customers are, both in the home and in the workplace.
In the United States, the Representative contacts customers,
selling primarily through the use of brochures which also highlight
new products and specially priced items for each two-week sales
campaign. Product samples, demonstration products and selling aids
such as make-up color charts are also used. Generally, the
Representative forwards an order every two weeks to a designated
distribution center. This order is processed and the products are
assembled at the distribution center and delivered to the
Representative's home, usually by a local delivery service. The
Representative then delivers the merchandise and collects payment from
the customer for their own account. Payment by the Representative to
Avon is customarily made when the next order is forwarded to the
distribution center. The cost of merchandise to the Representative
varies according to the product category and/or to the total order
size for each two-week sales campaign and averages approximately 60
percent of the recommended selling price.
Avon employs certain electronic order systems to increase
Representative support in the United States and allow them to run
their business more efficiently as well as to improve order processing
accuracy. One of these systems permits Representatives to submit add-
on orders with a touch-tone telephone, enabling them to augment orders
already submitted by placing a phone call. Another system, Avon's
Personal Order Entry Terminal, permits the top-producing
Representatives in the United States to transmit orders electronically
by phone line, 24 hours a day, seven days a week.
Outside the United States, each sales campaign is generally of a
three or four week duration. Although terms of payment and cost of
merchandise to the Representative vary from country to country, the
basic method of direct selling and marketing by Representatives is
essentially the same as that used in the United States, and
substantially the same merchandising and promotional techniques are
utilized.
The recruiting and training of Representatives are the primary
responsibilities of district managers. In the United States, each
district manager has responsibility for a market area covered by 225
to 300 Representatives. District managers are employees of Avon and
are paid a salary and a sales incentive based primarily on the
increase over the prior year's sales of Avon products by
Representatives in their district. Personal contacts, including
recommendations from current Representatives and local advertising,
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constitute the primary means of obtaining new Representatives. Because
of the high rate of turnover among Representatives, a characteristic
of the direct-selling method, recruiting and training of new
Representatives are continually necessary.
From time to time, the question of the legal status of
Representatives has arisen, usually in regard to possible coverage
under social benefit laws that would require Avon (and in most
instances, the Representatives) to make regular contributions to
social benefit funds. Although Avon has generally been able to address
these questions in a satisfactory manner, the matter has not been
fully resolved in all countries. If there should be a final
determination adverse to Avon in a country, the cost for future, and
possibly past, contributions could be so substantial in the context of
the volume of business of Avon in that country that it would have to
consider discontinuing operations in that country.
Promotion and Marketing
Sales promotion and sales development activities are directed
toward giving selling assistance to the Representatives through sales
aids such as brochures, product samples and demonstration products. In
order to support the efforts of Representatives to reach new
customers, especially working women and other individuals who
frequently are not at home, specially designed sales aids, promotional
pieces, customer flyers and product and image enhancing media
advertising are used. In addition, Avon seeks to motivate its
Representatives through the use of special incentive programs that
reward superior sales performance. Periodic sales meetings with
Representatives are conducted by the district manager. The meetings
are designed to keep Representatives abreast of product line changes,
explain sales techniques and provide recognition for sales
performance.
A number of merchandising techniques, including the introduction
of new products, the use of combination offers, the use of trial sizes
and the promotion of products packaged as gift items, are used. In
general for each sales campaign, a distinctive brochure is published,
in which new products are introduced and selected items are offered at
special prices or are given particular prominence in the brochure. CFT
products are available each sales campaign at consistently low prices,
while maintaining introductory specials and periodic sales on selected
items for limited time periods.
From time to time, various regulations or laws have been proposed
or adopted that would, in general, restrict the frequency, duration or
volume of sales resulting from new product introductions, special
prices or other special price offers. The Company's pricing
flexibility and broad product lines are expected to be able to
mitigate the effect of these regulations.
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Competitive Conditions
The CFT; gift and decorative; apparel; and fashion jewelry and
accessory industries are highly competitive. Avon is one of the
leading manufacturers and distributors of cosmetics and fragrances in
the United States. Its principal competitors are the large and well-
known cosmetics and fragrances companies that manufacture and sell
broad product lines through various types of retail establishments.
There are many other companies that compete in particular products or
product lines sold through retail establishments.
Avon has many competitors in the gift and decorative products and
apparel industries in the United States, including retail
establishments, principally department stores, gift shops and direct-
mail companies, specializing in these products.
Avon is one of the leading distributors of fashion jewelry and
accessories for women in the United States. Its principal competition
in the fashion jewelry industry consists of a few large companies and
many small companies that manufacture and sell fashion jewelry for
women through retail establishments.
The number of competitors and degree of competition that Avon
faces in its foreign CFT and fashion jewelry markets varies widely
from country to country. Avon is one of the leading manufacturers and
distributors in the CFT industry in most of its foreign markets, as
well as in the fashion jewelry industry in Europe.
There are a number of direct-selling companies which sell product
lines similar to Avon's, some of which also have worldwide operations
and compete with Avon.
Avon believes that the personalized customer service offered by
Representatives; the high quality, attractive designs and reasonable
prices of its products; new product introductions; and its guarantee
of satisfaction are significant factors in establishing and
maintaining its competitive position.
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Avon's consolidated net sales, by classes of principal products,
are as follows:
Years ended December 31
1998 1997 1996
(In millions)
Cosmetics, fragrance and toiletries... $3,181.6 $3,093.9 $2,946.8
Gift and decorative...................... 1,050.6 1,049.7 934.1
Apparel.....................................572.0 565.6 556.3
Fashion jewelry and accessories......... 408.5 370.2 377.0
$5,212.7 $5,079.4 $4,814.2
International Operations
Avon's international operations are subject to certain customary
risks inherent in carrying on business abroad, including the risk of
adverse currency fluctuations, currency remittance restrictions and
unfavorable economic and political conditions.
Avon's international operations are conducted primarily through
subsidiaries in 45 countries and Avon's products are distributed in
some 89 other countries.
Manufacturing
Avon manufactures and packages almost all of its CFT products.
Raw materials, consisting chiefly of essential oils, chemicals,
containers and packaging components, are purchased from various
suppliers. Packages, consisting of containers and packaging
components, are designed by its staff of artists and designers.
The design and development of new products are affected by the
cost and availability of materials such as glass, plastics and
chemicals. Avon believes that it can continue to obtain sufficient raw
materials and supplies to manufacture and produce its products.
Avon has eighteen manufacturing laboratories around the world,
two of which are principally devoted to the manufacture of fashion
jewelry. In the United States, Avon's CFT products are produced in
three manufacturing laboratories for the four distribution centers and
all Beauty and Express centers. Most products sold in foreign
countries are manufactured in Avon's facilities abroad.
The fashion jewelry line is generally developed by Avon's staff
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and produced in its two manufacturing laboratories, one in Puerto Rico
and one in Ireland, or by several independent manufacturers.
Trademarks and Patents
Avon's business is not materially dependent on third party patent
or other intellectual property rights and Avon is not a party to any
material license, franchise or concession. The Company, however, does
seek to protect its key proprietary technologies by aggressively
pursuing comprehensive patent coverage in all major markets.
Avon's major trademarks are protected by registration in the
United States and the other countries where its products are marketed
as well as in many other countries throughout the world.
Contingencies
Although Avon has completed its divestiture of all discontinued
operations, various lawsuits and claims (asserted and unasserted), are
pending or threatened against Avon. The Company is also involved in a
number of proceedings arising out of the federal Superfund law and
similar state laws. In some instances Avon, along with other
companies, has been designated as a potentially responsible party
which may be liable for costs associated with these various hazardous
waste sites. In the opinion of Avon's management, based on its review
of the information available at this time, the difference, if any,
between the total cost of resolving such contingencies and reserves
recorded by Avon at December 31, 1998 should not have a material
adverse impact on Avon's consolidated financial position, results of
operations or cash flows.
SEASONAL NATURE OF BUSINESS
Avon's sales and earnings have a marked seasonal pattern
characteristic of many companies selling CFT;
gift and decorative products; apparel; and fashion
jewelry. Christmas sales cause a sales peak in the fourth quarter of
the year. Fourth quarter net sales were 30 percent of total net sales
in both 1998 and 1997, respectively, and before one-time charges,
fourth quarter operating profit was 37 percent and 36 percent
of total operating profit in 1998 and 1997, respectively.
RESEARCH ACTIVITIES
Avon's research and development department is a leader in the
industry, based on the number of new product launches, including
formulating effective beauty treatments relevant to women's needs. In
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addition, Avon's research and development supports its environmental
responsibilities.
A team of researchers and technicians apply the disciplines of
science to the practical aspects of bringing products to market around
the world. Relationships with well known dermatologists and other
specialists extends Avon's own research to deliver new formulas and
ingredients. Each year, Avon researchers test and develop more than
600 products in the CFT and jewelry categories as well as analyze,
evaluate and develop gift and decorative products.
Avon has pioneered many innovative products, including Skin-So-
Soft, its best-selling bath oil; BioAdvance, the first skin care
product with stabilized retinol, the purest form of Vitamin A; and
Collagen Booster, the premier product to capitalize on Vitamin C
technology. Avon also introduced the benefits of aromatherapy to
millions of American women, encapsulated color for the Color-Release
line and introduced alpha-hydroxy acid for cosmetic use in the Anew
Perfecting Complex products. Today, Avon's Anew product line has been
expanded to include technologically advanced products such as Retinol
Recovery Complex PM Treatment and Night Force Vertical Lifting
Complex. Night Force employs a patent-pending material named AVC10, a
molecule that was engineered by Avon researchers over a three-year
period.
The amounts incurred on research activities relating to the
development of new products and the improvement of existing products
were $31.4 million in 1998, $29.9 million in 1997, and $30.2 million
in 1996. This research included the activities of product research and
development and package design and development. Most of these
activities are related to the development of CFT products.
ENVIRONMENTAL MATTERS
Pursuant to Avon's global environmental policy, environmental
audits are conducted to ensure Avon facilities around the world meet
or exceed local regulatory standards. A corporate environmental
operations committee ensures that opportunities for environmental
performance improvements are reflected in our products, packaging and
manufacturing processes.
In general, compliance with environmental regulations impacting
Avon's global operations has not had, and is not anticipated to have,
any material effect upon the capital expenditures, financial position
or competitive position of Avon.
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EMPLOYEES
At December 31, 1998, Avon employed 33,900 people. Of these,
8,000 were employed in the United States and 25,900 in other
countries. The number of employees tends to rise from a low point in
January to a high point in November and decreases somewhat in December
when Christmas shipments are completed.
ITEM 2. PROPERTIES
Avon's principal properties consist of manufacturing laboratories
for the production of CFT and fashion jewelry and distribution centers
where offices are located and where finished merchandise is warehoused
and shipped to Representatives in fulfillment of their orders.
Substantially all of these properties are owned by Avon or its
subsidiaries, are in good repair, adequately meet Avon's needs and
operate at reasonable levels of productive capacity.
The domestic manufacturing laboratories are located in Morton
Grove, IL; Springdale, OH; and Suffern, NY; the distribution centers
are located in Atlanta, GA; Glenview, IL; Newark, DE; and Pasadena,
CA. Other properties include four manufacturing laboratories,
including a fashion jewelry manufacturing laboratory in Ireland, and
ten distribution centers in Europe; five manufacturing laboratories
and nine distribution centers in Latin America; one manufacturing and
three distribution centers in North America (other than in the U.S.);
and four manufacturing laboratories and ten distribution centers in
the Pacific region. The research and development laboratories are
located in Suffern, NY. Avon leases space for its executive and
administrative offices in New York City and its fashion jewelry
manufacturing facility in Puerto Rico.
ITEM 3. LEGAL PROCEEDINGS
Various lawsuits and claims (asserted and unasserted), arising in
the ordinary course of business or related to businesses previously
sold, are pending or threatened against Avon.
In 1991, a class action lawsuit was initiated against Avon on
behalf of certain classes of holders of Avon's Preferred Equity-
Redemption Cumulative Stock ("PERCS"). This lawsuit alleges various
contract and securities law claims relating to the PERCS (which were
fully redeemed that year). Avon has rejected the assertions in this
case, believes it has meritorious defenses to the claims and is
vigorously contesting this lawsuit.
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In the opinion of Avon's management, based on its review of the
information available at this time, the difference, if any, between
the total cost of resolving such contingencies and reserves recorded
by Avon at December 31, 1998 should not have a material adverse impact
on Avon's consolidated financial position, results of operations or
cash flows.
Avon is involved in a number of proceedings arising out of the
federal Superfund law and similar state laws. In some instances Avon,
along with other companies, has been designated as a potentially
responsible party which may be liable for costs associated with these
various hazardous waste sites. Based upon Avon's current knowledge of
the proceedings, management believes, without taking into
consideration any insurance recoveries, if any, that in the aggregate
they would not have a material adverse impact on Avon's consolidated
financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the quarter ended December 31, 1998.
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Executive Officers of the Registrant
Officers are elected by the Board of Directors at its first
meeting following the Annual Meeting of Shareholders. Officers serve
until the first meeting of the Board of Directors following the Annual
Meeting of Shareholders at which Directors are elected for the
succeeding year, or until their successors are elected, except in the
event of death, resignation or removal, or the earlier termination of
the term of office.
Information regarding employment contracts between Avon and named
executive officers is incorporated by reference to the "Contracts with
Executives" section of Avon's Proxy Statement for the 1999 Annual
Meeting of Shareholders.
Listed below are the executive officers of Avon, each of whom (except
as noted) has served in various executive and operating capacities
with Avon during the past five years:
Elected
Title Name Age Officer
Chairman of the Board and Director .. James E. Preston 65 1971
Chief Executive Officer and Director Charles R. Perrin 53 1998(1)
President,
Chief Operating Officer and Director..Andrea Jung 40 1997(2)
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Executive Vice President and Director.Susan J. Kropf 50 1997
Executive Vice Presidents.............Jose Ferreira 42 1997
Fernando Lezama 59 1997
Executive Vice President and
Chief Financial Officer. ...........Robert J. Corti 49 1988
Senior Vice President, General Counsel
and Secretary.......................Ward M. Miller, Jr. 66 1993
Senior Vice President.................Jill Kanin-Lovers 47 1998(3)
Vice President and Controller.........Janice Marolda 38 1998(4)
(1) Charles R. Perrin joined Avon as Vice Chairman and Chief
Operating Officer in January 1998 and was later elected Chief
Executive Officer, effective July 1, 1998. Mr. Perrin has been a
member of Avon's Board of Directors since May 1996. Prior to
joining Avon, he was Chairman and Chief Executive Officer of
Duracell International Inc. from 1994 until 1996. He joined
Duracell in 1985 as President of its U.S. business and was named
President and Chief Operating Officer in 1992.
(2) Andrea Jung was elected President in January 1998 and was later
elected Chief Operating Officer, succeeding Mr. Perrin in that
capacity, effective July 1, 1998. Ms. Jung joined Avon in
January 1994 as President, Product Marketing and was promoted to
Executive Vice President, Global Marketing and New Business in
March 1997.
(3) Jill Kanin-Lovers joined Avon as Senior Vice President, Human
Resources, effective October 1, 1998. Prior to joining Avon, Ms.
Kanin-Lovers was Vice President, Global Operations Human
Resources at IBM and Senior Vice President, Worldwide
Compensation and Benefits Services at American Express.
(4) Janice Marolda was elected Vice President and Controller in June
1998. Ms. Marolda has been with Avon for thirteen years, in both
the U.S. and Global organizations.
PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
This information is incorporated by reference to "Market Prices
per share of Common Stock by Quarter" on page 43 of Avon's 1998 Annual
Report to Shareholders.
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ITEM 6. SELECTED FINANCIAL DATA
The information for the five-year period 1994 through 1998 is
incorporated by reference to the "Eleven-Year Review" on pages 61 and
62 of Avon's 1998 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
This information is incorporated by reference to "Management's
Discussion and Analysis" on pages 30 through 42 of Avon's 1998 Annual
Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See discussion under the heading "Risk Management Strategies and
Market Rate Sensitive Instruments" on page 39 and Note 7 on page 52 of
Avon's 1998 Annual Report to Shareholders for information concerning
market risk sensitive instruments. Such information is incorporated
by reference in this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information is incorporated by reference to the
"Consolidated Financial Statements and Notes" on pages 44 through 59,
together with the report thereon of PricewaterhouseCoopers LLP, on
page 60, and "Results of Operations by Quarter" on page 43 of Avon's
1998 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors is incorporated by reference to
the "Election of Directors" and "Information Concerning the Board of
Directors" sections of Avon's Proxy Statement for the 1999 Annual
Meeting of Shareholders. Information regarding executive officers is
presented in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference to the "Information
Concerning the Board of Directors" and "Executive Compensation"
-14-
<PAGE>15
sections of Avon's Proxy Statement for the 1999 Annual Meeting of
Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
This information is incorporated by reference to the "Ownership
of Shares" section of Avon's Proxy Statement for the 1999 Annual
Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference to the "Contracts
with Executives" section of Avon's Proxy Statement for the 1999 Annual
Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
Annual
Report to
Shareholders Form 10-K
Page Number Page Number
(a) 1. Consolidated Financial Statements of
Avon Products, Inc. and Subsidiaries
Consolidated statements of income for
each of the years in the three-year
period ended December 31, 1998........ 44
Consolidated balance sheets at
December 31, 1998 and 1997............. 45
Consolidated statements of cash flows
for each of the years in the three-year
period ended December 31, 1998......... 46
Consolidated statements of changes in
shareholders' equity for each of
the years in the three-year period
ended December 31, 1998................ 47
Notes to consolidated financial
statements............................. 48-59
Report of Independent Accountants
PricewaterhouseCoopers LLP............. 60
-15-
<PAGE>16
(a) 2. Financial Statement Schedule
Report of Independent Accountants on Financial Statement Schedule
PricewaterhouseCoopers LLP S-1
Consent of Independent Accountants
PricewaterhouseCoopers LLP S-2
Financial statement schedule for each
of the years in the three-year period
ended December 31, 1998...............
II. Valuation and qualifying
accounts............. S-3
-16-
<PAGE>17
Financial statements of the registrant and all other financial
statement schedules are omitted because they are not applicable or
because the required information is shown in the consolidated
financial statements and notes.
(a)3. Exhibits
Exhibit
Number Description
3.1 Restated Certificate of Incorporation of Avon, filed with the
Secretary of State of the State of New York on May 13, 1996
(incorporated by reference to Exhibit 3.1 to Avon's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996).
3.2 By-laws of Avon, as restated, effective June 6, 1996
(incorporated by reference to Exhibit 3.2 to Avon's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996).
3.3 Certificate of Amendment of the Certificate of Incorporation of
Avon Products, Inc., filed May 13, 1998 (incorporated by
reference to Exhibit 3.3 to Avon's Quarterly Report on Form 10-Q
for the quarter ended March 30, 1998).
4.1 Amended and Restated Revolving Credit and Competitive Advance
Facility Agreement, dated as of August 8, 1996, among Avon, Avon
Capital Corporation and a group of banks and other lenders
(incorporated by reference to Exhibit 4.1 to Avon's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996).
4.2 Indenture dated as of August 1, 1997 between Avon as Issuer,
and The Chase Manhattan Bank, as Trustee relating to the 6.55%
Notes due 2007 (incorporated by reference to Exhibit 4.2 to
Avon's Registration Statement on Form S-4, Registration
Statement No. 333-41299 filed December 1, 1997).
4.3 Rights Agreement, dated as of March 30, 1998 (the "Rights
Agreement"), between Avon and First Chicago Trust Company of New
York (incorporated by reference to Exhibit 4 to Avon's
Registration Statement on Form 8-A, filed March 18, 1998).
10.1* Avon Products, Inc. 1993 Stock Incentive Plan, approved by
stockholders on May 6, 1993 (incorporated by reference to
Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993).
-17-
<PAGE>18
10.2* Form of Stock Option Agreement to the Avon Products, Inc. 1993
Stock Incentive Plan (incorporated by reference to Exhibit 10.2
to Avon's Annual Report on Form 10-K for the year ended December
31, 1993).
10.3* First Amendment to the 1993 Avon Stock Incentive Plan effective
January 1, 1997, approved by stockholders on May 1, 1997
(incorporated by reference to exhibit 10.1 to Avon's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997).
10.4* Avon Products, Inc. 1997 Long-Term Incentive Plan, effective as
of January 1, 1997 approved by stockholders on May 1, 1997
(incorporated by reference to Exhibit 10.4 to Avon's Annual
Report on Form 10-K for the year ended December 31, 1997).
10.5* Supplemental Executive Retirement Plan and Supplemental Life
Plan of Avon Products, Inc., as amended and restated as of July
1, 1998.
10.6* Benefit Restoration Pension Plan of Avon Products, Inc.,
effective as of January 1, 1994 (incorporated by reference to
Exhibit 10.7 to Avon's Annual Report on Form 10-K for the year
ended December 31, 1994).
10.7* Trust Agreement, amended and restated as of March 2, 1990,
between Avon and Chase Manhattan Bank, N.A. (incorporated by
reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-
Q for the quarter ended March 31, 1990 and refiled under Form SE
for the year ended December 31, 1996).
10.8* First Amendment, dated as of January 30, 1992, to the Trust
Agreement, dated as of March 2, 1990, by and between Avon and
Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit
10.2 to Avon's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1993).
10.9* Second Amendment, dated as of June 12, 1992 to the Trust
Agreement, dated as of March 2, 1990, by and between Avon and
Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit
10.3 to Avon's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1993).
10.10* Third Amendment, dated as of November 5, 1992, to the Trust
Agreement, dated as of March 2, 1990, by and between Avon and
Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit
10.4 to Avon's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1993).
- -18-
<PAGE>19
10.11* The Avon Products, Inc. Deferred Compensation Plan, as amended
and restated as of July 1, 1998 (incorporated by reference to
Exhibit 4(b) to Avon's Registration Statement on Form S-8,
Registration No. 333-65989 filed October 22, 1998).
10.12* Trust Agreement, dated as of April 21, 1995, between Avon and
Chemical Bank, amending and restating the Trust Agreement as of
August 3, 1989 between Avon and Manufacturers Hanover Trust
Company (incorporated by reference to Exhibit 10.14 to Avon's
Annual Report on Form 10-K for the year ended December 31,
19975).
10.13*Employment Agreement, dated as of November 1, 1995, between Avon
and James E. Preston (incorporated by reference to Exhibit 10.16
to Avon's Annual Report on Form 10-K for the year ended December
31, 1995).
10.14* Stock Option Agreement between Avon and James E. Preston dated
October 30, 1995 (incorporated by reference to Exhibit 10.17 to
Avon's Annual Report on Form 10-K for the year ended December
31, 1995).
10.15* Supplemental Employment Agreement, date as of December 10, 1997
between Avon and James E. Preston (incorporated by reference to
Exhibit 10.16 to Avon's Annual Report on Form 10-K for the year
ended December 31, 1997).
10.16* Stock Option Agreement between Avon and James E. Preston dated
December 10, 1997(incorporated by reference to Exhibit 10.17 to
Avon's Annual Report on Form 10-K for the year ended December
31, 1997).
10.17* Employment Agreement, dated as of December 11, 1997 between
Avon and Charles R. Perrin (incorporated by reference to Exhibit
10.18 to Avon's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.18* Stock Option Agreement between Avon and Charles R. Perrin dated
December 10, 1997 (incorporated by reference to Exhibit 10.19
to Avon's Annual Report on Form 10-K for the year ended December
31, 1997).
10.19* Employment Agreement dated as of December 11, 1997 between Avon
and Andrea Jung (incorporated by reference to Exhibit 10.20 to
Avon's Annual Report on Form 10-K for the year ended December
31, 1997).
10.20* Form of Employment Agreement, dated as of September 1, 1994,
between Avon and certain senior officers (incorporated by
- -19-
<PAGE>20
reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-
Q for the quarter ended September 30, 1994).
10.21* Avon Products, Inc. Compensation Plan for Non-Employee
Directors, effective May 1, 1997 (incorporated by reference to
Exhibit 10.22 to Avon's Annual Report on Form 10-K for the year
ended December 31, 1997).
10.22* Avon Products, Inc. Board of Directors' Deferred Compensation
Plan, amended and restated, effective January 1, 1997
(incorporated by reference to Exhibit 10.23 to Avon's Annual
Report on Form 10-K for the year ended December 31, 1997).
10.23* Trust Agreement, dated as of December 31, 1991, between Avon
and Manufacturers Hanover Trust Company (incorporated by
reference to Exhibit 10.23 to Avon's Annual Report on Form 10-K
for the year ended December 31, 1991 and refiled under Form SE
for the year ended December 31, 1996).
10.24* First Amendment, dated as of November 5, 1992, to the Trust
Agreement dated as of December 31, 1991, by and between Avon and
Manufacturers Hanover Trust Company (incorporated by reference
to Exhibit 10.7 to Avon's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1993).
10.25* Stock Option Agreement between Avon and Charles R. Perrin dated
June 4, 1998 (incorporated by reference to Exhibit 10.1 to
Avon's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998).
10.26* Stock Option Agreement between Avon and Andrea Jung dated June
4, 1998 (incorporated by reference to Exhibit 10.2 to Avon's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998).
13 Portions of the Annual Report to Shareholders for the year
ended December 31, 1998 incorporated by reference in response to
Items 1,5 through 8 in this filing.
21 Subsidiaries of the registrant.
23 Consent of PricewaterhouseCoopers LLP (set forth on page S-2 of
this Annual Report on Form 10-K).
24 Power of Attorney
27 Financial Data Schedule
99 Financial statements for the Avon Products, Inc. Employees'
Savings and Stock Ownership Plan and the Avon
Mirabella/Lomalinda Employees' Savings Plan for
- -20-
<PAGE>21
the year ended December 31, 1998 will be filed by amendment.
* The Exhibits identified above and in the Exhibit Index with an
asterisk (*) are management contracts or compensatory plans or
arrangements.
(b) Reports on Form 8-K
There was no Form 8-K filed during the fourth quarter of 1998.
(c) Avon's Annual Report on Form 10-K for the year ended December
31, 1998, at the time of filing with the Securities and Exchange
Commission, shall modify and supersede all prior documents filed
pursuant to Section 13, 14 or 15(d) of the Securities Exchange
Act of 1934 for purposes of any offers or sales of any
securities after the date of such filing pursuant to any
Registration Statement or Prospectus filed pursuant to the
Securities Act of 1933, which incorporates by reference such
Annual Report on Form 10-K.
-21-
<PAGE>22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 24th day of February 1999.
Avon Products, Inc.
By /s/WARD M. MILLER, JR.
Ward M. Miller, Jr.
Senior Vice President, General
Counsel and Secretary
-22-
<PAGE>23
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
Signature Title Date
*
________________
James E. Preston Chairman of the
Board and Director February 4, 1999
*
_________________
Charles R. Perrin Chief Executive Officer
and Director - Principal
Executive Officer February 4, 1999
*
_______________
Robert J. Corti Executive Vice President,
Chief Financial Officer -
Principal Financial Officer February 4, 1999
*
______________
Janice Marolda Vice President and
Controller - Principal
Accounting Officer February 4, 1999
*
___________
Andrea Jung President and Chief February 4, 1999
Operating Officer and
Director
*
______________
Susan J. Kropf Executive Vice President, February 4, 1999
President, Avon North
America and Director
*
________________
Brenda C. Barnes Director February 4, 1999
*
_________________
Richard S. Barton Director February 4, 1999
*
____________________
Remedios Diaz Oliver Director February 4, 1999
*
_________________
Edward T. Fogarty Director February 4, 1999
*
________________
Stanley C. Gault Director February 4, 1999
- -23-
<PAGE>24
*
_______________
George V. Grune Director February 4, 1999
*
____________
Ann S. Moore Director February 4, 1999
*
___________
Paula Stern Director February 4, 1999
/s/WARD M. MILLER, JR.
____________________________
Ward M. Miller, Jr. Attorney-in-fact February 4, 1999
- -24
<PAGE>S-1
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders of Avon Products, Inc.:
Our audits of the consolidated financial statements referred to
in our report dated February 4, 1999 appearing in the 1998 Annual
Report to Shareholders of Avon Products, Inc. and subsidiaries, which
report and consolidated financial statements are incorporated by
reference in this Annual Report on Form 10-K, also included an audit
of the financial statement schedule list in Item 14 (a) (2) of this
Form 10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial
statements.
PricewaterhouseCoopers L.L.P.
New York, New York
February 4, 1999
S-1
<PAGE>S-2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the following
Registration Statements of Avon Products, Inc. on Form S-8 (Reg. Nos.
33-47209, 33-60218, 33-60918 and 33-65998) of our reports dated
February 4, 1999 on our audits of (i) the consolidated financial
statements of Avon Products, Inc. as of December 31, 1998 and 1997 and
for each of the years in the three-year period ended December 31,
1998, which report is included in the 1998 Annual Report to
Shareholders and incorporated by reference in this Annual Report on
Form 10-K, and (ii) the 1998, 1997 and 1996 financial statement
schedule of Avon Products, Inc., which report is included in this
Annual Report on Form 10-K.
PricewaterhouseCoopers L.L.P.
New York, New York
February 24, 1999
S-2
<PAGE>S-3
AVON PRODUCTS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In millions)
Years ended December 31
Additions
_____________________
Balance at Charged to Charged Balance
beginning costs and to other at end
of period expenses accounts Deductions of period
1998
Allowance for doubtful
accounts receivable $35.5 $91.3 $ -- $77.8(a) $49.0
1997
Allowance for doubtful
accounts receivable $36.4 $80.8 $ -- $81.7(a) $35.5
1996
Allowance for doubtful
accounts receivable $32.6 $79.0 $ -- $75.2(a) $36.4
(a) Accounts written off, net of recoveries and foreign currency
translation adjustment.
S-3
CONFORMED COPY
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
Commission file number 1-4881
____________
AVON PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
____________
EXHIBITS
<PAGE>
INDEX TO EXHIBITS
(a)3. Exhibits
Exhibit
Number Description
3.1 Restated Certificate of Incorporation of Avon, filed with the
Secretary of State of the State of New York on May 13, 1996
(incorporated by reference to Exhibit 3.1 to Avon's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996).
3.2 By-laws of Avon, as restated, effective June 6, 1996
(incorporated by reference to Exhibit 3.2 to Avon's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996).
3.3 Certificate of Amendment of the Certificate of Incorporation of
Avon Products, Inc., filed May 13, 1998 (incorporated by
reference to Exhibit 3.3 to Avon's Quarterly Report on Form 10-Q
for the quarter ended March 30, 1998).
4.1 Amended and Restated Revolving Credit and Competitive Advance
Facility Agreement, dated as of August 8, 1996, among Avon, Avon
Capital Corporation and a group of banks and other lenders
(incorporated by reference to Exhibit 4.1 to Avon's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996).
4.2 Indenture dated as of August 1, 1997 between Avon as Issuer,
and The Chase Manhattan Bank, as Trustee relating to the 6.55%
Notes due 2007 (incorporated by reference to Exhibit 4.2 to
Avon's Registration Statement S-4, Registration Statement No.
333-41299 filed December 1, 1997).
4.3 Rights Agreement, dated as of March 30, 1998 (the "Rights
Agreement"), between Avon and First Chicago Trust Company of New
York (incorporated by reference to Exhibit 4 to Avon's
Registration Statement on Form 8-A, filed March 18, 1998).
10.1* Avon Products, Inc. 1993 Stock Incentive Plan, approved by
stockholders on May 6, 1993 (incorporated by reference to
Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993).
10.2* Form of Stock Option Agreement to the Avon Products, Inc. 1993
Stock Incentive Plan (incorporated by reference to Exhibit 10.2
to Avon's Annual Report on Form 10-K for the year ended December
31, 1993).
<PAGE>
10.3* First Amendment to the 1993 Avon Stock Incentive Plan effective
January 1, 1997, approved by stockholders on May 1, 1997
(incorporated by reference to Exhibit 10.1 to Avon's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997).
10.4* Avon Products, Inc. 1997 Long-Term Incentive Plan, effective as
of January 1, 1997, approved by stockholders on May 1, 1997
(incorporated by reference to Exhibit 10.4 to Avon's Annual
Report on Form 10-K for the year ended December 31, 1997).
10.5* Supplemental Executive Retirement Plan and Supplemental Life
Plan of Avon Products, Inc., as amended and restated as of July
1, 1998.
10.6* Benefit Restoration Pension Plan of Avon Products, Inc.,
effective as of January 1, 1994 (incorporated by reference to
Exhibit 10.7 to Avon's Annual Report on Form 10-K for the year
ended December 31, 1994).
10.7* Trust Agreement, amended and restated as of March 2, 1990,
between Avon and Chase Manhattan Bank, N.A. (incorporated by
reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-
Q for the quarter ended March 31, 1990 and refiled under Form SE
for the year ended December 31, 1996).
10.8* First Amendment, dated as of January 30, 1992, to the Trust
Agreement, dated as of March 2, 1990, by and between Avon and
Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit
10.2 to Avon's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1993).
10.9* Second Amendment, dated as of June 12, 1992 to the Trust
Agreement, dated as of March 2, 1990, by and between Avon and
Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit
10.3 to Avon's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1993).
10.10* Third Amendment, dated as of November 5, 1992, to the Trust
Agreement, dated as of March 2, 1990, by and between Avon and
Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit
10.4 to Avon's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1993).
10.11* The Avon Products, Inc. Deferred Compensation Plan, as amended
and restated as of January 1, 1998 (incorporated by reference to
Exhibit 4(b) to Avon's Registration Statement on Form S-8,
Registration No. 333-65989 filed October 22, 1998).
<PAGE>
10.12* Trust Agreement, dated as of April 21, 1995, between Avon and
Chemical Bank, amending and restating the Trust Agreement as of
August 3, 1989 between Avon and Manufacturers Hanover Trust
Company (incorporated by reference to Exhibit 10.14 to Avon's
Annual Report on Form 10-K for the year ended December 31,
1995).
10.13* Employment Agreement, dated as of November 1, 1995, between
Avon and James E. Preston (incorporated by reference to Exhibit
10.16 to Avon's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.14* Stock Option Agreement between Avon and James E. Preston dated
October 30, 1995 (incorporated by reference to Exhibit 10.17 to
Avon's Annual Report on Form 10-K for the year ended December
31, 1995).
10.15* Supplemental Employment Agreement, dated as of December 10,
1997 between Avon and James E. Preston (incorporated by
reference to Exhibit 10.16 to Avon's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.16* Stock Option Agreement between Avon and James E. Preston dated
December 10, 1997 (incorporated by reference to Exhibit 10.17 to
Avon's Annual Report on Form 10-K for the year ended December
31, 1997).
10.17* Employment Agreement, dated as of December 11, 1997 between
Avon and Charles R. Perrin (incorporated by reference to Exhibit
10.18 to Avon's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.18* Stock Option Agreement between Avon and Charles R. Perrin dated
December 10, 1997 (incorporated by reference to Exhibit 10.19
to Avon's Annual Report on Form 10-K for the year ended December
31, 1997).
10.19* Employment Agreement dated as of December 11, 1997 between Avon
and Andrea Jung (incorporated by reference to Exhibit 10.20 to
Avon's Annual Report on Form 10-K for the year ended December
31, 1997).
10.20* Form of Employment Agreement, dated as of September 1, 1994,
between Avon and certain senior officers (incorporated by
reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-
Q for the quarter ended September 30, 1994).
<PAGE>
10.21* Avon Products, Inc. Compensation Plan for Non-Employee
Directors, effective May 1, 1997 (incorporated by reference to
Exhibit 10.22 to Avon's Annual Report on Form 10-K for the year
ended December 31, 1997).
10.22* Avon Products, Inc. Board of Directors' Deferred Compensation
Plan, amended and restated, effective January 1, 1997
(incorporated by reference to Exhibit 10.23 to Avon's Annual
Report on Form 10-K for the year ended December 31, 1997).
10.23* Trust Agreement, dated as of December 31, 1991, between Avon
and Manufacturers Hanover Trust Company (incorporated by
reference to Exhibit 10.23 to Avon's Annual Report on Form 10-K
for the year ended December 31, 1991 and refiled under Form SE
for the year ended December 31, 1996).
10.24* First Amendment, dated as of November 5, 1992, to the Trust
Agreement dated as of December 31, 1991, by and between Avon and
Manufacturers Hanover Trust Company (incorporated by reference
to Exhibit 10.7 to Avon's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1993).
10.25* Stock Option Agreement between Avon and Charles R. Perrin dated
June 4, 1998 (incorporated by reference to Exhibit 10.1 to
Avon's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998).
10.26* Stock Option Agreement between Avon and Andrea Jung dated June
4, 1998 (incorporated by reference to Exhibit 10.2 to Avon's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998).
13 Portions of the Annual Report to Shareholders for the year
ended December 31, 1998 incorporated by reference in response to
Items 1,5 through 8 in this filing.
21 Subsidiaries of the registrant.
23 Consent of PricewaterhouseCoopers LLP (set forth on page S-2 of
this Annual Report on Form 10-K).
24 Power of Attorney
27 Financial Data Schedule
<PAGE>
99 Financial statements for the Avon Products, Inc. Employees'
Savings and Stock Ownership Plan and the Avon
Mirabella/Lomalinda Employees' Savings Plan for the year ended
December 31, 1998 will be filed by amendment.
* The Exhibits identified above and in the Exhibit Index with an
asterisk (*) are management contracts or compensatory plans or
arrangements.
EXHIBIT 10.20
<PAGE>
Exhibit 10.20
Form of Employment Agreement, dated as of September 1, 1994
between Avon Products, Inc. and certain senior officers (incorporated
by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994).
Avon has an employment agreement with each of the following senior
officers:
Susan J. Kropf
Ward Miller, Jr.
EXHIBIT 10.5
<PAGE>
SUPPLEMENTAL EXECUTIVE
RETIREMENT AND LIFE PLAN
OF
AVON PRODUCTS, INC.
AMENDED AND RESTATED AS OF JULY 1, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
SECTION 1 INTRODUCTION 1
SECTION 2 DEFINITIONS 1
SECTION 3 PARTICIPATION 8
SECTION 4 SUPPLEMENTAL RETIREMENT ALLOWANCES 9
SECTION 5 SURVIVOR RETIREMENT ALLOWANCES 12
SECTION 6 SUPPLEMENTAL LIFE ALLOWANCES 16
SECTION 7 FORMS OF PAYMENT 18
SECTION 8 ADMINISTRATION OF THE PLAN 19
SECTION 9 CERTAIN RIGHTS AND LIMITATIONS 20
SECTION 10 AMENDMENT AND TERMINATION OF THE PLAN 22
SECTION 11 CLAIM PROCEDURES 25
<PAGE>
SECTION 1
INTRODUCTION
Avon Products, Inc. (the "Company") adopted the Supplemental Executive
Retirement Plan and Supplemental Life Plan of Avon Products, Inc.,
originally effective as of January 1, 1982, and last amended and restated
such plan as of January 1, 1995 (the "Plan"). The Company now wishes to
amend and restate the Plan to reflect changes to certain of the Company's
other retirement programs. The terms and conditions of participation and
benefits under the Plan are set out in this document. The terms of this
document shall be effective as of July 1, 1998.
The Company intends to maintain the Plan indefinitely and, in order
to afford Plan Participants and their Beneficiaries the maximum security,
has established a grantor trust (the "Trust") to aid it in accumulating the
amounts necessary to satisfy its contractual liability to pay certain
benefits under the terms of the Plan. The Plan provides for the Company to
pay all benefits and administrative costs from its general assets to the
extent not paid by the Trust. The establishment of the Trust shall not
convey rights to the Participants which are greater than those of the
general creditors of the Company and shall not affect the Company's
continuing liability to pay Plan benefits and administrative costs, except
that the Company's liability shall be offset by actual benefits and
administrative cost payments, if any, made by the Trust.
SECTION 2
DEFINITIONS
As used in this Plan, the masculine pronoun shall include the feminine
and the feminine pronoun shall include the masculine unless otherwise
specifically indicated. In addition, the following words and phrases as
used in this Plan shall have the following meaning unless a different
meaning is plainly required by the context:
2.1 "Actuarial Equivalent" shall mean a benefit of equivalent
value, when computed on the basis of the same mortality table and the rate
or rates of interest and/or the empirical tables which are being used to
determine the Participant's benefit under the Retirement Plan. However,
in the case of lump sum distributions of a Participant's Supplemental
Retirement Allowance, the conversion factor used to determine the Actuarial
Equivalent shall be the same as specified in Section (e) of Appendix I of
the Retirement Plan, except that the applicable interest rate with regard
to any Participant shall not be greater than the lowest rate in effect at
any time on or after the date the Participant attains age 60, if the sum of
the Participant's age and Creditable Service is at least 85 years.
2.2 "Annual Benefit Offset" shall mean the aggregate annual retirement
allowance which would have been payable to a Participant under the Retirement
Plan and the Other Plans, expressed in the form of a single life annuity, which
form of benefit shall be the Actuarial Equivalent of the aggregate benefits
which would be payable under such plans if they commenced on the same date as
the Supplemental Retirement Allowance. For purposes of determining the annual
<PAGE>
retirement allowance payable under the Retirement Plan in calculating
the Annual Benefit Offset, such allowance shall be deemed to be the annual
retirement allowance which would have been payable to the Participant under
the formula contained in the Retirement Plan on June 30, 1998, if such
formula had continued in effect after that date until the Participant's
retirement or death. At the Company's discretion, the Annual Benefit Offset
may exclude the Participant's annual retirement allowance payable to such
Participant under any non-qualified defined benefit plan sponsored by the
Company, including the Company's Benefit Restoration Plan, provided that
such Participant must irrevocably elect in writing to forego any benefit
under such excluded plan.
2.3 "Average Final Compensation" shall mean the average annual
Compensation of a Participant during the three (3) years of the Participant's
last ten (10) years of Creditable Service in which the Participant's
Compensation was highest. If a Participant has less than three (3)
years of Creditable Service, Average Final Compensation shall be computed
over all such years.
2.4 "Beneficiary" shall mean the person or persons designated by a
Participant as beneficiary in a time and manner determined by the Retirement
Board. If the Participant fails to designate a beneficiary or if the
beneficiary predeceases the Participant, the Participant's spouse
shall be the beneficiary, or if no spouse survives the Participant, the
Participant's estate shall be the beneficiary. A Participant may change his
designated beneficiary at the time and in the manner determined by the
Retirement Board.
2.5 "Board of Directors" shall mean the Board of Directors of Avon
Products, Inc.
2.6 "Change of Control" shall mean:
(a) the acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of voting securities of the corporation where
such acquisition causes such person to own twenty percent (20%) or more
of the combined voting power of the then outstanding voting securities
of the Company entitled to vote generally in the election of directors
(the "Outstanding Company Voting Securities"); provided, however, that
for purposes of this Subsection (a), the following acquisitions shall
not be deemed to result in a Change of Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company,
(iii) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled
by the Company or (iv) any acquisition by any corporation pursuant to
a transaction that complies with clauses (i), (ii) and (iii) of
Subsection (c) below; and provided, further, that if any Person's
beneficial ownership of the Outstanding Company Voting Securities
reaches or exceeds twenty percent (20%) as a result of a transaction
described in clause (i) or (ii) above, and such Person subsequently
<PAGE>
acquires beneficial ownership of additional voting securities of the
Company, such subsequent acquisition shall be treated as an acquisition
that causes such Person to own twenty (20%) or more of the Outstanding
Company Voting Securities; or
(b) individuals who as of the date hereof, constitute the
Board of Directors (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board of Directors; provided,
however, that any individual becoming a director subsequent to the
date hereof whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least two-thirds
of the directors then comprising the Incumbent Board shall be considered
as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or threatened
election contest with respect to the election or removal of directors or
other actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board of Directors; or
(c) the approval by the shareholders of the Company of a
reorganization, merger or consolidation or sale or other disposition
of allor substantially all of the assets of the Company ("Business
Combination") or, if consummation of such Business Combination is
subject, at the time of such approval by shareholders, to the consent of
any government or governmental agency, the obtaining of such consent
(either explicitly or implicitly by consummation); excluding, however,
such a Business Combination pursuant to which (i) all or substantially
all of the individuals and entities who were the beneficial owners of the
Outstanding Company Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more than sixty
percent (60%) of, respectively, the then outstanding shares of common
stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation that as a
result of such transaction owns the Company or all or substantially all
of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding
Company Voting Securities, (ii) no Person (excluding any employee
Benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly
or indirectly, twenty percent (20%) or more of, respectively, the then
outstanding shares of common stock of the corporation resulting
from such Business Combination or the combined voting power of the then
outstanding voting securities of such corporation except to the extent
that such ownership existed prior to the Business Combination and (iii)
at least a majority of the members of the board of directors of the
corporation resulting from such Business Combination were members of
the Incumbent Board of Directors at the time of the execution of the
initial agreement, or of the action of the Board of Directors, providing
for such Business Combination; or
(d) approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
<PAGE>
Notwithstanding the foregoing, no Change of Control shall be deemed to have
occurred with respect to any individual by reason of any actions or events in
which such individual participates in a capacity other than in his or her
capacity as an officer or employee of the Company (or as a director of the
Company or a Subsidiary, where applicable).
2.7 "Company" shall mean Avon Products, Inc.
2.8 "Compensation" shall mean the regular salary or wages paid to an
Active Participant or deferred for services rendered to the Company or a
Subsidiary during any year in which the Participant accrues Creditable
Service, including any deferrals under a 401(k) plan or salary reduction under
a 125 plan of the Company or a Subsidiary, plus any bonus payable to an
employee (disregarding any election to defer the receipt thereof) under the
Management Incentive Plan and Variable Incentive Plan or any similar or
successor plan for services performed during the prior year; however, Active
Participants eligible to participate in the Management Incentive Plan are not
eligible to participate in the Variable Incentive Plan after January 1, 1998
but the bonus payable to the Active Participants participating in the Variable
Incentive Plan prior to January 1, 1998 will continue to be included in
Compensation. Compensation shall not include special termination or severance
payments or benefits, whether characterized as such, made pursuant to any
employment agreement, separation agreement, severance plan or policy or any
similar arrangement, unless such agreement, plan, policy or arrangement
provides that the special termination or severance payments or benefits are
to be included as Compensation under the Plan.
Notwithstanding the foregoing, with respect to any period of absence
(during which disability benefits are being paid to the Participant under the
Company's Short Term or Long Term Disability Plan) which is included as
Creditable Service, the Participant's annual Compensation for purposes of
the Plan during such period of absence shall be deemed to be the greater of
(i) his Compensation in the last full calendar year of his employment
immediately preceding the beginning of such absence, or (ii) the actual
Compensation he received in the year the absence began.
2.9 "Compensation Committee" means the Compensation Committee appointed
by the Board of Directors.
2.10 "Creditable Service" shall mean:
(a) The total number of years and completed months of service
rendered by an Active Participant as an employee of the Company or any
Subsidiary;
(b) Periods of authorized leaves of absence from the Company or
a Subsidiary approved by the Retirement Board, including but not limited
to leaves required to be granted pursuant to the Family and Medical Leave
Act of 1993 and the Uniformed Services Employment and Reemployment Rights
Act, and, notwithstanding any other provision of this Plan to the
contrary, any period of absence while disability benefits are being paid
to the Participant under the Company's Short Term or Long Term Disability
Plans;
<PAGE>
(c) Any prior Creditable Service under this Plan rendered by an
employee who was formerly a Participant and who subsequently becomes a
new Active Participant pursuant to Plan Section 3.1 or 3.2;
(d) Service which is recognized for purposes of the Plan by
reason of any Outside Agreement. To the extent Creditable Service is
recognized under an Outside purposes of eligibility for the Supplemental
Retirement Allowance, it shall also be recognized for purposes of the
Supplemental Life Allowance unless otherwise specifically provided in
such Outside Agreement; and
(e) Solely for purposes of determining the time for the
commencement of benefits under the SERP, a Vested or Frozen Participant
shall continue to earn Creditable Service during the period in which he
is an employee of the Company or a Subsidiary.
Subject to approval by the Compensation Committee, a Participant may be
granted additional years of Creditable Service either for purposes of
determining the amount of allowance under the Plan or for purposes of
satisfying the service requirements necessary for benefits under the Plan,
or both. Additional service granted under a specific provision of the
Plan or under provisions of individual contracts with the Participant or under
any severance plan or policy of the Company covering the Participant shall
also be included in determining Creditable Service, but only in accordance
with the specific terms of such provisions.
2.11 "Dependent Child" shall mean any unmarried child, who has not
attained age 21, of the Participant or, effective January 1, 1999, a
Participant's Domestic Partner or any unmarried child, regardless of the
child's age, of the Participant or, effective January 1, 1999, the
Participant's Domestic Partner, if the child becomes incapacitated prior to
attaining age 19; provided, however, that such incapacitated child shall
cease to be a Dependent Child at the later of the date the child attains age
21 or ceases to be incapacitated. The term child shall include a child born
of the Participant or, effective January 1, 1999, a Participant's Domestic
Partner, a child legally adopted by the Participant or, effective January 1,
1999, a Participant's Domestic Partner, and a stepchild of the Participant,
in each instance living with the Participant or, effective January 1, 1999,
the Participant's Domestic Partner in a normal parent-child
relationship.
2.12 "Dependent Children's Allowance" shall mean the benefit payable to
the Dependent Children pursuant to the SERP and as described in Plan
Section 5.3.
2.13 "Domestic Partner" shall mean, effective January 1, 1999, an
individual of the same or opposite sex as the Participant, who shares a
committed and mutually dependent relationship with the Participant, and
(a) both the Participant and the Domestic Partner must be at
least the age of consent for marriage in the Participant's state of
residence; and
<PAGE>
(b) the Domestic Partnership must be an exclusive relationship
with the Participant in which the Domestic Partner resides with the
Participant and intends to do so permanently; and
(c) the Domestic Partner must be mutually responsible with the
Participant for basic living expenses; and
(d) the Domestic Partners cannot be related by blood to a degree
of closeness that would prohibit legal marriage;
(e) the Domestic Partners cannot be married to or in a Domestic
Partner relationship with anyone else; and
(f) a Participant must have filed an Affidavit of Eligibility
for Domestic Partner Benefits with the Plan Administrator, and
(g) the Participant has not filed an Affidavit of Termination
of Domestic Partnership within the previous twelve (12) months;
An individual shall cease to be a Domestic Partner upon the filing by the
Participant of an Affidavit of Termination of Domestic Partnership with the
Plan Administrator.
2.13 "Nonforfeitable" shall refer only to the vested unsecured
contractual right of a Participant, his Beneficiary and his Dependent
Children, if any, to benefits under this Plan. In no event, however,
shall "Nonforfeitable" imply any preferred claim on, or any beneficial
ownership interest in, any assets of the Company before those assets are
paid to any individual pursuant to the terms of the Plan. As provided in
Plan Section 9.5, certain events may result in the forfeiture even of
Nonforfeitable benefits.
2.14 "Normal Retirement Age" shall mean age 65.
2.15 "Other Plans" shall mean the employer-provided portion of any
defined benefit pension plan sponsored by the Company (other than the
Retirement Plan) or any Subsidiary and of any retirement or pension
allowance (but not any form of severance or special termination
payment) set forth and payable pursuant to any employment contract or any
other agreement (other than an individual deferred compensation contract
under which elective employee salary or bonus deferrals are made) between
the Participant and the Company or a Subsidiary.
The term "Other Plans" shall also include the employer-provided portion
of any other pension or retirement plans sponsored by the predecessor
employer of a Participant and of any retirement or pension allowance
(but not any form of severance or special termination payment) set forth and
payable pursuant to any employment contract or any other agreement
(other than an individual deferred compensation contract under which
elective employee salary or bonus deferrals are made) between the Participant
and the predecessor employer of a Participant providing for benefits
attributable in whole or in part to service which is recognized under the
Plan as Creditable Service.
<PAGE>
Notwithstanding the foregoing, the employer-provided portion of the
benefits paid or payable to or on behalf of a Participant pursuant to Other
Plans shall only include a proportionate share of such benefits based on the
ratio by which the portion of the service recognized under the Other Plan
which is recognized as Creditable Service bears to the total service
recognized under the Other Plan.
2.16 "Outside Agreement" shall mean a written agreement entered into
between a duly authorized officer of the Company with authority to act in the
matter and a Participant which recognizes any period of time prior to
the commencement of such Participant's employment with the Company as service
for purposes of certain retirement or other benefits or modifies any of the
benefits or provisions of the Plan.
2.17 "Participant" shall mean any Active Participant, Vested
Participant, Frozen Participant or Retired Participant.
(a) "Active Participant" shall mean an employee from the time
participation in the Plan begins pursuant to Plan Section 3 until the
earliest of the time:
(i) the Participant retires,
(ii) the Participant dies,
(iii) the Participant terminates employment with the
Company and its Subsidiaries, or
(iv) the Plan is terminated.
In addition, if a Participant is placed on inactive employee status, as
defined by the Retirement Board from time to time under uniform and
nondiscriminatory rules, and, at the date of such change in status, the
Participant has attained age 62 or the sum of the Participant's age and
years of Creditable Service total at least 80 years, the Participant
will continue as an Active Participant in the Plan.
(b) "Retired Participant" shall mean a former employee who has
retired on or after meeting the requirements for a Supplemental
Retirement Allowance under Plan Section 4.1.
(c) "Vested Participant" shall mean an employee or former
employee of the Company or Subsidiary who ceased to be an Active
Participant, who has not become a Retired Participant and who,
immediately after ceasing to be an Active Participant, has a
Nonforfeitable right to benefits under Plan Section 10.
2.18 "Plan" shall mean this Supplemental Executive Retirement and
Life Plan of Avon Products, Inc., as from time to time amended.
2.20 "Pre-Retirement Beneficiary's Allowance" shall mean the benefit
payable to the Beneficiary of certain Participants, pursuant to the SERP and
as described in Plan Section 5.1.
<PAGE>
2.19 "Post Retirement Beneficiary's Allowance" shall mean the benefit
payable to the Beneficiary of certain Participants pursuant to the SERP and
as described in Plan Section 5.2.
2.20 "Retirement Board" shall mean the person or persons appointed to
administer the Plan as provided in Plan Section 8.
2.21 "Retirement Plan" shall mean, prior to July 1, 1998, the
Employees' Retirement Plan of Avon Products, Inc. and thereafter, the Avon
Products, Inc. Personal Retirement Account Plan, as amended from time to time.
2.22 "SERP" shall mean the portion of the Plan pursuant to which
Supplemental Retirement Allowances, Pre-Retirement Beneficiary's Allowances,
Post-Retirement Beneficiary's Allowances and Dependent Children's Allowances
are payable.
2.23 "SLIP" shall mean the portion of the Plan pursuant to which
Supplemental Life Allowances are payable.
2.24 "Subsidiary" shall mean any majority-owned subsidiary of the
Company.
2.25 "Supplemental Life Allowance" shall mean the benefit referred
to in Plan Section 6.
2.26 "Supplemental Retirement Allowance" shall mean the benefit
referred to in Plan Section 4.
2.27 "Surviving Spouse" shall mean the spouse to whom the Participant
was married on the date the Participant's Supplemental Retirement Allowance
commenced under this Plan or on the Participant's date of death, if earlier.
SECTION 3
PARTICIPATION
3.1 Commencement of SERP Participation.
(a) Each individual who was a Participant in the SERP as of
June 30, 1998, shall be a Participant in the SERP on July 1, 1998.
A listing of Participants in the SERP as of July 1, 1998 is attached
to the Plan as Appendix A, which Appendix may thereafter be updated
from time to time, provided that all updates shall be attested by the
signatures of two members of the Retirement Board.
(b) The Compensation Committee shall have the authority to
include as Active Participants in the SERP officers of the Company on
the U.S. payroll, at the level of Senior Vice President or above, who
are covered by individual employment agreements with the Company which
have been approved by the Board of Directors, and such other management
or highly compensated employees of the Company or a Subsidiary (within
the meaning of Section 201(2) of the Employee Retirement Income
Security Act of 1974, as amended) as it deems fit.
<PAGE>
3.2 Commencement of SLIP Participation.
Any employee who is an Active Participant in the SERP shall also be an
Active Participant in the SLIP.
3.3 Termination of SERP Participation.
When an individual ceases to be an Active Participant (as defined in
Section 2.17(a) hereof), he shall cease to be a Participant and shall
have no rights to a Supplemental Retirement Allowance unless he is a
Vested Participant or a Retired Participant.
3.4 Termination of SLIP Participation.
(a) If an individual who first became a Participant prior to
January 1, 1990, ceases to be an Active Participant, he shall continue
to be a Participant in the SLIP if he is eligible for a Supplemental
Life Allowance in accordance with the provisions of Plan Section 6.
(b) If an individual who first became a Participant on or
after January 1, 1990, ceases to be an Active Participant, he shall
cease to be a Participant in the SLIP on the date he ceases to be an
Active Participant.
SECTION 4
SUPPLEMENTAL RETIREMENT ALLOWANCES
4.1 Nonforfeitable Right to a Supplemental Retirement Allowance.
(a) An Active Participant who attains Normal Retirement Age
shall have a Nonforfeitable right to benefits under this Section 4,
subject to the provisions of Plan Section 9, and may retire and
receive payment of a Normal Retirement Allowance under the SERP.
Payment of the Normal Retirement Allowance shall commence not later than
thirty (30) days after the later of the date the Participant actually
retires or attains age 65.
(b) An Active Participant who has attained age 55 and has
fifteen (15) or more years of Creditable Service, or whose attained age
plus his Creditable Service totals at least 85 years, shall have a
Nonforfeitable right to benefits under this Section 4 and may retire
and apply for payment of an Early Retirement Allowance under the SERP.
Payment of the Early Retirement Allowance shall commence on the first
day of the calendar month next following his date of retirement.
(c) An Active Participant who has attained age 58 and completed
fifteen (15) or more years of Creditable Service and who is deemed to be
suffering from a hardship, as determined in the sole and unilateral
discretion of the Retirement Board on a case-by-case basis, shall have
a Nonforfeitable right to benefits under this Section 4 and may
retire and apply for payment of a Hardship Retirement Allowance. Payment
of the Hardship Retirement Allowance shall commence on the first day of
the month following the date the Participant's application for retirement
<PAGE>
is approved by the Retirement Board.
(d) Approval by the Retirement Board under this Section 4
may be evidenced by the written consent of any two members of such
Board. In the event the Plan is amended or terminated or in the
event of a Change of Control of the Company, Participants shall have
the right to a Supplemental Retirement Allowance pursuant to
Plan Section 10.
4.2 Amount of Normal Retirement Allowance.
(a) The annual Normal Retirement Allowance under the SERP for
Participants who have a Nonforfeitable right to such an allowance
pursuant to Plan Section 4.1(a) shall be equal to:
(1) 2% of the Participant's Average Final Compensation
multiplied by the Participant's Creditable Service up to
twenty-five (25) years; plus
(2) 1% of the Participant's Average Final Compensation
multiplied by the Participant's Creditable Service in excess of
twenty-five (25) years but not in excess of thirty-five
(35) years; less
(3) the Annual Benefit Offset.
(b) Notwithstanding the provisions of Plan Subsection 4.2(a),
any Participant entitled to a benefit pursuant to Plan Section 4.1(a)
who (i) is or was an officer of the Company as of January 1, 1995, at
the level of Senior Vice President or above, and covered by an
individual employment agreement with the Company which had been
approved by the Board of Directors or (ii) is or was a senior executive
designated by the Compensation Committee as eligible to receive a minimum
allowance, shall receive an annual Normal Retirement Allowance which,
when added to the Actuarial Equivalent of the benefit paid or payable
to such Participant under the Retirement Plan and Other Plans
(expressed as an annual benefit in the same form as the benefit under
Plan Section 4.2 is payable), is not less than fifty percent (50%) of the
Participant's Average Final Compensation. Such offset shall be
calculated in a manner similar to that set forth in the definition of
Annual Benefit Offset.
4.3 Amount of Early Retirement Allowance.
(a) The annual Early Retirement Allowance under the SERP for
Participants who have a Nonforfeitable right to such an allowance
pursuant to Plan Section 4.1(b) shall be equal to the Normal
Retirement Allowance determined in accordance with Plan
Subsection 4.2(a), based on the Participant's Average Final
Compensation and Creditable Service at the date of retirement;
provided, however, that if the Participant retires before
the sum of such Participant's age and Creditable Service is 85 years,
the allowance shall be calculated by determining the benefit without
regard to the Annual Benefit Offset, by reducing the benefit 3/12ths of
<PAGE>
1% for each month by which the date the allowance commences precedes
the month in which the Supplemental Retirement Allowance would
have commenced if the Participant retired at Normal Retirement Age and
by 5/12ths of 1% for each such month in excess of sixty (60) months and
by then applying the Annual Benefit Offset. The Early Retirement
Allowance payable to a Participant whose age and Creditable Service
total at least 85 years shall be equal to the allowance determined in
accordance with Plan Subsection 4.2(a) based on Average Final
Compensation and Creditable Service at the time of retirement without
reduction for commencement of payment prior to Normal Retirement Age;
provided, however, that if such allowance commences after the first day
of the calendar month following the month in which the Participant
retires, the allowance shall be increased so that it is the Actuarial
Equivalent of the allowance payable as of the first day of the month
following the month in which the Participant retires.
(b) Notwithstanding the provisions of Plan Subsection
4.3(a) above, any Participant entitled to a benefit pursuant to Plan
Section 4.1(b) who has attained age 60 and completed fifteen (15) years
of Creditable Service and who (i) is or was an officer of the Company
as of January 1, 1995, at the level of Senior Vice President or above,
and covered by an individual employment agreement with the Company
which had been approved by the Board of Directors or (ii) is or was a
senior executive designated by the Compensation Committee as eligible
to receive a minimum allowance, shall receive an annual Early
Retirement Allowance which, when added to the Actuarial Equivalent of
any retirement allowance paid or payable to such Participant under the
Retirement Plan and any Other Plans (expressed as an annual benefit in
the same form as the benefit payable pursuant to this Plan Section 4.3)
is not less than fifty percent (50%) of the Participant's Average Final
Compensation, reduced by 4/12ths of 1% for each month by which the
Participant's date of retirement precedes Normal Retirement Age; provided,
however, that if such allowance commences after the first day of the
calendar month following the month in which the Participant retires,
the allowance shall be increased so that it is the Actuarial Equivalent
of the allowance payable as of the first day of the month following the
month in which the Participant retires. The offset described in the
immediately preceding sentence shall be calculated in a manner similar
to that set forth in the definition of the Annual Benefit Offset.
4.4 Amount of Hardship Retirement Allowance.
The annual Hardship Retirement Allowance under the SERP for
Participants who have a Nonforfeitable right to such an allowance pursuant to
Plan Section 4.1(c) or 4.1(d) shall be equal to the Normal Retirement
Allowance determined in Plan Subsection 4.2(a), based on the Participant's
Average Final Compensation and Creditable Service at the date of retirement;
provided, however, such allowance shall in no event be less than the Early
Retirement Allowance to which such Participant would be entitled upon
retirement under Plan Subsection 4.3(b), if applicable.
4.5 Restoration of Retired Participants to Service.
Anything contained in this Plan to the contrary notwithstanding, if a
<PAGE>
Participant who has received or is receiving a Supplemental Retirement
Allowance again becomes an employee of the Company or a Subsidiary, any
retirement allowance payable under this Plan shall cease upon reemployment
and such allowance shall commence to be paid when the Participant again
retires. On subsequent retirement, the Supplemental Retirement Allowance
payable to such Participant shall be based on Compensation and Creditable
Service before and after the period of prior retirement, reduced by an
amount which is the Actuarial Equivalent of the benefits the Participant
received prior to reemployment; provided, however, that such benefit shall
not be less than the benefit the Participant was receiving during prior
retirement.
4.6 Outside Agreements.
(a) To the extent an Outside Agreement provides for a benefit
in addition to (or on the terms and conditions different from) any
benefit otherwise payable under the Plan, such benefit under such
Outside Agreement shall be deemed to be, and shall be, payable under
this Plan.
(b) Nothing in Plan Subsection (a) above shall be construed to
limit any rights of any Participant under an Outside Agreement, except
that any benefits paid hereunder pursuant to this Plan Section 4.6 shall
be offset against any amounts payable with respect to any substantially
similar obligations under the Outside Agreement so as to avoid
duplication of payment.
SECTION 5
BENEFICIARY RETIREMENT ALLOWANCES
5.1 Pre-Retirement Beneficiary's Allowance.
(a) If, prior to receipt of a Supplemental Retirement Allowance,
a Participant dies while employed by the Company or a Subsidiary and
has at least ten (10) years of Creditable Service, or has attained age
65, or dies while receiving disability benefits under the Company's
Short Term or Long Term Disability Insurance Plans and after having
completed ten (10) years of Creditable Service, or dies with
Nonforfeitable benefits under Plan Section 10, his Beneficiary shall
receive a Pre-Retirement Beneficiary's Allowance under the SERP payable
during the Beneficiary's remaining lifetime.
(b) Payment of the annual Pre-Retirement Beneficiary's
Allowance under the SERP shall commence as of the first day of the
calendar month following the month in which the Participant died or
would have attained age 55, whichever is later. However, the
Retirement Board may, under rules uniformly applicable to all similarly
situated, approve a request made by a Beneficiary to commence payment on
the first day of any earlier calendar month after the Participant's death
("early commencement date" hereafter).
(c) If the Pre-Retirement Beneficiary's Allowance commences as
<PAGE>
of the first day of the month following the month in which the
Participant died or would have attained age 55, whichever is later, the
Pre-Retirement Beneficiary's Allowance shall be an annual allowance for
the life of the Beneficiary, payable monthly, equal to the allowance
(based on the Participant's Creditable Service as of his date of death)
the Beneficiary would have received if the Participant had retired and
begun to receive the Supplemental Retirement Allowance in the form of a
100% joint and survivor annuity with such Beneficiary on the date of
death, or on the date such Participant would have attained age 55, if
later. Notwithstanding the foregoing, if the Participant was married
or had a Domestic Partner on the date of the Participant's death, and
the Pre-Retirement Beneficiary's Allowance is payable to such spouse or
Domestic Partner, the Pre-Retirement Beneficiary Allowance shall not be
less than an amount equal to twenty percent (20%) of the Participant's
annual rate of Compensation at the time of his death or earlier
termination of employment, less the Actuarial Equivalent of the amount
of any death benefit allowance (expressed as an annual amount payable for
the life of the Beneficiary and commencing on the same date as the Pre-
Retirement Beneficiary's Allowance commences, regardless of whether the
Beneficiary is the actual recipient of such death benefit allowance) paid
or payable on behalf of such Participant under the Retirement Plan and
any Other Plans.
(d) Notwithstanding Subsection (c) hereof, if a Participant
who as of the date of his death meets one of the requirements set forth
below, dies while employed by the Company or a subsidiary, his Pre-
Retirement Beneficiary's Allowance shall be determined pursuant to this
Section (d):
(1) Such Participant has attained age 65, or
(2) Such Participant has attained age 55 and completed
fifteen (15) or more years' Creditable Service, or
(3) The sum of such Participant's age and Creditable
Service is at least 85.
The amount of such Pre-Retirement Beneficiary's Allowance for such
Participant shall be the Actuarial Equivalent of the Normal Retirement
Allowance, or if applicable, the Early Retirement Allowance, otherwise
payable to the Participant if he had retired as of the date of his death.
Such Pre-Retirement Beneficiary's Allowance shall be payable only in
the form of a single lump sum payment in cash.
In anticipation of the probability that the Pre-Retirement Beneficiary's
Allowance will be subject to both Federal Income Taxes and Federal Estate
Taxes, the payment of a Pre-Retirement Beneficiary's Allowance, at the
Company's sole discretion, may be delayed, in whole or in part, for a
period of up to twelve (12) months following the date of the
Participant'sdeath, and may be subject to appropriate tax withholdings.
If payment is delayed more than sixty (60) days after the date of death,
however, the lump sum amount shall be increased until the actual payment
date using the factors utilized in valuing such lump sum.
<PAGE>
(e) If the Retirement Board approves an early commencement date
with respect to the Pre-Retirement Beneficiary's Allowance under Plan
Subsection (b) above, the Pre-Retirement Beneficiary's Allowance shall
be a monthly allowance for the life of the Beneficiary and shall be
equal to the Pre-Retirement Beneficiary's Allowance the Beneficiary
would have received under Plan Subsection (c) above if the Retirement
Board had not approved the early commencement date, reduced by 1/12th of
5% for each month by which the date payments commence precedes the first
day of the month following the month in which the SERP Participant would
have attained age 55, provided that in no event shall such reduced
allowance be less than the Actuarial Equivalent of the allowance
otherwise payable under Plan Subsection (c) above.
5.2 Post-Retirement Beneficiary's Allowance.
The Beneficiary of a Retired Participant who dies prior to the
commencement of a Supplemental Retirement Allowance will receive a Post-
Retirement Beneficiary's Allowance from the Plan equal to fifty percent (50%)
of the Supplemental Retirement Allowance the Retired Participant would have
been receiving if benefits had commenced in the form provided for in Plan
Section 7.1(b) on the date of the Retired Participant's death. The Post-
Retirement Beneficiary's Allowance under the Plan shall begin on the first
day of the month following the Retired Participant's death and shall be paid
to the Beneficiary for such Beneficiary's remaining lifetime. The Beneficiary
of a Retired Participant who dies after the commencement of a Supplemental
Retirement Allowance under the SERP shall be entitled to receive benefits
from the SERP in accordance with the form of benefit payable to the Retired
Participant in accordance with the provisions of Plan Section 7.
5.3 Dependent Children's Allowance.
(a) Each Dependent Child, up to a maximum of four (4) such
children, shall receive a Dependent Children's Allowance from the SERP
which is a yearly allowance equal to ten percent (10%) of the yearly
amount of the Beneficiary's Allowance calculated under Plan Section 5.1
or 5.2, whichever is applicable, at the time of the Participant's death
(calculated as if the Beneficiary is the Surviving Spouse or Domestic
Partner even if such allowance is not payable to such beneficiaries),
plus ten percent (10%) of the yearly benefits which are payable to the
Surviving Spouse or the Participant's Domestic Partner under the
Retirement Plan and any Other Plan (or would be payable is such benefits
were payable to such Surviving Spouse or Domestic Partner)
(based on the assumption that benefits commence on the same date as
benefits commence hereunder).
(b) For purposes of Plan Subsection (a) above, if the spouse or
Domestic Partner of a Participant predeceases the Participant, the
allowance under Plan Section 5.1 or 5.2 shall be determined as if the
spouse or Domestic Partner had not predeceased the Participant and as if
yearly benefits under the Retirement Plan and any Other Plan are
payable to such predeceased spouse or Domestic Partner and shall be based
upon the spouse's or Domestic Partner's actuarially determined life
expectancy as of the date of the spouse's or Domestic Partner's death.
<PAGE>
(c) For purposes of Plan Subsection (a) above, in the event that
the Participant had no spouse or Domestic Partner, other than for the
reason that the spouse or Domestic Partner predeceased the Participant,
the allowance under Plan Section 5.1 or 5.2 shall be based upon the
assumption that the Participant had a spouse or Domestic Partner who
was five (5) years younger than the Participant, that any yearly benefits
payable under the Retirement Plan and any Other Plan are payable to such
assumed spouse or Domestic Partner, and that the spouse's or Domestic
Partner's allowance under Plan Section 5.1 or 5.2, whichever is applicable,
had commenced on the date of the Participant's death.
(d) For purposes of Plan Subsection (a) above, in the event the
spouse or Domestic Partner of a Participant dies prior to commencement of
benefits under the Plan, the amount of the Dependent Children's Allowance
hereunder shall be determined on the assumption that the spouse's or
Domestic Partner's allowance under Plan Section 5.1 or 5.2, whichever is
applicable, had commenced on the date of the spouse's or Domestic
Partner's death and that any yearly benefits payable under the Retirement
Plan and any Other Plan had commenced on the date of the spouse's or
Domestic Partner's death.
(e) The Dependent Children's Allowance hereunder shall commence
on the day payment of the spouse's or Domestic Partner's allowance
commences (or would have commenced) under the SERP, or the earliest
date it could have commenced had the spouse or Domestic Partner not
predeceased the Participant, or if the Participant had no spouse for
any other reason, on the earliest date it could have commenced had the
Participant had a spouse or Domestic Partner who was five (5) years
younger than the Participant, and shall continue to be paid to each
Dependent Child until the earlier of the date such child ceases to be a
Dependent Child or dies.
(f) If there are more than four (4) Dependent Children, the
total amount otherwise payable to four (4) Dependent Children shall be
divided equally among all Dependent Children at the time such payment is
made. When a child ceases to be a Dependent Child or dies, the total
allowance then payable shall be reallocated among the remaining Dependent
Children to the extent applicable; provided, however, that no
Dependent Child shall be entitled to an allowance in excess of the benefit
set forth in Plan Subsection (a) above.
5.4 Allowance to Spouse Not Reduced.
The amount of any allowance payable to a Beneficiary under Plan Section
5.1 or 5.2 shall not be reduced due to the payment of a benefit under the Plan
to one or more Dependent Children.
5.5 Domestic Partner Benefits.
Notwithstanding anything contained in this Section 5 to the contrary, the
provisions of this Section 5 concerning Domestic Partners and Dependent
Children of Domestic Partners shall not be effective until January 1, 1999.
<PAGE>
SECTION 6
SUPPLEMENTAL LIFE ALLOWANCES
6.1 Right to a Supplemental Life Allowance.
(a) A Participant becomes eligible for a Supplemental Life
Allowance payable to his Beneficiary if he dies:
(1) while an Active Participant who is either employed by
the Company or a Subsidiary or is receiving a disability benefit
under the Company's Short Term or Long Term Disability Plans; or
(2) while a Frozen Participant or a Retired Participant,
provided he became an Active Participant in the SLIP prior to
January 1, 1990;
(3) while an employee, provided he became an Active
Participant in the SLIP prior to January 1, 1990, and was an
Active Participant for at least five (5) years;
(b) A Participant who became an Active Participant in the
SLIP prior to January 1, 1990, and is a Participant at the time the
Plan is terminated or modified or at the time of a Change of Control
will be entitled to a Supplemental Life Allowance as provided in
Plan Section 10.
(c) A Participant shall become Nonforfeitable in a Supplemental
Life Allowance only if he dies under one of the circumstances described
in Subsection (a) of this Section, if he was an Active Participant in
the Plan prior to January 1, 1990 and becomes Nonforfeitable in a
Supplemental Retirement Allowance or as provided in Section 10.
6.2 Amount of Supplemental Life Allowance.
(a) If a Participant has a right to a Supplemental Life
Allowance as described above, the Beneficiary of such Participant
shall receive a Supplemental Life Allowance payable upon the death
of a Participant, provided that such Participant has not made the
election described in Plan Section 6.4 or 6.5.
(b) The amount of the Supplemental Life Allowance shall be
as established by the Compensation Committee upon the Participant's
commencement of participation in the Plan, except that the
Compensation Committee reserves the right to increase or reduce
the amount of such allowance from time to time, subject to the
provisions of Plan Section 10. Notwithstanding the foregoing, if
an Active Participant first became a Participant in the Plan prior
to January 1, 1990, his level of coverage under the SLIP may not be
reduced after he has been an Active Participant for at least two years
for so long as he remains an Active Participant. Further, if a
Participant has a right to a Supplemental Life Allowance pursuant to
Plan Section 6.1(a)(ii) or (iii), his benefit under the SLIP will
continue at the same level as in effect on the date preceding the date
he ceased to be an Active Participant.
<PAGE>
6.3 Notwithstanding the foregoing, if the Company obtains a life
insurance policy (or policies) on the life of a Participant whether or not
in connection with this Plan and the insurer is not obligated to pay the
policy's death benefit proceeds on the grounds that the Participant committed
suicide or any other grounds based on actions or inactions on the part of the
Participant, then and in that event, the Company's obligation to make payments
of a Supplemental Life Allowance shall be terminated. The Company shall, in
its sole discretion, determine what steps are necessary and take such action
as it deems reasonably appropriate to pursue and obtain payment of any death
benefit under said policy or policies. Whatever steps are deemed appropriate
by the Company to pursue this matter shall be conclusive. In no event shall
any Participant have any ownership interest in such policy or policies.
6.4 Notwithstanding the foregoing, a SLIP Participant may elect not
to be covered by the Supplemental Life Allowance benefit provided under this
Plan Section 6.
6.5 Subject to the terms and conditions imposed by the Retirement Board
any Participant who is eligible for the Supplemental Life Allowance during the
time such Participant is a Retired Participant, may elect, subject to the
approval of the Retirement Board, to forego the Supplemental Life Allowance
coverage provided under this Plan Section 6 in exchange for a paid-up whole
life insurance policy or policies (based on the application of dividends to
pay premiums) on such Retired Participant's life in an amount to be determined
by the Retirement Board. In the case of any such election, the Company will
also pay cash to such Retired Participant in an amount sufficient to enable
such Participant to pay any federal, state, and local income taxes
(calculated at the highest applicable marginal rates) resulting from the
distribution of such policy or policies and the corresponding cash payment.
6.6 If (a) a Participant terminates employment prior to becoming a
Retired Participant or (b) the Company has obtained a life insurance policy
on the life of such Participant to assist it in meeting its obligations
under this Plan, and (c) such policy provides that it may be assigned,
then if the Company elects, the Participant may purchase such policy from
the Company on such terms and conditions as shall be determined by the
Retirement Board; provided, however, that in no event shall the Company
receive less than the amount of cash it could have received had it
surrendered such policy to the insurer.
SECTION 7
FORMS OF PAYMENT
7.1 Automatic Form.
(a) Except as otherwise provided for married Participants or,
effective January 1, 1999, Participants with Domestic Partners pursuant
to Plan Subsection 7.1(b), or unless an optional form of retirement
allowance has been requested by the Participant under Plan Section 7.2
and approved by the Retirement Board, the annual Supplemental Retirement
Allowance shall be payable in monthly installments for the life of the
Participant only, ending with the last monthly payment during the month
of the Participant's death.
<PAGE>
(b) Unless an optional form of retirement allowance has been
requested by the Participant under Plan Section 7.2 and has been
approved by the Retirement Board, the automatic form of payment of
a Supplemental Retirement Allowance to a Participant who is married
or has a Domestic Partner at the date the retirement allowance begins
shall be a joint and survivor benefit payable to the Participant in the
amount determined pursuant to the applicable Subsection of Plan
Section 4 payable during the lifetime of the Participant with the
provision that after the Participant's death an annual Supplemental
Retirement Allowance shall be payable to the Surviving Spouse or
Domestic Partner of the Participant equal to one-half the
Supplemental Annual Retirement Allowance payable during the
Participant's life.
(c) Notwithstanding anything contained in Subsections (a) and
(b) of this Plan Section 7.1 to the contrary, if the Actuarial Equivalent
present value of any Supplemental Retirement Allowance payable to a
Participant (including the value of any benefit payable to his
Surviving Spouse or Domestic Partner after his death) does not exceed
$10,000, or such greater amount as the Retirement Board shall from time
to time determine under rules of uniform applicability, the Company may
pay the Participant or Beneficiary a single lump sum payment.
(d) Notwithstanding anything contained in the Plan to the
contrary, on and after a Change of Control, the normal form of
Supplemental Retirement Allowance shall be a single lump sum payment
in cash.
7.2 Request for Optional Form.
(a) Any Participant (other than Participants who have been
cashed out by the Company pursuant to Plan Subsection 7.1(c) or 7.1(d))
may, by written notice received by a member of the Retirement Board at
least two (2) months prior to retirement or in the case of a Vested
Participant, at least two months prior to the due date of the first
payment of the Supplemental Retirement Allowance, request that the
allowance be converted into an optional form of retirement allowance
of Actuarial Equivalent value, in accordance with any form of payment
as may be permitted under the Retirement Plan. Such request shall be
subject to the approval of the Retirement Board. For purposes of this
PlanSection 7.2, a retirement allowance of a Participant who is married
or has a Domestic Partner prior to conversion into an optional form
shall include the value of the benefit to be continued to the Surviving
Spouse or Domestic Partner after the Participant's death. In the event a
lump sum optional form of benefit is payable and such sum is not paid on
the date benefit payments are scheduled to commence, the lump sum
benefit shall be increased until the date paid by the interest rate
factors utilized in valuing such lump sum.
(b) A Beneficiary entitled to a Supplemental Retirement
Allowance pursuant to Plan Section 5.1 or 5.2 may, by written notice
received by a member of the Retirement Board within sixty (60) days
following the Participant's date of death, or if later, within
<PAGE>
thirty (30) days following the Beneficiary's receipt of written notice
from the Company that he or she is entitled to an allowance under the
Plan, request that the allowance be converted into a lump sum optional
form of benefit of Actuarial Equivalent value. Such request shall be
subject to the approval of the Retirement Board. In the event a lump
sum optional form of benefit is payable and such sum is not paid on the
date benefit payments are scheduled to commence, the lump sum benefit
shall be increased until the date paid by the interest rate factors
utilized in valuing such lump sum.
7.3 Effective Optional Forms.
The optional form of Supplemental Retirement Allowance requested and
approved under Plan Section 7.2 shall become effective on the first day of
the month for which the Participant's allowance is payable. If the
Participant dies, or the designated Beneficiary dies before the first
day of the month for which the Participant's allowance is payable under a
contingent annuitant option, the approved option shall thereby be revoked.
7.4 Elective Transfer to Deferred Compensation Plan.
A Participant may elect by written notice delivered to the Company at
least six months prior to the date on which the Supplemental Retirement
Allowance would otherwise have been paid or commenced, or such other date
as the Company may establish, to have the lump sum Actuarial Equivalent
value of his or her Supplemental Retirement Allowance credited to the
Participant's account under the Avon Products, Inc. Deferred Compensation
Plan. If such election is made, the crediting of the Participant's account
in the Avon Products, Inc. Deferred Compensation Plan of the amount required
under this Section 7.4 shall be in complete discharge and satisfaction of
the Company's obligation to pay the Participant a Supplemental Retirement
Allowance pursuant to the SERP.
SECTION 8
ADMINISTRATION OF THE PLAN
8.1 Except as otherwise specifically provided in the Plan, the
Retirement Board shall be the administrator of the Plan. The Retirement
Board shall have full authority to determine all questions arising in
connection with the Plan, including the discretionary authority to interpret
the Plan, to adopt procedural rules and to employ and rely on such legal
counsel, actuaries, accountants and agents as it may deem advisable to assist
in the administration of the Plan. Decisions of the Retirement Board shall be
conclusive and binding on all persons. The Retirement Board shall provide to
the trustee of any Trust established pursuant to Plan Section 1, such
certification or other documentation as may be required by the trustee
in connection with the payment of benefits to Participants.
8.2 After a Change in Control, the Retirement Board may be changed by
the Company only with the consent of a majority of the Participants
(excluding Beneficiaries).
<PAGE>
SECTION 9
CERTAIN RIGHTS AND LIMITATIONS
9.1 The establishment of the Plan shall not be construed as
conferring any legal rights upon any employee or other person for a
continuation of employment, nor shall it interfere with the rights of the
Company or a Subsidiary to discharge any employee and to treat such employee
without regard to the effect which such treatment might have upon such
employee as a Participant of the Plan.
9.2 If the Retirement Board shall find that a Participant or other
person entitled to a benefit is unable to care for his affairs because
of illness, accident or is a minor, the Retirement Board may direct that
any benefit payment due such participant or other person, unless claim
shall have been made therefor by a duly appointed legal representative, be
paid to the spouse, a child, parent or other blood relative, or to a person
with whom the Participant or other person resides. Any such payment so made
shall be a complete discharge of the liabilities of the Plan with respect to
such Participant or such other person.
9.3 Each Participant, before any benefit shall be payable to or on
behalf of such person under the Plan, shall file with a member of the
Retirement Board at least thirty (30) days prior to the time of retirement
or in the case of a Vested Participant prior to the earliest date the
retirement allowance can commence, such information, if any, as shall be
required to establish such person's rights and benefits under the Plan.
9.4 No benefit under the Plan shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, garnishment,
attachment, encumbrance or charge, and any attempt so to do shall be void;
nor shall any such benefit be in any manner liable for or subject to the
debts, contract liabilities, engagements or torts of the person entitled to
such benefit.
9.5 The obligation of the Company to make or continue payment of
any benefits hereunder shall cease with respect to any Participant who
(a) at any time is convicted of a crime involving dishonesty or fraud
relating to the Company (b) at the time, without the Company's written
consent knowingly uses or discloses any confidential or proprietary
information relating to the Company or (c) within three years following
termination of employment, without the Company's written consent, accepts
employment with, or provides consulting services to, a principal
competitor of the Company.
9.6 Except to the extent a Participant has a Nonforfeitable right to a
benefit pursuant to Plan Section 10, if, after written notice by the Company,
the Participant declines retirement at the request of the Company, or if the
Participant's voluntary retirement (other than for disability) prior to
age 62 is not approved by the Company, the Retirement Board shall have the
right to cause forfeiture of any benefit to or on account of the Participant
under the Plan.
9.7 A Participant at the time participation commences shall supply the
<PAGE>
Retirement Board with such evidence of good health and insurability, including
a physical examination, as the Retirement Board may from time to time require
to satisfy any insurance company in connection with obtaining life insurance
for benefits under Plan Section 6. A Participant who fails to supply such
evidence when required shall not be entitled to such benefits under Plan
Section 6.
9.8 All benefits payable under the Plan shall be payable by the
Company from its general assets. The Plan shall not be funded by the Company.
However, solely for its own convenience the Company reserves the right to
provide for payment of benefits hereunder through a trust which may be
irrevocable but the assets of which shall be subject to the claims of
the Company's general creditors in the event of the Company's bankruptcy or
insolvency, as defined in the Trust established pursuant to Plan Section 1.
In no event shall the Company be required to segregate any amount credited to
any account, which shall be established merely as an accounting convenience;
no Participant, Beneficiary, Surviving Spouse or Dependent Child shall have
any rights whatsoever in any specific assets of the Company or the Trust; no
rights of any Participant, Beneficiary, Surviving Spouse or Dependent Child,
hereunder shall be subject to participation, alienation, sale, transfer,
assignment, pledge, garnishment, attachment or encumbrance nor to the debts,
contracts, liabilities, engagements or torts of any Participant, Beneficiary,
Surviving Spouse or Dependent Child.
9.9 When payments commence under the Plan, the Company shall have
the right to deduct from each payment made under the Plan any required
withholding taxes.
9.10 Notwithstanding any other provision of the Plan to the contrary,
the Company shall make payments hereunder before such payments are otherwise
due if it determines, based on a change in the tax or revenue laws of the
United States of America, a published ruling or similar announcement issued
by the Internal Revenue Service, a regulation issued by the Secretary of the
Treasury or his delegate, a decision by a court of competent jurisdiction
involving a Participant or Beneficiary, or a closing agreement made under
Internal Revenue Code section 7121 that is approved by the Internal Revenue
Service and involves a Participant or Beneficiary, that a Participant or
Beneficiary has recognized or will recognize income for federal income tax
purposes with respect to amounts that are or will be payable to him under the
Plans before they are paid to him.
SECTION 10
AMENDMENT AND TERMINATION OF THE PLAN
10.1 Right to Amend.
The Board of Directors (or the Compensation Committee to the extent it
has been delegated authority) reserves the right at any time and from time to
time, and retroactively if, to amend or modify in whole or in part, any or
all of the provisions of the Plan pursuant to its normal procedures; provided
that no such modification or amendment shall adversely affect the rights and
benefits of Participants which had accrued or become Nonforfeitable under this
Plan prior to the date such amendment or modification is adopted or becomes
<PAGE>
effective, whichever is later. For purposes of this Plan Section 10,
"accrued" benefits refers to the benefits to which a Participant would be
entitled, based on his Creditable Service and Compensation as of the date
the determination is made, assuming the Participant had a Nonforfeitable
right to benefits as of such date.
10.2 Right to Terminate.
The Board of Directors (or the Compensation Committee to the extent it
has been delegated authority) may terminate the Plan for any reason at any
time provided that such termination shall not adversely affect the rights
and benefits of Participants which had accrued or become Nonforfeitable
under the Plan prior to the date termination is adopted or made effective,
whichever is later.
10.3 Effect of Plan Termination on Benefits.
(a) In the event the Plan is terminated, each Participant,
whether or not such Participant has met the age or service requirements
to be entitled to a benefit under the SERP or under the Retirement
Plan, shall have a Nonforfeitable right to: (i) the Supplemental
Retirement Allowance described in Plan Section 4, which such Participant
had accrued through the date of the termination of the Plan; and
(ii) to the death benefits described in Plan Section 5, based upon
the Plan Section 4 benefits accrued by the Participant through the
date of Plan termination.
(b) For purposes of Plan Section 4, such accrued benefit shall
be computed in accordance with Plan Section 4.3 as though the date
of termination of the Plan were the Participant's date of retirement,
provided that (i) if the Participant is less than age 55, his
minimum percentage benefit described in Plan Subsection 4.3(b) shall
be determined upon the assumption that the Participant were age 55,
and such minimum benefit shall then be multiplied by a fraction, the
numerator of which is the Participant's years of Creditable Service
and the denominator of which is his years of such Creditable Service
projected to age 55, and (ii) if the Participant terminates employment
involuntarily as described in Plan Section 10.5 before he attains age 65
and before his age and Creditable Service total 85 years and his
Supplemental Retirement Allowance commences on or after the date his
age and Creditable Service would have totaled 85 years if his
employment with the Company or a Subsidiary had continued, or it
commences on or after his attainment of age 65, his Supplemental
Retirement Allowance shall be computed without applying the reduction
for early commencement.
(c) The payment of the Supplemental Retirement Allowance
described in this Section shall commence at the time a Participant
(or the Participant's Beneficiary or Dependent Children) meets, under
the terms of the Plan at the time of its termination, the requirements
for payment of benefits whether or not employed by the Company at that
time. For this purpose, the Participant shall be considered to accrue
Creditable Service for purposes of determining the Participant's
eligibility for the receipt of a Supplemental Retirement Allowance
<PAGE>
as if the Participant continued in the service of the Company as an
Active Participant in the Plan, whether or not the Participant remains
in the employ of the Company). Notwithstanding the foregoing, the
Company in its discretion can pay a lump sum of Actuarial Equivalent
value of any benefits due to the Participant or his Beneficiary or
Dependent Children at any time following the termination of the Plan.
(d) A Participant who participated in the SLIP prior to
January 1, 1990, shall have a right to the Supplemental Life Allowance at
the same level in effect at the time of Plan termination. The Company
shall fully satisfy all of its obligations to the Participant
with respect to such Supplemental Life Allowance by immediately
distributing or causing to be distributed to such Participant a fully
paid whole life insurance policy or policies on the Participant's life
which, as of the date of distribution and thereafter will provide,
without application of dividends, at death a death benefit at least
equal to one-half of the amount of the Supplemental Life Allowance.
In the case of any such distribution of a life insurance policy, the
Company will also pay enough cash to the Participant to enable the
Participant to pay any federal, state and local income taxes (calculated
at the highest applicable marginal rates) resulting from the
distribution of the policy and the corresponding cash payment made
pursuant to this sentence.
10.4 Effect of Plan Amendment on Benefits.
In the event the Plan is amended or modified in whole or in part to
reduce future accruals of benefits, Supplemental Retirement Allowances or
death benefits or to reduce or eliminate Supplemental Life Allowances, the
Participants affected by any such amendment or modification
shall be treated:
(a) with respect to the Supplemental Retirement Allowance
or death benefits based thereon that accrued through the date of such
amendment or modification and were affected by such amendment or
modification as if the Plan were terminated as of such date and their
rights and entitlement to these benefits shall be determined under
Plan Section 10.3; provided, however, that such Participants shall
be entitled to continue to accrue benefits after the date of such
amendment or modification under such modified or amended terms of the
Plan; and
(b) with respect to a Supplemental Life Allowance as of the
date of such amendment or modification as if the Plan were terminated
as of such date and their rights and entitlement to these benefits
shall be determined under Plan Section 10.3(d); provided, however,
that such Participants shall be entitled to continue to accrue benefits
after the date of such amendment or modification under such modified or
amended terms of the Plan.
10.5 Effect of a Change of Control.
In the event of a Change of Control of the Company, then, with respect to
<PAGE>
(a) any person who has a right to a Supplemental Life Allowance
as described in Plan Section 6.1, whether retired, terminated or still
actively employed by the Company, and
(b) any person who is an Active Participant in the SERP at
the time of the Change of Control (or a former officer who is eligible
to be a Participant under Plan Section 4.1(d)) who subsequently either
ceases for any reason, other than voluntary termination of employment
as defined in Plan Section 10.6 below, to be an Active Participant or
becomes eligible for Plan participation at a reduced level,
then the Plan shall be deemed terminated at the date of the Change of Control
with respect to determining the Supplemental Life Allowance for persons
described in clause (a) above or the date of termination of employment with
respect to determining the Supplemental Retirement Allowance and death benefits
for persons described in clause (b) above. Any such person's right
and entitlement to Supplemental Retirement Allowances and death benefits
based on the Supplemental Retirement Allowance accrued through such date, and
Supplemental Life Allowances (including his or her right to an immediate
distribution of a fully paid whole life policy and income tax gross up)
payable to Participants who participated in the SLIP on January 1, 1990,
shall be determined under the provision of Plan Section 10.3; provided,
however that such Participants shall be entitled to continue to accrue
benefits after the date of the Change of Control under such terms of the Plan
if they are still eligible to continue participation
under the Plan.
10.6 Voluntary Termination of Employment.
For purposes of Plan Section 10.5, a voluntary termination of
employment shall mean any termination initiated by the Participant except
a termination initiated after:
(a) any substantial adverse change in position, duties, title
or responsibilities, other than merely by reason of the Company ceasing
to be a publicly-traded corporation;
(b) any material reduction in base salary or, unless replaced by
equivalent arrangements, any material reduction in annual bonus
opportunity or pension or welfare benefit plan coverages;
(c) any relocation required by the Company to an office or
location more than 25 miles from the Participant's current regular
office or location; or
(d) any failure of the Company to obtain the agreement of a
successor entity to assume the obligations set forth hereunder, provided
that the successor has had actual notice of the existence of this
arrangement and an opportunity to assume the Company's
responsibilities hereunder during a period of at least 10 business
days after receipt of such notice; provided that, in order for a
particular event to be treated as an exception to a "voluntary
<PAGE>
termination," a Participant must assert such exception within 180 days
after actual knowledge of the events giving rise thereto by giving the
Company written notice thereof and an opportunity to cure.
Notwithstanding the foregoing, in the event that any employment
agreement between the Participant and the Company or a Subsidiary in
effect at the time of such termination provides a definition of
"constructive termination" or termination for "good reason" or similar
terminology, such definition shall govern over the event described in
this Plan Section 10.6 to the extent that it provides addition
exceptions to the events which are considered a voluntary termination.
10.7 Effect of Merger or Acquisition.
If any company now or hereafter becomes a Subsidiary of the Company, the
Board of Directors (or the Compensation Committee to the extent it has been
delegated authority) may include an employee of such Subsidiary in the
membership of the Plan upon appropriate action by such company. In such
event, or, as a result of the merger or consolidation or as the result of
acquisition by the Company of all or part of the assets or business of
another company, the Board of Directors (or the Compensation Committee to the
extent it has been delegated authority) shall determine to what extent, if
any, benefits shall be granted for previous service with such Subsidiary,
or other company.
SECTION 11
CLAIM PROCEDURES
11.1 Every claim for benefits under the Plan shall be in writing
directed to a member of the Retirement Board.
11.2 Each claim filed shall be passed upon by the Retirement Board
within a reasonable time from its receipt. If a claim is denied in whole
or in part the claimant shall be given written notice of the denial in
language calculated to be understood by the claimant, which notice shall:
(a) specify the reason or reasons for the denial;
(b) specify the Plan provisions giving rise to the denial; and
(c) describe any further information or documentation necessary
for the claim to be honored, explain why such documentation or
information is necessary, and explain the Plan's review procedure.
11.3 Upon written request of any claimant whose claim has been denied
in whole or in part, the Retirement Board shall make a full and fair review
of the claim and furnish the claimant with a written decision concerning it.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be
Executed as of , 1988.
AVON PRODUCTS, INC.
By: /s/ James E. Preston
Title: Chariman of the Board
ATTEST:
/s/ Ward M. Miller, Jr.
Ward M. Miller, Jr.
Secretary
[CORPORATE SEAL]
</DOCUMENT
EXHIBIT 13
<PAGE>30
Management's Discussion and Analysis
Avon Products, Inc.
Dollars in millions, except share data
The following discussion of the results of operations and financial condition of
Avon Products, Inc. ("Avon" or "Company") should be read in conjunction with the
information contained in the Consolidated Financial Statements and Notes
thereto. These statements have been prepared in conformity with generally
accepted accounting principles and require management to make estimates and
assumptions that affect amounts reported and disclosed in the financial
statements and related notes. Actual results could differ from these estimates.
All share and per share data included in this report have been restated to
reflect two-for-one stock splits distributed in September 1998 and June 1996.
Forward-Looking Statement
Certain statements in this report which are not historical facts or information
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including, but not limited to, the information
set forth herein. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
levels of activity, performance or achievement of the Company, or industry
results, to be materially different from any future results, levels of activity,
performance or achievement expressed or implied by such forward-looking
statements. Such factors include, among others, the following: general
economic and business conditions; the ability of the Company to implement its
business strategy; the Company's access to financing and its management of
foreign currency risks; the Company's ability to successfully identify new
business opportunities; the Company's ability to attract and retain key
executives; the Company's ability to achieve anticipated cost savings and
profitability targets; the impact of substantial currency exchange devaluations
in the Company's principal foreign markets; changes in the industry;
competition; the effect of regulatory and legal restrictions imposed by foreign
governments; the effect of regulatory and legal proceedings and other factors
discussed in Item 1 of the Company's Form 10-K. As a result of the foregoing
and other factors, no assurance can be given as to the future results and
achievements of the Company. Neither the Company nor any other person assumes
responsibility for the accuracy and completeness of these statements.
Results of Operations
Consolidated - Net income in 1998 was $270.0 compared with $338.8 in 1997. Basic
and diluted earnings per share in 1998 were $1.03 and $1.02, respectively,
compared with $1.28 and $1.27, respectively, in 1997.
Special and non-recurring charges were recorded in the first and third quarters
of 1998 for the Company's previously announced business process redesign
program. These charges totaled $154.4 pretax, which reduced net income by
$122.8 after tax, or $.46 per share on a basic and diluted basis. See Note 13
of the Notes to Consolidated Financial Statements for further discussion of this
program. Before the charges, net income for the year ended December 31, 1998 of
$392.8 increased 16% over 1997. Earnings per share before the charges of $1.49
and $1.48 on a basic and diluted basis, respectively, increased 16% and 17%,
respectively, from the comparable period in 1997. The 1997 results include the
favorable settlement of a value-added tax claim in the United Kingdom equal to
approximately $26.5 on a pretax basis. The $26.5 gain represents a $20.6
settlement of disputed value-added tax charges from prior years, which is
included in other (income) expense, net and $5.9 of interest which is included
in interest income. The net effect of this gain was to increase 1997 net income
by $16.7 and both basic and diluted earnings per share by $.06. Net income for
1996 was $317.9 and basic and diluted earnings per share were $1.19 and $1.18,
respectively.
Excluding the charges, operating profit was $633.9, or 17% over 1997 due to
higher sales and an improved gross margin, partially offset by a higher
operating expense ratio in 1998. Excluding the impact of foreign exchange,
operating profit increased 27% over 1997. The improvement in operating profit
combined with a favorable foreign exchange impact was partially mitigated by the
1997 value-added tax settlement in the United Kingdom. As a result, pretax
income before the charges, rose $75.4, or 14%, over 1997. Net income was also
impacted by a lower effective tax rate in 1998 and by favorable minority
interest due mainly to the results in China.
On a consolidated basis, Avon's net sales of $5.21 billion increased 3%
from $5.08 billion in 1997. Sales in North America increased 5% to $2.06 billion
primarily due to a 5% increase in the U.S. attributable mainly to a higher
average order size. International sales increased 1% to $3.15 billion from
$3.11 billion due to strong growth in Latin America, most significantly in
Brazil, Mexico, Argentina and Venezuela, as well as in Europe reflecting
improvements in the United Kingdom and Poland. These increases
<PAGE>31
were partially offset by sales declines in the Pacific, most significantly in
Japan, China and the Philippines. Excluding the impact of foreign exchange,
consolidated net sales rose 9% over the prior year. In 1997, consolidated net
sales of $5.08 billion increased 6% from $4.81 billion in 1996. International
sales increased 7% to $3.11 billion from $2.92 billion in 1996 due to strong
growth in Latin America, most significantly in Mexico, Argentina, Chile and
Venezuela, and in the United Kingdom, Russia, Central Europe and the Pacific
Rim, primarily Taiwan and the Philippines. These improvements were partially
offset by sales declines in Germany, Brazil and Japan. Sales in North America
increased 4% to $1.97 billion primarily due to the 1997 acquisition of Discovery
Toys and an increase in the U.S. average order size partially offset by a
decrease in the number of Representative orders. Excluding the impact of
foreign currency exchange, 1997 consolidated net sales rose 10% over 1996.
Cost of sales as a percentage of sales was 39.4% in 1998, compared with 40.4% in
1997. The 1998 cost of sales includes $37.9 of a non-recurring charge for
inventory write-downs related to the Company's business process redesign
program. The charge relates to the closure of facilities, discontinuation of
certain product lines, size-of-line reductions and a change in strategy for
product dispositions. See Note 13 of the Notes to the Consolidated Financial
Statements for further discussion of these charges. Excluding the charge, cost
of sales as a percentage of sales was 38.7%, a 1.7 point improvement from 1997.
This improvement was primarily due to a higher margin in Brazil, reflecting
actions taken in 1997 to reduce inventory levels combined with cost reduction
programs in 1998. Additionally, the gross margin in Venezuela improved as a
result of pricing strategies and business redesign efforts. Japan's gross margin
improved as a result of cost reduction initiatives, and the U.S. improved its
margin through pricing strategies, cost improvements and reduced clearance
activity in the non-cosmetics, fragrance and toiletries categories. In 1997,
cost of sales as a percentage of sales was 40.4%, compared with 39.9% in 1996.
The decline in gross margin was primarily due to unfavorable cost ratios in
Japan, resulting from an aggressive pricing strategy and a shift in sales mix to
lower-margin items, and in Brazil, reflecting a consumer shift towards lower-
priced products as well as actions taken to reduce inventory levels. These
declines were partially offset by a margin improvement in the United Kingdom due
to a shift in sales mix to higher-margin items.
Marketing, distribution and administrative expenses of $2.56 billion
increased $79.4, or 3%, from 1997 and increased as a percentage of sales to
49.2% from 48.9% in 1997. Increased operating expenses in the U.S. were
attributable primarily to the sales growth. Operating expenses grew in Brazil
in 1998 due to higher sales and increased marketing programs. Mexico's
operating expenses were higher in 1998 reflecting sales growth driven by
increased incentive programs and higher brochure costs to support the growth in
Representatives. These increases were partially offset by lower expenses in the
Pacific due to lower sales and the impact of currency devaluations. The overall
increase in the expense ratio was due to higher expense ratios in Mexico due to
increased marketing and promotional expenses associated with new product
launches, in Venezuela due to increased administrative expenses as a result of
the implementation of a new labor law, in Argentina due to increased marketing
expenses and in China reflecting the shutdown of sales operations for most of
the second quarter of 1998. In 1997, marketing, distribution and administrative
expenses of $2.48 billion increased $136.1, or 6%, from 1996 and increased
slightly as a percentage of sales to 48.9% from 48.8% in 1996. The increase in
operating expenses was attributed to markets which had experienced strong sales
growth, including Mexico, the United Kingdom, Russia, Taiwan and Venezuela.
Operating expenses in the U.S. increased due to higher strategic spending in
advertising and promotional support for new launches, the national rollout of
Avon Home and costs associated with the centralization of certain operational
areas. In addition, operating expenses in China were higher due to expenses
incurred in preparation for the planned opening of 24 new branches during 1997
which were not put into operation because of new government recertification
requirements on direct selling activities. These increases were partially
offset by lower expenses in Germany due mainly to the impact of a stronger U.S.
dollar in 1997.
Special charges of $116.5 were recorded in 1998 for the Company's business
process redesign program. These charges are primarily related to employee
severance benefits and facility rationalizations in Puerto Rico, the Dominican
Republic, Hong Kong and China as well as asset write-downs associated with the
divestiture of the Discovery Toys
business unit. See Note 13 of the Notes to the Consolidated Financial
Statements for further discussion of these charges.
Interest expense in 1998 of $41.0 was $.8 favorable to prior year due to
lower cost of borrowings. Interest expense in 1997 of $41.8 increased $1.8
compared to 1996 primarily due to increased domestic debt levels partially
offset by lower average debt outstanding in Brazil in 1997.
Interest income in 1998 of $15.9 decreased $.8 compared to 1997 primarily
due to the interest portion of the 1997 favorable value-added tax settlement in
the United Kingdom, partially offset by a Mexico tax refund claim, as well as
higher interest rates and increased average short-term investments in Brazil in
1998. Interest income in 1997 of $16.7 increased $2.2 compared to 1996 due to
the interest portion of the value-added tax settlement in the United Kingdom
partially offset by lower interest rates in Brazil and lower cash investment
levels in the U.S.
<PAGE> 32
Other (income) expense, net, was $14.4 unfavorable to 1997. Excluding the
1997 value-added tax settlement in the United Kingdom, other (income) expense,
net was $6.2 favorable primarily due to favorable foreign exchange. In 1997,
other (income) expense, net, was $24.8 favorable to 1996 due to the $20.6
portion of the value-added tax settlement in the United Kingdom as well as lower
foreign exchange losses in 1997.
Income taxes were $190.8 in 1998 and the effective tax rate was 41.9%
compared with $197.9 and an effective tax rate of 37.0% in 1997. Excluding the
effect of the special and non-recurring charges, income taxes were $222.4 and
the effective tax rate was 36.4%. The 36.4% effective tax rate was lower in
1998 due to the mix of earnings and income tax rates of the international
subsidiaries. In 1997, the effective tax rate was 37.0% compared with 37.5% in
1996. The effective tax rate was lower in 1997 due to the mix of earnings and
income tax rates of international subsidiaries.
Inflation in the United States has remained at a relatively low level
during the last three years and has not had a major effect on Avon's results of
operations. Many countries in which Avon has operations have experienced higher
rates of inflation than the United States. Mexico, Venezuela and Russia
experienced high cumulative rates of inflation over the three-year period 1996
through 1998. However, Mexico will be converted to non-hyperinflationary status
beginning January 1, 1999 due to reduced cumulative inflation rates during the
past three years.
Below is an analysis of the key factors affecting net sales and operating
profit by reportable segment for each of the years in the three-year period
ended December 31, 1998.
Years ended December 31 1998 1997 1996
Net Operating Net Operating Net Operating
Sales Profit Sales Profit Sales Profit
North America:
U.S. $1,774.0 $ 302.8 $1,696.7 $ 261.8 $1,672.5 $ 267.4
Other 287.6 40.2 275.4 35.1 224.3 34.4
-------- ------- -------- ------- -------- -------
Total 2,061.6 343.0 1,972.1 296.9 1,896.8 301.8
International*
Latin America 1,665.1 344.4 1,513.3 280.0 1,385.6 273.3
Pacific 623.3 62.5 782.4 67.0 751.1 77.0
Europe 862.7 108.5 811.6 91.7 780.7 67.4
-------- ------- -------- ------- -------- -------
Total 3,151.1 515.4 3,107.3 438.7 2,917.4 417.7
Total from operations $5,212.7 858.4 $5,079.4 735.6 $4,814.2 719.5
======== ======= ======== ======= ======== =======
Global expenses (224.5) (191.5) (174.7)
Special and non-recurring
charges (154.4) - -
Operating profit $ 479.5 $ 544.1 $ 544.8
======= ======= =======
* Excludes Canada, Dominican Republic and Puerto Rico which are now included in
North America.
Note: 1997 and 1996 data have been restated to reflect the Company's segments on
an operating profit basis. See Note 11 of the Notes to the Consolidated
Financial Statements for further details.
<PAGE> 33
North America - Sales in North America increased 5% to $2.06 billion and
operating profit increased 16% to $343.0 in 1998. The U.S. business, which
represents almost 90% of the North American segment, reported sales and
operating profit growth of 5% and 16%, respectively. Sales growth in the U.S.
reflected a 4% increase in the average order size coupled with a 1% increase in
the number of Representative orders. The sales improvement resulted from
increases in fashion jewelry and accessories, cosmetics, fragrance and
toiletries ("CFT") and home entertainment categories partially offset by a
decline in the gift and decorative category. Sales of fashion jewelry and
accessories rose significantly over the prior year, primarily in the accessories
segment, with the success of such products as organizer handbags, the Home Run
Hero watch introduced in the fourth quarter and increased sales of licensed
products, including Winnie the Pooh carryalls and sports watches. Growth in the
CFT category was driven by successful launches of Rare Rubies, Anew Retinol Hand
Complex, the Diane Von Furstenberg fragrance, Forest Lily. In addition, the
success of Avon's transfer resistant technology lipstick and Avon Color's Spring
Shade Collection combined with continued growth of the Avon Techniques hair care
and Skin-So-Soft lines contributed to the growth in CFT. Higher sales in the
home entertainment category were driven by the launch of a collection of
inspirational and religious products, as well as an increase in the sales of
demonstration products purchased by Representatives. These increases were
partially offset by a decline in the gift and decorative category resulting from
the phasing out of the Avon Home line and lower sales of Barbie and holiday
products in 1998. The improvement in U.S. operating profit was mainly a result
of the above sales increase combined with a favorable gross margin driven by
cost improvements, revised pricing strategies and reduced clearance activity.
In 1997, North American sales increased 4% to $1.97 billion and operating
profit decreased 2% to $296.9. Sales in the U.S. segment rose 1% to $1.70
billion and operating profit decreased 2% to $261.8. The 1% sales growth
reflected a 3% increase in average order size partially offset by a 2% decrease
in the number of Representative orders. Units sold in the U.S. increased 4%
over 1996. The U.S. sales improvement resulted from increases in the CFT and
gift and decorative categories partially offset by declines in apparel. The
growth in the CFT category was driven by the launches of Anew Retinol Recovery
Complex and Avon Techniques hair care line in addition to the first quarter 1997
product introductions in the specialty bath segment, such as California Bath and
the Soft and Sensual line extension of the Skin-So-Soft brand. Additionally, the
renovated Anew launch in early 1997 contributed to higher CFT sales. The
continued success of the seasonal Barbie dolls, the launch of Avon Home and the
success of the Mattel line of toys led to the increase in gift and decorative
sales. Apparel sales were lower in 1997 due to the success of the Olympic Games
collection in 1996 and lower sales of demonstration products in the first two
quarters of 1997. The decrease in operating profit resulted from a lower gross
margin and a higher operating expense ratio. The decline in gross margin was
due to strategic price investments in CFT products aimed at energizing customer
sales and the addition of Avon Home, a lower-margin new business. The
unfavorable operating expense ratio was driven by higher expenses related to
advertising and promotional support for new products, costs associated with the
centralization of the returned goods and call center operations and increased
field incentives designed to drive sales. In addition, operational costs
associated with higher returned goods processing in 1997 contributed to the
unfavorable expense ratio.
International - International sales increased 1% to $3.15 billion and operating
profit increased 17% to $515.4 from $438.7 in 1997. The sales growth resulted
from strong growth in Latin America, particularly in Brazil, Mexico, Argentina
and Venezuela, as well as in Europe reflecting improvements in the United
Kingdom and Poland. These results were significantly offset by sales declines
in the Pacific, most significantly in Japan, China and the Philippines.
Excluding the impact of foreign currency exchange, international sales rose 11%
and operating profit increased 30% over 1997.
In Latin America, sales increased 10% to $1.67 billion and operating
profit increased 23%, or $64.4, to $344.4 in 1998. The sales improvement
resulted from strong growth in Brazil and, to a lesser extent, Mexico, Argentina
and Venezuela. Brazil's growth in sales was driven by attractive pricing and
successful new product launches, which resulted in strong double-digit increases
in units and orders in 1998. Additionally, the number of active Representatives
rose 31% from 1997. Mexico's sales increase was driven by successful new
product launches including Anew Night Force, Yessamin fragrance and Women of
Earth, as well as increases in the apparel and home line extensions which
offered superior design and promotions in 1998. Argentina and Venezuela
reported strong increases in units, orders and customers served. Excluding the
impact of foreign currency exchange, sales in Latin America rose 19% over 1997.
The increase in the region's operating profit was primarily due to favorable
results in Brazil attributable to the strong sales increase and an improved
gross margin and operating expense ratio. Brazil's gross margin improvement
resulted from actions taken in 1997 to reduce inventory levels as well as better
vendor negotiations and continued cost reduction programs in 1998. The
favorable operating expense ratio was driven by the strong sales increase.
Operating profit improvements in Mexico due to the sales increase, and in
Venezuela due to pricing strategies and business redesign efforts, contributed
to the region's growth in operating profit. Excluding the impact of foreign
currency exchange, operating profit in Latin America increased 34% over the
prior year.
<PAGE>34
In the Pacific Region, sales decreased 20% to $623.3 in 1998 and operating
profit decreased 7% to $62.5 from $67.0 in 1997. The decline in sales resulted
from decreases in every major market, most significantly in Japan, China and the
Philippines. The Asian currency and economic crisis which began in mid-1997
continued throughout 1998 and negatively impacted results in the Pacific. The
general economic environment is poor with low consumer confidence and reduced
spending. Excluding the impact of foreign currency exchange, sales decreased
3%, a 17 point differential from U.S. dollar reported results. In addition,
selling activities in China were suspended for most of the second quarter of
1998 due to governmental restrictions on direct-selling companies. As of the
beginning of June, the Company received Chinese governmental approval to resume
operations as a wholesale and retail business and became operational again in
mid-June. The Company converted its branches into retail outlets to serve
customers and received approval to utilize sales promoters, much like
Representatives, to promote product sales in China. Despite the above
difficulties, most markets showed growth in active Representatives and number of
customers served resulting from a strong focus on active recruitment to expand
the Representative base throughout the region. The Philippines posted double-
digit increases in orders, customers served and active Representatives. Local
currency sales in the Philippines increased 10% over the prior year. The
decrease in the region's operating profit resulted primarily from declines
discussed above. Despite the sales decline, Japan's operating profit increased
significantly over the prior year as a result of improvements in gross margin
and operating expense ratio. Japan's margin improvements resulted from cost
reduction strategies and the elimination of many lower-margin products in 1998.
Additionally, business process redesign efforts have resulted in lower operating
expenses. Excluding the impact of foreign currency exchange, operating profit
in the Pacific increased 19% from 1997.
In the Europe Region, sales increased 6% to $862.7 and operating profit
increased $16.8, or 18%, to $108.5 in 1998. The sales increase was primarily
due to growth in the United Kingdom resulting from a higher average order size
in 1998. The United Kingdom continues to focus on developing the core business
through Representatives, growth in orders and customers as well as brand
awareness and image enhancement. In addition, Poland's sales increased
significantly from 1997 as a result of dramatic growth in active Representatives
and all business fundamentals including units, orders and customers served.
These improvements were partially offset by sales shortfalls in Russia
attributable to the devaluation of the Russian ruble in August 1998. Average
orders have declined significantly in Russia due to low consumer purchasing
power. In response to this situation, several actions have been taken by local
management including pricing flexibility to maintain and build market share and
reduce credit sales, as well as a tightening of expense controls. Geographic
expansion into new cities has also been deferred. The devaluation negatively
affected Russia's U.S. dollar results in 1998. Excluding the impact of foreign
currency exchange, sales in Europe and Russia increased 10% and 26%,
respectively, from prior year. The increase in the region's operating profit
was due to the overall sales increase combined with an improved operating margin
in the United Kingdom. A shift in sales mix to higher-margin items contributed
to a gross margin improvement, and continued active expense management led to a
favorable operating expense ratio in the United Kingdom. These increases were
partially offset by operating profit declines in Russia mainly due to the
devaluation of the ruble discussed above. Excluding the impact of foreign
currency exchange, operating profit in Europe increased 25% over 1997.
In 1997, international sales increased 7% to $3.11 billion and operating profit
increased 5% to $438.7. The sales increase reflected strong growth in Latin
America, particularly in Mexico, Argentina, Chile and Venezuela, and in the
United Kingdom, Russia, Central Europe and the Pacific Rim, most significantly
in Taiwan and the Philippines. These improvements were partially offset by
sales declines in Germany, Brazil and Japan, discussed below. Excluding the
impact of foreign currency exchange, international sales grew 13% over 1996.
In Latin America, 1997 sales increased 9% to $1.51 billion and operating
profit increased 2%, or $6.7, to $280.0 from $273.3 in 1996. The sales
improvement was driven by tremendous growth in Mexico reflecting strong
increases in the number of orders, average order size and active Representatives
primarily due to customer growth initiatives. These initiatives included
incentive programs focused on retention, increased sampling on breakthrough
products such as Anew Vitamin C, increased advertising and an emphasis on market
penetration in metropolitan areas. The sales increase in the region also
reflected significant unit growth in Argentina and Chile and an increased
average order size in Venezuela. In addition, Central American markets posted
strong sales increases in 1997 attributable to growth in units and active
Representatives. These improvements were partially offset by a significant
sales decline in Brazil. In 1997, consumers in Brazil experienced a tightening
of credit which limited their purchasing ability resulting in declines in units
<PAGE> 35
sold and active Representatives. To improve Representative count, aggressive
retention and achievement programs were implemented including incentives and
premiums to improve activity and order size. Excluding the impact of foreign
currency exchange, sales in Latin America were up 15% over 1996. The increase
in the region's operating profit was primarily due to favorable results in
Mexico reflecting the strong sales increase, described above, combined with a
favorable operating expense ratio. In addition, operating profits were higher
in Argentina and Chile due mainly to the sales growth. These improvements were
partially offset by a lower operating profit in Brazil due to a significant
gross margin decline and an unfavorable operating expense ratio. The gross
margin decline resulted from a shift in consumer preferences towards lower-
priced products and margin investments relating to inventory reduction efforts.
The unfavorable operating expense ratio in Brazil was driven by the sales
decline. Actions were taken in Brazil to reduce manufacturing and customer
service costs, negotiate better terms and costs with vendors and introduce more
global products with a higher price and improved margin.
In the Pacific Region, 1997 sales increased 4% to $782.4 and operating profit
decreased 13% to $67.0 from $77.0 in 1996. The increase in sales was driven by
operational improvements in the Pacific Rim, most significantly in Taiwan and
the Philippines. Growth in units, customers served and active Representatives
was significant in both Taiwan and the Philippines. Taiwan's sales performance
was the strongest in the region resulting from successful merchandising
campaigns, product launches supported by strong advertising and promotional
activities, including the introduction of Lighten Up Undereye Treatment and
effective field sales programs in 1997. The sales growth in the Philippines was
driven by successful new and extended CFT lines, a new line of children's
apparel and an additional service center in 1997. These improvements were
partially offset by a significant sales decline in Japan due primarily to an
unfavorable exchange impact of a stronger U.S. dollar in 1997 and a reduction in
the average order size. Excluding the impact of foreign currency exchange,
sales in the Pacific were up 14%. The decrease in the region's operating profit
resulted from declines in Japan and, to a lesser extent, in China. The gross
margin in Japan declined significantly as a result of strategic pricing programs
as well as a shift in sales mix to lower-margin non-CFT items. The competitive
environment remained intense in Japan with the continued relaxation of import
restrictions and the accelerated growth in discount outlets. As a result,
prices were adjusted in early 1997 to make products more competitive in the
marketplace. Efforts were focused on restructuring the business in Japan for
improved profitability, including innovative recruiting programs, enhanced
advertising campaigns and new systems focused on improving customer access.
Despite sales growth in China, operating profits declined due to the government
licensing revalidation process of all direct selling companies. As a result, no
new branches were opened in 1997, but the expense base associated with the
planned expansions negatively impacted China's operating profit. The region's
operating profit was also negatively impacted by currency devaluations
throughout Southeast Asia.
Several currencies in the Pacific Rim devalued significantly during 1997.
The Thai baht devalued by 57%, the Philippine peso by 34%, the Malaysian ringgit
by 39% and the Indonesian rupiah by 61%. These devaluations lowered pretax
income by approximately $7.0 for the full year. In response to this situation,
several actions were taken by local management, including cost negotiations with
vendors and a focus on growing the Representative base. In terms of size, these
markets represented approximately 5% of Avon's consolidated net sales in 1997.
In the Europe Region, 1997 sales increased 4% to $811.6 and operating
profit increased $24.3, or 36%, to $91.7. The sales increase was primarily due
to strong growth in the United Kingdom resulting from an increased average order
size, unit growth and a favorable exchange rate impact. The sales growth in the
United Kingdom was also attributable to a focus on improving market share
through brand and image enhancement. Customers were spending more in 1997 as a
function of the improvement in image and the quality of the Avon brochure. The
European sales improvement was also driven by unit and active Representative
growth in Russia and in Central Europe, primarily Poland. Russia continued to
exceed expectations as the most successful startup market in Avon's history.
Russia's success was attributable to a strong Representative structure,
geographic expansion into new cities, installation of new assembly lines which
increased capacity and investment in system upgrades to support the sales
growth. These improvements were partially offset by sales shortfalls in Germany
resulting from an unfavorable exchange impact of a stronger U.S. dollar in 1997
and a weak economic environment which led to lower consumer spending and higher
unemployment. Excluding the impact of foreign currency exchange, sales in
Europe increased 11% over 1996. The increase in operating profit was mainly due
to the overall sales increase and an improved gross margin in the United Kingdom
resulting from a favorable product mix of higher-margin items in 1997.
Additionally, the continued effect of expense reduction efforts in Europe
contributed to a lower operating expense ratio.
See Foreign Operations section under Liquidity and Capital Resources for
additional discussion.
<PAGE> 36
Global Expenses - Global expenses were $224.5 in 1998 compared with $191.5 in
1997. The $33.0 increase reflected increased expenses in 1998 associated with
information technology system and global marketing initiatives and higher
expenses for incentive compensation programs primarily due to the improved
operating results in 1998. In 1997, global expenses were $16.8 unfavorable
compared with 1996 primarily due to process redesign and system initiatives.
Accounting Changes - Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards ("FAS") No. 130, "Reporting Comprehensive
Income". This statement establishes standards for the reporting and
presentation of comprehensive income and its components in a full set of
financial statements. As shown in the statements of changes in shareholders'
equity and Note 5 of Notes to the Consolidated Financial Statements,
comprehensive income includes all changes in equity during a period, except
those resulting from investments by and distributions to the Company's
stockholders. As this standard only requires additional information in the
financial statements, it does not affect the Company's results of operations or
financial position.
Effective January 1, 1998, the Company adopted FAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which changes the way the
Company reports information about its operating segments. The information for
1997 and 1996 has been restated from that previously reported in order to
conform with the current year's presentation. FAS No. 131 requires a new basis,
entitled the management approach, for determining reportable segments. This
approach is based on the way management organizes segments within a company for
making operating decisions and assessing performance. FAS No. 131 also
establishes standards for supplemental disclosure about products and services,
geographical areas and major customers. Segment results for the three years
ended December 31, 1998 are presented in Note 11.
Effective January 1, 1998, the Company adopted FAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". FAS No. 132
standardizes the disclosure requirements for pensions and other postretirement
benefits, although it does not impact the measurement or recognition of those
benefits. There was no impact on the Company's results of operations or
financial position in adopting this statement. Prior years' information has
been restated to conform with the requirements of FAS No. 132.
Effective January 1, 1998, the Company adopted AICPA Statement of Position
("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". SOP No. 98-1 requires certain costs in connection
with developing or obtaining internally used software to be capitalized that
previously would have been expensed as incurred. The adoption of SOP No. 98-1
did not have a material impact on the Company's results of operations, financial
position or cash flows.
Effective December 31, 1997, the Company adopted FAS No. 128, "Earnings per
Share". FAS No. 128 establishes standards for computing and presenting earnings
per share ("EPS") and replaces the presentation of previously disclosed EPS with
both basic and diluted EPS. Based upon the Company's capitalization structure,
the EPS amounts calculated in accordance with FAS No. 128 approximated the
Company's EPS amounts in accordance with Accounting Principles Board Opinion No.
15, "Earnings per Share". All prior period EPS data have been restated in
accordance with FAS No. 128.
Effective January 1, 1996, the Company adopted the fair value disclosure
requirements of FAS No. 123, "Accounting for Stock-Based Compensation". As
permitted by the statement, the Company did not change the method of accounting
for its employee stock compensation plans. See Note 8 of the Notes to the
Consolidated Financial Statements for the fair value disclosures required under
FAS No. 123.
Recent Pronouncements - In June 1998, the Financial Accounting Standards Board
issued FAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". FAS No. 133 is effective for all fiscal quarters of all fiscal
years beginning after June 15, 1999 (January 1, 2000 for the Company). FAS No.
133 requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction. For fair-value hedge
transactions in which the Company is hedging changes in the fair value of an
asset, liability or firm commitment, changes in the fair value of the derivative
instrument will be included in the income statement along with the offsetting
changes in the hedged item's fair value. For cash-flow hedge transactions in
which the Company is hedging the variability of cash flows related to a variable
rate asset, liability or a forecasted transaction, changes in the fair value of
the derivative instrument will be reported in other comprehensive income. The
gains and losses on the derivative instruments that are reported in other
comprehensive income will be reclassified to earnings in the periods in which
earnings are impacted by the variability of the cash flows of the hedged item.
The ineffective portion of all of the hedges will be recognized in current
period earnings. The Company has not yet determined the impact that the
adoption of FAS No. 133 will have on its results of operations or financial
position.
<PAGE> 37
Contingencies - Although Avon has completed its divestiture of all discontinued
operations, various lawsuits and claims (asserted and unasserted) are pending or
threatened against Avon. The Company is also involved in a number of proceedings
arising out of the federal Superfund law and similar state laws. In some
instances, Avon, along with other companies, has been designated as a
potentially responsible party which may be liable for costs associated with
these various hazardous waste sites. In the opinion of Avon's management, based
on its review of the information available at this time, the difference, if any,
between the total cost of resolving such contingencies and reserves recorded by
Avon at December 31, 1998 should not have a material adverse impact on Avon's
consolidated financial position, results of operations or cash flows.
Liquidity and Capital Resources
Cash Flows - Net cash provided by continuing operations was $324.4 in 1998
compared to $315.5 in 1997. The 1998 increase principally reflects, among other
things, a lower working capital level partially offset by lower adjusted net
income. The lower funding of working capital included the 1997 settlement of
tax issues in the U.S. A more detailed analysis of the individual items
contributing to the 1998 and 1997 amounts is included in the Consolidated
Statements of Cash Flows.
There was no cash used by discontinued operations in 1998 and 1997,
compared to $38.2 in 1996. The $38.2 cash used in 1996 primarily reflected
final payment of a settlement reached with a discontinued operation,
Mallinckrodt, in December 1995.
Excluding changes in debt and other financing activities, net cash usage of
$117.6 in 1998 was $19.7 favorable compared to net cash usage of $137.3 in 1997.
During 1998 and 1997, the Company received net proceeds of approximately $58.1
and $58.6, respectively, under securities lending transactions which were used
to repay domestic commercial paper borrowings and are included in the cash flows
as other financing activities. See Note 4 of the Notes to the Consolidated
Financial Statements for further discussion of these transactions. The $19.7
variance reflects a favorable exchange rate impact on cash and higher cash
provided by continuing operations. These sources were partially offset by
higher capital expenditures and increased dividend payouts in 1998. In 1997,
excluding changes in debt and other financing activities, there was a net
increase in cash usage of $130.7. This variance reflected lower cash provided
by continuing operations, higher capital expenditures and an unfavorable
exchange rate impact on cash. These uses were partially offset by the
unfavorable impact of discontinued operations reflected in 1996 cash flows and
lower repurchases of common stock in 1997. For the period 1994 through 1998,
32.1 million shares of common stock have been purchased for approximately $641.5
under the stock repurchase programs. See Note 9 of the Notes to Consolidated
Financial Statements for further details of the stock repurchase programs.
Working Capital - At December 31, 1998, current assets exceeded current
liabilities by $11.9 while at the end of 1997, current liabilities exceeded
current assets by $11.9. This increase of $23.8 is primarily due to lower net
debt (debt less cash and equivalents) which resulted from the repayment of
$100.0 reclassified as short-term debt in 1997 on the 6-1/8% deutsche mark notes
and lower accounts payable. In addition, higher receivables, partially offset
by lower inventory levels, as discussed in the Inventories section, and higher
accrued compensation resulting from increased incentive compensation expense in
1998 also contributed to the variance.
Avon's liquidity results from its ability to generate significant cash flows
from operations and its ample unused borrowing capacity. Avon's credit
agreements do not contain any provisions or requirements with respect to working
capital.
Capital Resources - Total debt of $256.3 at December 31, 1998 increased $22.0
from $234.3 at December 31, 1997, compared with an increase of $32.7 from
December 31, 1996. In addition, at December 31, 1998 and 1997, other non-
current liabilities included approximately $112.4 and $58.1, respectively,
related to securities lending activities. See Note 4 of the Notes to
Consolidated Financial Statements for further discussion of these activities.
During 1998 and 1997, cash flows from continuing operations and other financing
activities combined with cash on hand and higher debt levels were used for
dividends, repurchase of common stock and capital expenditures. During 1996,
cash flows from continuing operations and higher debt levels, partially offset
by higher cash and equivalents, were used for dividends, the stock repurchase
program, capital expenditures, a payment made related to discontinued operations
and the purchase of a company in South Africa.
At December 31, 1998, debt maturing within one year consists of borrowings
from banks of $53.9 and the current maturities of long-term debt of $1.4.
Management believes that cash from operations and available sources of financing
are adequate to meet anticipated requirements for working capital, dividends,
capital expenditures, the stock repurchase program and other cash needs.
In May 1998, Avon issued $100.0 of bonds embedded with option features (the
"bonds") to pay down commercial paper borrowings. The bonds have a twenty-year
maturity; however, after five years, the bonds, at the holder's option, can be
sold back to the Company at par or can be called at par by the underwriter and
resold to
<PAGE>38
investors as fifteen-year debt. The coupon rate on the bonds is 6.25% for the
first five years, but will be refinanced at market rates if the bonds are called
in year five.
In connection with the bond issuance, Avon entered into a five-year
interest rate swap contract with a notional amount of $50.0 to effectively
convert fixed interest on a portion of the bonds to a variable interest rate,
based on LIBOR.
During 1997, the Company issued $100.0 of 6.55% notes, due August 1, 2007
to pay down commercial paper borrowings.
During 1996, the Company entered into an agreement, which expires in 2001,
with various banks to amend and restate the five-year, $600.0 revolving credit
and competitive advance facility agreement. Within this facility, the Company
is able to borrow, on an uncommitted basis, various foreign currencies. The new
agreement and the prior agreement are referred to, collectively, as the credit
facility.
The credit facility is primarily to be used to finance working capital,
provide support for the issuance of commercial paper and support the stock
repurchase program. At the Company's option, the interest rate on borrowings
under the credit facility is based on LIBOR, prime or federal fund rates. The
credit facility has an annual facility fee of $.4. The credit facility contains
a covenant for interest coverage, as defined. The Company is in compliance with
this covenant. There were no borrowings outstanding at December 31, 1998 and
1997.
The Company has uncommitted lines of credit available of $65.0 with various
banks which have no compensating balances or fees. As of December 31, 1998 and
1997, there were no borrowings under lines of credit or bankers' acceptance
facilities. In addition, as of December 31, 1998 and 1997, there were
international lines of credit totaling $329.5 and $295.8, respectively, of which
$53.9 and $29.4 were outstanding, respectively. There were no compensating
balances or fees under these facilities.
Inventories - Avon's products are marketed during twelve to twenty-six
individual sales campaigns each year. Each campaign is conducted using a
brochure offering a wide assortment of products, many of which change from
campaign to campaign. It is necessary for Avon to maintain relatively high
inventory levels as a result of the nature of its business, including the number
of campaigns conducted annually and the large number of products marketed.
Avon's operations have a seasonal pattern characteristic of many companies
selling CFT, fashion jewelry and accessories, gift and decorative items and
apparel. Christmas sales cause a peak in the fourth quarter which results in the
build up of inventory at the end of the third quarter. Inventory levels are then
sharply reduced by the end of the fourth quarter. Inventories of $538.4
at December 31, 1998 were $26.4 lower than 1997 due mainly to reduced
inventory levels in the U.S. The decrease in the U.S. results from improvements
in CFT related to the implementation of supply chain initiatives which resulted
in reduced cycle times, reorder quantity reductions, reduced overstocking and
lower component prices. In addition, write-downs in fashion jewelry and
accessories and apparel associated with the Company's business process redesign
program contributed to the decrease. See Note 13 of the Notes to Consolidated
Financial Statements for further discussion of the business process redesign
program. It is Avon's objective to continue to manage purchases and inventory
levels maintaining the focus of operating the business at efficient inventory
levels. However, the addition or expansion of product lines such as apparel,
jewelry and impulse gift items, products that are subject to changing fashion
trends and consumer tastes, as well as planned expansion in high growth markets,
may cause the inventory levels to grow periodically.
Capital Expenditures - Capital expenditures during 1998 were $189.5 (1997 -
$169.4). These expenditures were made for capacity expansion in high growth
markets, maintenance of worldwide facilities, contemporization and replacement
of information systems, supply chain initiatives in the U.S. and for shipping
and other customer service improvements, primarily in the United Kingdom and
Brazil. Numerous construction and information systems projects were in progress
at December 31, 1998 with an estimated cost to complete of approximately $87.4.
Capital expenditures in 1999 are currently expected to be in the range of $200.0
- - $220.0. These expenditures will include improvements on existing facilities,
continued investments for capacity expansion in high growth markets, facility
modernization, information systems and equipment replacement projects.
Foreign Operations - The Company derived approximately 60% of its 1998
consolidated net sales and consolidated operating profit from operations from
its subsidiaries outside of North America. In addition, as of December 31, 1998,
these subsidiaries comprised approximately 53% of the Company's consolidated
total assets.
Avon's operations in many countries utilize numerous currencies. Avon has
significant net assets in Brazil, the United Kingdom, Japan, Argentina, Germany
and the Philippines. Changes in the value of these countries' currencies
relative to the U.S. dollar result in direct charges or credits to equity.
Effective January 1, 1997, Mexico was designated as a country with a highly
inflationary economy due to the cumulative inflation rates over the three year
period
<PAGE>39
1994-1997. However, Mexico will be converted to non-hyper inflationary status
effective January 1, 1999 due to reduced cumulative inflation rates over the
past three years.
The Russian ruble devalued significantly in August 1998. In response to this
situation, several actions have been taken by local management including pricing
flexibility to maintain and build market share, the reduction of credit sales as
well as a tightening of expense controls. The devaluation negatively affected
Russia's U.S. dollar results in 1998. In terms of size, Russia's 1998 net sales
represented approximately 1% of Avon's consolidated net sales. Avon's results
continue to be negatively impacted by the Asian currency and economic crisis
which began in mid-1997.
On April 21, 1998, the Chinese government issued a directive banning all
direct selling in China resulting in the shutdown of the Company's sales
operations for most of the second quarter. As of the beginning of June, the
Company received Chinese governmental approval to resume operations as a
wholesale and retail business and became operational again on June 15, 1998.
The Company converted its 75 branches into
retail outlets to serve customers. During the end of the second quarter of
1998, Avon received government approval to utilize sales promoters, much like
Representatives, to promote product sales in China.
Avon's well diversified global portfolio of businesses has demonstrated
that the effects of weak economies and currency fluctuations in certain
countries may be offset by strong results in others. Fluctuations in the value
of foreign currencies cause U.S. dollar-translated amounts to change in
comparison with previous periods. Accordingly, Avon cannot project in any
meaningful way the possible effect of such fluctuations upon translated amounts
or future earnings. This is due to the large number of currencies involved, the
constantly changing exposure in these currencies, the complexity of intercompany
relationships, the hedging activity entered into in an attempt to minimize
certain of the effects of exchange rate changes where economically feasible and
the fact that all foreign currencies do not react in the same manner against the
U.S. dollar.
Certain of the Company's financial instruments, which are discussed below
under Risk Management Strategies and Market Rate Sensitive Instruments and in
Note 7 of the Notes to the Consolidated Financial Statements, are used to hedge
various amounts relating to certain international subsidiaries. However, the
Company's foreign currency hedging activities are not significant when compared
to the Company's international financial position or results of operations.
Some foreign subsidiaries rely primarily on borrowings from local commercial
banks to fund working capital needs created by their highly seasonal sales
pattern. From time to time, when tax and other considerations dictate, Avon will
finance subsidiary working capital needs or borrow foreign currencies. At
December 31, 1998, the total indebtedness of foreign subsidiaries was $55.6.
It is Avon's policy to remit all the available cash (cash in excess of
working capital requirements, having no legal restrictions and not considered
permanently reinvested) of foreign subsidiaries as rapidly as is practical.
During 1998, these subsidiaries remitted, net of taxes, $340.2 in dividends and
royalties. This sum is a substantial portion of the 1998 consolidated net
earnings of Avon's foreign subsidiaries.
Risk Management Strategies and Market Rate Sensitive Instruments - The Company
operates globally, with manufacturing and distribution facilities in various
locations around the world. The Company may reduce its primary market exposures
to fluctuations in interest rates and foreign exchange rates by creating
offsetting positions through the use of derivative financial instruments. The
Company does not use derivative financial instruments for trading or speculative
purposes, nor is the Company a party to leveraged derivatives.
The Company periodically uses interest rate swaps to hedge portions of
interest payable on its debt. In addition, the Company may periodically employ
interest rate caps to reduce exposure, if any, to increases in variable interest
rates.
The Company may periodically hedge foreign currency royalties, net
investments in foreign subsidiaries, firm purchase commitments and contractual
foreign currency cash flows or obligations, including third-party and
intercompany foreign currency transactions. The Company regularly monitors its
foreign currency exposures and ensures that hedge contract amounts do not exceed
the amounts of the underlying exposures.
At December 31, 1998, the Company held foreign currency forward contracts
with notional amounts totaling $285.9 and option contracts with notional amounts
totaling $32.6 to hedge foreign currency items. Only $7.3 of these contracts
have maturities after December 31, 1999. Also outstanding in 1998 were foreign
currency forward contracts totaling $45.0 which do not qualify as hedging
transactions under the current accounting definitions and, accordingly, have
been marked to market. The mark-to-market adjustment at December 31, 1998 was
insignificant.
At December 31, 1998, the Company has entered into forward contracts to
purchase approximately 3,469,200 shares of Avon common stock at an average price
of $36.31 per share at December 31, 1998. The contracts mature over the next
three years and provide for physical or net share settlement to the Company.
Accordingly, no adjustment for subsequent changes in fair value has been
recognized.
<PAGE> 40
The Company attempts to minimize its credit exposure to counterparties by
entering into interest rate swap and cap contracts only with major international
financial institutions with "A" or higher credit ratings as issued by Standard &
Poor's Corporation. The Company's foreign currency and interest rate derivatives
are comprised of over-the-counter forward contracts or options with major
international financial institutions. Although the Company's theoretical credit
risk is the replacement cost at the then estimated fair value of these
instruments, management believes that the risk of incurring losses is remote and
that such losses, if any, would not be material.
Non-performance of the counterparties to the balance of all the currency
and interest rate swap agreements would not result in a significant write off at
December 31, 1998. Each agreement provides for the right of offset between
counterparties to the agreement. In addition, Avon may be exposed to market
risk on its foreign exchange and interest rate swap agreements as a result of
changes in foreign exchange and interest rates. The market risk related to the
foreign exchange agreements should be substantially offset by changes in the
valuation of the underlying items being hedged.
The Company is exposed to changes in financial market conditions in the
normal course of its operations primarily due to international businesses and
transactions denominated in foreign currencies and the use of various financial
instruments to fund ongoing activities.
Various derivative and non-derivative financial instruments held by the
Company are sensitive to changes in interest rates. These financial instruments
are either discussed above or in Notes 4 and 7 of the Notes to Consolidated
Financial Statements. Interest rate changes would result in gains or losses in
the fair value of debt and other financing instruments held by the Company.
Based on the outstanding balance of all instruments at December 31, 1998, a
hypothetical 50 basis point increase or decrease in interest rates prevailing at
this date, sustained for one year, would not represent a material potential loss
in fair value, earnings or cash flows. This potential loss was calculated based
on discounted cash flow analyses using interest rates comparable to the
Company's current cost of debt. In 1998, the Company did not experience a
material loss in fair value, earnings or cash flows associated with changes in
interest rates.
The Company also engages in various hedging activities in order to reduce
potential losses due to foreign currency risks. Consistent with the nature of
the economic hedge of such foreign exchange contracts, any unrealized gain or
loss would be offset by corresponding decreases or increases, respectively, of
the underlying instrument or transaction being hedged. These financial
instruments are discussed above and in Note 7 of the Notes to Consolidated
Financial Statements. Based on the Company's foreign exchange contracts at
December 31, 1998, the impact of a 10% appreciation or 10% depreciation of the
U.S. dollar against the Company's foreign exchange contracts would not represent
a material potential loss in fair value, earnings or cash flows. This potential
loss does not consider the underlying foreign currency transaction or
translation exposures of the Company. The hypothetical impact was calculated on
the combined option and forward positions using forward rates at December 31,
1998 adjusted for an assumed 10% appreciation or 10% depreciation of the U.S.
dollar against the foreign contracts. The impact of payoffs on option contracts
is not significant to this calculation. Additionally, any foreign currency risk
associated with the foreign denominated debt instrument was assumed to be offset
by a related currency exchange swap contract. In 1998, foreign exchange losses
associated with the Company's foreign exchange contracts did not represent a
material loss in fair value, earnings or cash flows.
As of December 31, 1998, the primary currencies for which the Company has
net underlying foreign currency exchange rate exposure are the U.S. dollar
versus the Argentine peso, Brazilian real, British pound, Canadian dollar,
German mark, Japanese yen and the Mexican peso. The Company is also exposed to
other South American and Asian currencies.
The Company does not hedge its foreign currency exposure in a manner that
would entirely eliminate the effect of changes in foreign exchange rates on the
Company's consolidated financial position, results of operations and cash flows.
The impact of a 10% appreciation or 10% depreciation of the U.S. dollar against
the Company's net underlying foreign currency transaction and translation
exposures could be significant.
Other Information
On October 23, 1997, the Company announced that it raised its
long-term growth targets for sales and earnings per share and that it expects to
record special charges in connection with a major business process redesign
program. Commencing in 1998, the long-term target for sales growth has been
raised to 8-10% compounded annually, and its target for earnings per share
growth has been raised to 16-18% annually. Previously, the Company targeted
long-term sales growth of 6-8% and long-term earnings per share growth of 13-
15%. The higher targets come largely as a result of initiatives currently
underway and others under review intended to reduce costs by up to $400.0 a year
by 2000, with $200.0 of the savings being reinvested concurrently in advertising
and marketing programs to boost sales. In the first quarter of 1998, the
Company
<PAGE> 41
recorded $108.4 pretax of such one-time charges ($84.2 after tax, or $.32 per
share on a basic and diluted basis) in connection with the business process
redesign program. Slightly more than half of the total pretax charges in the
first quarter were to be cash related with payments in 1998 and 1999. In the
third quarter of 1998, the Company recorded additional special charges for
business redesign efforts totaling $46.0 pretax ($38.6 after tax, or $.14 per
share on a basic and diluted basis). Approximately 70% of the third quarter
pretax charges were to be cash related with payments in 1998 and 1999. At
December 31, 1998, the remaining liability balance was $28.5 and relates
primarily to severance costs that will be paid during 1999. The Company expects
to record the additional one-time charges in 1999 as plans are finalized.
Euro
A single currency called the euro was introduced in Europe on January 1, 1999.
Eleven of the fifteen member countries of the European Union adopted the euro as
their common legal currency on that date. Fixed conversion rates between these
participating countries' existing currencies (the "legacy currencies") and the
euro were established as of that date. The legacy currencies are scheduled to
remain legal tender as denominations of the euro until June 30, 2002. During
this transition period, parties may settle transactions using either the euro or
a participating country's legal currency. Beginning in January 2002, new euro-
denominated bills and coins will be issued, and legacy currencies will be
withdrawn from circulation.
Avon operating subsidiaries affected by the euro conversion have
established plans to address issues raised by the euro currency conversion.
These issues include, among others, the need to adapt information technology
systems, business processes and equipment to accommodate euro-denominated
transactions, the impact of one common currency on pricing and recalculating
currency risk. Avon does not expect system and equipment conversion costs to be
material. Due to the numerous uncertainties associated with the market impact of
the euro conversion, the Company cannot reasonably estimate the effects one
common currency will have on pricing and the resulting impact, if any, on
results of operations, financial condition or cash flows.
Year 2000 Update
General
The "Year 2000 issue" is the result of computer programs being written using
two-digits rather than four to define the applicable year. If the Company's
computer programs with date-sensitive functions are not Year 2000 compliant,
they may fail or make miscalculations due to interpreting a date including "00"
to mean 1900, not 2000. The result may be disruptions in operations, including,
among other things, a temporary inability to process transactions or engage in
similar normal business activities.
The Company commenced its worldwide Year 2000 initiative in early 1996.
The Company has developed a comprehensive project plan as a means for ensuring
that all information technology ("IT") systems, including applications,
operating systems, mainframe, mid range and client server platforms, all non-
information technology ("Non-IT") systems, including embedded applications and
equipment and key third parties are Year 2000 compliant by December 31, 1999.
The Company has identified high risk applications that are critical to its
business, recognizing the fact that timely compliance of these systems is
crucial, and, therefore, has designed its programs to address these systems
first. Furthermore, the Company has established a project team to identify and
address the Company's Year 2000 risks and issues in an attempt to ensure the
integrity and reliability of the Company's information systems and business
processes.
Project Plan
The Company's Year 2000 project plan is divided into four major sections,
including: Infrastructure, Application Softwares, Validation of Third Party
Compliance and Embedded Systems. The project has five phases, which are common
to all sections: 1) identifying, inventorying and prioritizing Year 2000 items;
2) assessing Year 2000 compliance of identified items and related potential
risks in circumstances of non-compliance of these items; 3) remediating,
replacing or upgrading, as appropriate, material items that are determined not
to be Year 2000 compliant; 4) validation testing of material items to ensure
compliance; and 5) contingency planning and implementation. The Company
utilizes internal resources and outside consultants to renovate and test its IT
and Non-IT systems for Year 2000 compliance. None of the Company's other
information technology projects have been deferred due to the implementation of
the Year 2000 project.
The Infrastructure section consists of hardware, including mainframe and
AS/400 platforms, and software, including operating systems, other than
Applications Software. This section has completed all phases through
remediation and has progressed to the validation testing phase. All
Infrastructure activities are expected to be completed by June 1999.
The Applications Software section includes the conversion of both in-house
developed and vendor-supplied software applications.
<PAGE>42
In-house developed software that is not Year 2000 compliant has undergone
remediation of its application, whereas non-compliant vendor provided software
has been upgraded or replaced, where available by the supplier. This section's
testing phase, which includes procedures for independent validation and
verification of code, is ongoing and is anticipated to be completed by June
1999.
Validation of Third Party Compliance includes the process of recognizing,
prioritizing and communicating with key suppliers and service providers with
whom the Company has a direct and significant relationship and are believed to
be critical to its business operations. Identification of significant vendors
has been completed and a strategy has been initiated in an attempt to reasonably
ascertain their progress in addressing the Year 2000 issue. The Company has
distributed comprehensive questionnaires to key suppliers, and, with the
guidance of outside consultants, is in the process of conducting detailed
assessments of the responses received. The validation of third party compliance
is expected to be completed by May 1999. Follow-up reviews will also be
scheduled for the remainder of 1999.
The Embedded Systems section includes all hardware, software and associated
embedded computer chips that are utilized in operating and maintaining the
internal functions of the Company's facilities, i.e. climate control systems.
The Company has elected to employ a regional-based strategy for addressing Year
2000 compliance of its embedded systems. Avon U.S. operations have
substantially completed the remediation of embedded systems and anticipate all
repair and testing to be completed by March 1999. From an international
standpoint, the Company is in the process of inventorying material items that
are not Year 2000 compliant and expects the assessment phase to be completed by
July 1999, with all remediation testing scheduled to be completed by year-end
1999.
Costs
The total estimated cost associated with achieving worldwide Year 2000
compliance will be approximately $29.4, of which $17.0 has been spent to date.
Replacement costs and costs associated
with the validation of third party compliance are included in these figures.
The Company does not separately track the internal costs incurred for the Year
2000 project, those costs primarily being related to payroll costs for the
Company's information systems group. The Company's policy is to expense as
incurred information system maintenance and modification costs and to capitalize
costs related to system replacement. The costs of the Company's Year 2000
compliance efforts are being funded through operating cash flows.
Risks
The Company expects to identify and resolve all Year 2000 problems that may
adversely affect its business operations. However, management
believes that it is not possible to determine with complete certainty that all
Year 2000 matters affecting the Company have been or will be identified or
corrected, resulting in part from the uncertainty of the Year 2000 readiness of
third party suppliers. Thus, the Company is unable to determine at this time
whether the consequences of Year 2000 failures will have a material impact on
the Company's results of operations, liquidity or financial condition. The
Company believes, however, that its risk of being adversely impacted by Year
2000 failures is mitigated due to its product portfolio being so diversified,
with the vast majority of its items not being date-sensitive. The strategy
employed by the Company's Year 2000 project is expected to significantly reduce
the Company's level of uncertainty about the Year 2000 issue and the Year 2000
compliance of key third parties who materially impact its business.
Contingency Plans
Development of contingency plans is in progress and will be developed in detail
during 1999. Once established, contingency plans and related cost estimates
will be continually modified, if necessary, as additional information becomes
available.
Disclaimer
Readers are cautioned that forward-looking statements contained in the Year 2000
Update should be read in conjunction with the Company's disclosure under the
heading "Forward-Looking Statement".
<PAGE>43
Results of Operations by Quarter
Avon Products, Inc.
All share and per share data shown below have been restated to reflect two-for-
one stock splits which were distributed in September 1998 and June 1996.
In millions, except per share data
First Second Third Fourth Year
1998
Net sales $1,183.4 $1,247.2 $1,233.2 $1,548.9 $5,212.7
Gross profit* 680.3 781.6 755.0 942.8 3,159.7
Special charges 70.5 - 46.0 - 116.5
Operating (loss)profit (16.3) 178.6 82.7 234.5 479.5
(Loss)income before taxes and
minority interest (26.6) 173.6 76.5 232.4 455.9
(Loss)income before
minority interest (32.7) 109.7 39.8 148.3 265.1
Net (loss)income $ (31.0) $ 111.4 $ 41.5 $ 148.1 $ 270.0
========= ======== ======== ======== ========
(Loss)earnings per share:
Basic $ (.12) $ .42 $ .16 $ .56 $ 1.03(1)
========= ======== ======== ======== ==========
Diluted $ (.12) $ .42 $ .16 $ .56 $ 1.02(1)
========= ======== ======== ======== ==========
*First quarter includes a one-time charge of $37.9 for inventory write-downs.
1997
Net sales $1,087.6 $1,225.0 $1,249.4 $1,517.4 $5,079.4
Gross profit 646.0 748.9 732.2 901.3 3,028.4
Operating profit 73.1 157.0 117.5 196.5 544.1
Income before taxes and
minority interest 63.0 150.5 107.9 213.5 534.9
Income before minority
interest 39.7 94.8 68.0 134.5 337.0
Net income $ 41.3 $ 95.2 $ 68.6 $ 133.7 $ 338.8
======== ======== ======== ======== ========
Earnings per share:
Basic $ .16 $ .36 $ .26 $ .51 $ 1.28(1)
======== ======== ======== ======== ===========
Diluted $ .15 $ .36 $ .26 $ .50 $ 1.27(1)
======== ======== ======== ======== ===========
(1) The sum of per share amounts for the quarters does not necessarily equal
that for the year because the computations are made independently.
Market Prices per share of Common Stock by Quarter
1998 1997
Quarter High Low High Low
First $ 40.63 $ 28.00 $ 31.81 $ 26.06
Second 44.50 36.94 37.00 25.31
Third 44.31 25.00 39.00 29.25
Fourth 46.25 25.75 38.38 27.75
Avon common stock is listed on the New York Stock Exchange. At December 31,
1998, there were 23,375 shareholders of record. The Company believes that there
are over 60,000 additional shareholders who are not "shareholders of record" but
who beneficially own and vote shares through nominee holders such as
brokers, benefit plan trustees, etc. Dividends of $.68 per share, or $.17 per
share each
quarter, were declared and paid in 1998. Dividends of $.63 per share, or $.1575
per share each quarter, were declared and paid in 1997.
<PAGE>44
Consolidated Statements of Income
Avon Products, Inc.
In millions, except per share data
Years ended December 31 1998 1997 1996
Net sales $5,212.7 $5,079.4 $4,814.2
Costs, expenses and other:
Cost of sales** 2,053.0 2,051.0 1,921.2
Marketing, distribution and
administrative expenses 2,563.7 2,484.3 2,348.2
Special charges 116.5 - -
--------- --------- ---------
Operating profit 479.5 544.1 544.8
========= ========= =========
Interest expense 41.0 41.8 40.0
Interest income (15.9) (16.7) (14.5)
Other (income) expense, net (1.5) (15.9) 8.9
--------- --------- ---------
Total other expenses 23.6 9.2 34.4
Income before taxes and minority interest 455.9 534.9 510.4
Income taxes 190.8 197.9 191.4
--------- -------- --------
Income before minority interest 265.1 337.0 319.0
Minority interest 4.9 1.8 (1.1)
--------- --------- ---------
Net income $ 270.0 $ 338.8 $ 317.9
========= ========= =========
Earnings per share:
Basic $ 1.03 $ 1.28* $ 1.19*
Diluted $ 1.02 $ 1.27* $ 1.18*
*Restated to reflect a two-for-one stock split distributed in September 1998.
**1998 includes a one-time charge of $37.9 for inventory write-downs.
The accompanying notes are an integral part of these statements.
<PAGE>45
Consolidated Balance Sheets
Avon Products, Inc.
In millions, except share data
December 31 1998 1997
Assets
Current assets
Cash, including cash equivalents of $59.7 and $60.0 $ 105.6 $ 141.9
Accounts receivable (less allowance for doubtful
accounts of $49.0 and $35.5) 492.6 444.8
Inventories 538.4 564.8
Prepaid expenses and other 204.8 192.5
--------- ---------
Total current assets $1,341.4 $1,344.0
Property, plant and equipment, at cost
Land 51.4 48.6
Buildings and improvements 613.0 567.0
Equipment 728.4 666.0
-------- --------
1,392.8 1,281.6
Less accumulated depreciation 722.9 670.6
- --------- ---------
669.9 611.0
Other assets 422.2 317.9
--------- ---------
Total assets $2,433.5 $2,272.9
========= =========
Liabilities and Shareholders' Equity
Current liabilities
Debt maturing within one year $ 55.3 $ 132.1
Accounts payable 416.9 476.0
Accrued compensation 161.3 111.3
Other accrued liabilities 308.2 268.9
Sales and taxes other than income 106.2 101.0
Income taxes 281.6 266.6
--------- ---------
Total current liabilities $1,329.5 $1,355.9
Long-term debt 201.0 102.2
Employee benefit plans 390.0 367.6
Deferred income taxes 36.3 31.2
Other liabilities (including minority interest
of $36.1 and $37.5) 191.6 131.0
Commitments and contingencies (Note 14)
Shareholders' equity
Common stock, par value $.25 - authorized:
400,000,000 shares; issued
351,314,366 and 174,711,173 shares 87.8 43.7
Additional paid-in capital 780.0 733.1
Retained earnings 719.1 660.9
Accumulated other comprehensive income (301.3) (270.3)
Treasury stock, at cost - 88,793,640 and
42,897,463 shares (1,000.5) (882.4)
--------- ---------
Total shareholders' equity 285.1 285.0
--------- ---------
Total liabilities and shareholders' equity $2,433.5 $2,272.9
========= =========
The accompanying notes are an integral part of these statements.
<PAGE>46
Consolidated Statements of Cash Flows
Avon Products, Inc.
In millions
Years ended December 31 1998 1997 1996
Cash flows from operating activities
Net income $ 270.0 $ 338.8 $ 317.9
Adjustments to reconcile income to net cash
provided by continuing operations:
Depreciation and amortization 72.0 72.1 64.5
Provision for doubtful accounts 91.3 80.8 79.0
Translation gains (7.2) (.1) (.2)
Deferred income taxes (13.0) 18.0 (.7)
Special charges 88.5 - -
Other 3.9 9.4 9.9
Changes in assets and liabilities:
Accounts receivable (157.6) (121.4) (125.5)
Inventories (17.2) (67.5) (65.4)
Prepaid expenses and other (4.0) 6.7 13.7
Accounts payable and accrued liabilities 13.0 42.9 97.8
Income and other taxes 19.5 (56.1) 57.7
Noncurrent assets and liabilities (34.8) (8.1) (23.6)
-------- -------- --------
Net cash provided by continuing operations 324.4 315.5 425.1
Net cash used by discontinued operations - - (38.2)
Net cash provided by operating activities 324.4 315.5 386.9
-------- -------- --------
Cash flows from investing activities
Capital expenditures (189.5) (169.4) (103.6)
Disposal of assets 5.8 3.3 3.3
Acquisitions of subsidiary stock and other
investing activities 1.4 (9.0) (6.3)
-------- -------- --------
Net cash used by investing activities (182.3) (175.1) (106.6)
-------- ------- -------
Cash flows from financing activities
Cash dividends (180.6) (168.3) (158.1)
Debt, net (maturities of three months or less) (96.1) (39.8) 17.8
Proceeds from short-term debt 54.7 25.7 37.5
Retirement of short-term debt (34.9) (49.0) (14.1)
Proceeds from long-term debt 100.1 100.0 -
Retirement of long-term debt (.6) (.8) (1.5)
Proceeds from exercise of stock options,
net of taxes 24.0 20.6 10.0
Repurchase of common stock (107.8) (110.8) (127.8)
Other financing activities 58.1 58.6 -
-------- -------- --------
Net cash used by financing activities (183.1) (163.8) (236.2)
-------- -------- --------
Effect of exchange rate changes on cash and
equivalents 4.7 (19.2) (11.0)
-------- -------- --------
Net (decrease)increase in cash and equivalents (36.3) (42.6) 33.1
Cash and equivalents at beginning of year 141.9 184.5 151.4
-------- -------- --------
Cash and equivalents at end of year $ 105.6 $ 141.9 $ 184.5
======== ======== ========
Cash paid for
Interest $ 39.2 $ 36.0 $ 35.2
Income taxes, net of refunds received 188.5 215.8 158.9
The accompanying notes are an integral part of these statements.
<PAGE>47
Consolidated Statements of Changes in Shareholders' Equity
Avon Products, Inc.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
<C> <C> <C>
Accumulated
Additional
Other
Common Stock Paid-In
Retained Comprehensive Treasury
In millions, except share data Shares Amount Capital
Earnings Income Stock Total
Balance at December 31, 1995 173,498,112 $ 43.4 $ 672.9 $
325.8 $(202.1) $(647.3) $192.7
Comprehensive income:
Net income
317.9 317.9
Foreign currency translation
adjustments
(8.6) (8.6)
- ------
Total comprehensive income
309.3
Dividends - $1.16 per share
(154.9) (154.9)
Exercise of stock options, including
tax benefits 423,267 .1 15.6
15.7
Grant, cancellation and
amortization of restricted stock 36,000 2.7
2.7
Repurchase of common stock
(127.8) (127.8)
Benefit plan contributions 2.4
1.6 4.0
----------- ------ ------- -----
- --- -------- -------- -------
Balance at December 31, 1996 173,957,379 43.5 693.6
488.8 (210.7) (773.5) 241.7
Comprehensive income:
Net income
338.8 338.8
Foreign currency translation
adjustments
(59.6) (59.6)
- -------
Total comprehensive income
279.2
Dividends - $1.26 per share
(166.7) (166.7)
Exercise of stock options, including
tax benefits 713,298 .2 30.3
30.5
Grant, cancellation and
amortization of restricted stock 40,496 4.6
4.6
Repurchase of common stock
(110.8) (110.8)
Benefit plan contributions 4.6
1.9 6.5
----------- ------ ------- -----
- --- -------- -------- -------
Balance at December 31, 1997 174,711,173 43.7 733.1
660.9 (270.3) (882.4) 285.0
Comprehensive income:
Net income
270.0 270.0
Foreign currency translation
adjustments
(15.6) (15.6)
Minimum pension liability adjustment
(15.4) (15.4)
- -------
Total comprehensive income
239.0
Dividends - $.68 per share
(178.9) (178.9)
Two-for-one stock split effected
in the form of a stock
dividend from retained
earnings (Note 9) 175,419,475 43.9
(32.9) (11.0) -
Exercise of stock options, including
tax benefits 916,102 .2 38.2
38.4
Grant, cancellation and
amortization of restricted stock 267,616 7.1
7.1
Repurchase of common stock
(107.8) (107.8)
Benefit plan contributions 1.6
.7 2.3
----------- ------ ------- -----
- ---- -------- ---------- --------
Balance at December 31, 1998 351,314,366 $ 87.8 $ 780.0 $
719.1 $(301.3) $(1,000.5) $ 285.1
=========== ====== =======
========= ======== ========== ========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>48
Notes to Consolidated Financial Statements
Avon Products, Inc.
In millions, except share data
1. Description of the Business and Summary of Significant Accounting Policies
Business
Avon Products, Inc. ("Avon" or the "Company") is a global manufacturer and
marketer of beauty and related products. The product categories include
cosmetics, fragrance and toiletries; gift and decorative; apparel; and fashion
jewelry and accessories. Avon's business is comprised of one industry segment,
direct selling, which is conducted in North America, Latin America, the Pacific
and Europe. Sales are made to the ultimate customers principally by independent
Avon Representatives.
Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include the
accounts of Avon and its majority and wholly-owned subsidiaries. Intercompany
balances and transactions are eliminated. These statements have been prepared in
conformity with generally accepted accounting principles and require management
to make estimates and assumptions that affect amounts reported and disclosed in
the financial statements and related notes. Actual results could differ from
these estimates.
Foreign Currency - The Company has operations in various countries around the
world. Fluctuations in the value of foreign currencies cause U.S. dollar-
translated amounts to change in comparison with previous periods. Accordingly,
the Company cannot project in any meaningful way the possible effect of such
fluctuations upon translated amounts or future earnings. This is due to the
large number of currencies involved, the constantly changing exposure in these
currencies, the complexity of intercompany relationships, the hedging activity
entered into in an attempt to minimize certain of the effects of exchange rate
changes where economically feasible and the fact that all foreign currencies do
not react in the same manner against the U.S. dollar.
Financial statements of foreign subsidiaries operating in other than highly
inflationary economies are translated at year-end exchange rates for assets and
liabilities and average exchange rates prevailing during the year for income and
expense accounts. Translation adjustments of these subsidiaries are recorded
within accumulated other comprehensive income.
For financial statements of subsidiaries operating in highly inflationary
economies, nonmonetary assets (principally inventories and fixed assets) and the
related expenses (principally cost of sales and depreciation) are translated at
the respective historical exchange rates in effect when the assets were acquired
or when the subsidiary was designated as operating in a highly inflationary
economy. Monetary assets and liabilities are translated at
year-end exchange rates. All other income and expense accounts are translated at
average exchange rates prevailing during the year. Adjustments resulting from
the translation of the financial statements of these subsidiaries are included
in income.
Revenue Recognition - Avon recognizes revenue as shipments are made and title
passes to independent Representatives, who are Avon's customers.
Cash and Equivalents - Cash equivalents are stated at cost plus accrued
interest, which approximates fair value. Cash equivalents are highly liquid debt
instruments with an original maturity of three months or less and consist of
time deposits with a number of U.S. and non-U.S. commercial banks with high
credit ratings. In accordance with Avon's policy, the maximum amount invested in
any one bank is limited. Avon believes it is not exposed to any significant
credit risk regarding cash and equivalents.
Inventories - Inventories are stated at the lower of cost or market. Cost is
determined using the last-in, first-out ("LIFO") method for substantially all
U.S. inventories, except apparel, and the first-in, first-out method for all
other inventories.
Depreciation - Substantially all buildings, improvements and equipment are
depreciated using the straight-line method over estimated useful lives.
Estimated useful lives for buildings and improvements range from 20 to 45 years
and equipment range from 3 to 15 years.
Other Assets - Systems development costs related to the development of major
information and accounting systems are capitalized and amortized over the
estimated useful life of the related project, not to exceed five years.
Stock Options - Compensation cost is recognized for fixed price options using
the intrinsic value method. Under this method, compensation cost is the excess,
if any, of the quoted market price of the stock at the grant date or other
measurement date over the amount an employee must pay to acquire the stock.
Financial Instruments - Derivative financial instruments are used by the Company
in the management of its interest rate and foreign currency exposures and are
accounted for on an accrual basis. Gains and losses resulting from effective
hedges of existing assets,
<PAGE>49
liabilities and firm commitments are deferred as other assets or liabilities and
recognized when the offsetting gains and losses are recognized on the related
hedged items. Income and expense are recorded in the same category as that
arising from the related asset or liability being hedged. Items which do not
qualify for hedge accounting are marked to market with the resulting gain or
loss recognized in other (income) expense, net. Gains realized on termination
of interest rate swap contracts are deferred and amortized over the remaining
terms of the original swap agreements. Costs of interest rate cap contracts are
amortized over the effective lives of the contracts if considered to be economic
hedges; otherwise, they are marked to market.
The Company also uses financial instruments, principally forward contracts to
purchase Avon common stock, to hedge certain employee benefit costs and the cost
of the Company's share repurchase program. Contracts that require physical or
net share settlement are initially measured at fair value with subsequent
changes in fair value not recognized.
Research and Development - Research and development costs are expensed as
incurred and aggregated in 1998 $31.4 (1997 - $29.9; 1996 - $30.2).
Advertising - Advertising costs are expensed as incurred and aggregated in 1998
$65.0 (1997 - $64.5; 1996 - $69.6).
Income Taxes - Deferred income taxes have been provided on items recognized for
financial reporting purposes in different periods than for income tax purposes
at future enacted rates.
U.S. income taxes have not been provided on approximately $198.9 of
undistributed income of subsidiaries that has been or is intended to be
permanently reinvested outside the United States or is expected to be remitted
free of U.S. income taxes. If such undistributed income was remitted, no
substantial tax cost would be incurred.
Earnings per Share - Basic earnings per share are computed by dividing net
income by the weighted-average number of shares outstanding during the year.
Diluted earnings per share are calculated to give effect to all potentially
dilutive common shares that were outstanding during the year.
For each of the three years ended December 31, the number of shares used in
the computation of basic and diluted earnings per share are as follows:
1998 1997 1996
Basic EPS
Weighted-average shares 263.27 264.67 267.40
Incremental shares from conversion of:
Stock options 2.68 2.33 1.86
------ ------ ------
Diluted EPS
Adjusted weighted-average shares 265.95 267.00 269.26
====== ====== ======
Reclassifications - To conform to the 1998 presentation, certain
reclassifications were made to the prior years' consolidated financial
statements.
2. Accounting Changes
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("FAS") No. 130, "Reporting Comprehensive Income". This statement
establishes standards for the reporting and presentation of comprehensive income
and its components in a full set of financial statements. As shown in the
Statement of Changes in Shareholders' Equity and Note 5, comprehensive income
includes all changes in equity during a period, except those resulting from
investments by and distributions to the Company's stockholders. As this
standard only requires additional information in the financial statements, it
does not affect the Company's results of operations or financial position.
Effective January 1, 1998, the Company adopted FAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information", which changes the way
the Company reports information about its operating segments. The information
for 1997 and 1996 has been restated from that previously reported in order to
conform with the current year's presentation. FAS No. 131 requires a new basis,
entitled the management approach, for determining reportable segments. This
approach is based on the way management organizes segments within a company for
making operating decisions and assessing performance. FAS No. 131 also
establishes standards for supplemental disclosure about products and services,
geographical areas and major customers. Segment results for the three years
ended December 31, 1998 are presented in Note 11.
Effective January 1, 1998, the Company adopted FAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". FAS No. 132
standardizes the disclosure requirements for pensions and other postretirement
benefits, though it does not impact the measurement or recognition of those
benefits. There was no impact on the Company's results of operations or
financial position in adopting this statement. Prior years' information has
been restated to conform with the requirements of FAS No. 132.
Effective January 1, 1998, the Company adopted AICPA Statement of Position
("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". SOP No. 98-1 requires certain costs in connection
with developing or obtaining internally used software to be capitalized that
previously would have been expensed as incurred. The adoption of SOP No. 98-1
did not have a material impact on the Company's results of operations, financial
position, or cash flows.
Effective December 31, 1997, the Company adopted FAS No. 128, "Earnings per
Share". FAS No. 128 establishes standards for computing and presenting earnings
per share ("EPS") and replaces the presentation of previously disclosed EPS with
both basic and diluted EPS. Based upon the Company's capitalization structure,
the EPS amounts calculated in accordance with FAS No. 128 approximated the
Company's EPS amounts in accordance with Accounting Principles Board Opinion
("APB") No. 15, "Earnings per Share". All prior period EPS data have been
restated in accordance with FAS No. 128.
<PAGE>50
Effective January 1, 1996, the Company adopted the fair value disclosure
requirements of FAS No. 123, "Accounting for Stock-Based Compensation". As
permitted by the statement, the Company did not change the method of accounting
for its employee stock compensation plans. See Note 8 for the fair value
disclosures required under FAS No. 123.
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". FAS No. 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999 (January 1, 2000 for the Company). FAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction. For fair-value hedge transactions in
which the Company is hedging changes in the fair value of an asset, liability,
or firm commitment, changes in the fair value of the derivative instrument will
be included in the income statement along with the offsetting changes in the
hedged item's fair value. For cash-flow hedge transactions in which the Company
is hedging the variability of cash flows related to a variable rate asset,
liability, or a forecasted transaction, changes in the fair value of the
derivative instrument will be reported in other comprehensive income. The gains
and losses on the derivative instruments that are reported in other
comprehensive income will be reclassified to earnings in the periods in which
earnings are impacted by the variability of the cash flows of the hedged item.
The ineffective portion of all of the hedges will be recognized in current
period earnings. The Company has not yet determined the impact that the
adoption of FAS No. 133 will have on its results of operations or financial
position.
3. Inventories
Inventories at December 31 consisted of the following:
1998 1997
Raw materials $140.6 $147.4
Finished goods 397.8 417.4
------ ------
Total $538.4 $564.8
====== ======
LIFO-based inventories at December 31, 1998 were $135.3; (1997 - $143.5)
with the current estimated replacement cost exceeding the carrying value by
approximately $3.6 (1997 - $15.2).
4. Debt and Other Financing
Debt at December 31 consisted of the following (see also Note 7 regarding
financial instruments):
1998 1997
Maturing within one year:
Notes payable $ 53.9 $ 29.4
Current portion of long-term debt 1.4 102.7
------- -------
Total $ 55.3 $ 132.1
======= =======
Long-term debt:
6.25% bonds, due 2018 $ 100.0 $ -
6.55% notes, due 2007 100.0 100.0
170 million 6-1/8% deutsche mark notes, due 1998 (1) - 100.0
Other, payable to 2002 with interest from 7% to 31% 2.4 4.9
Less current portion (1.4) (102.7)
-------- --------
Total $ 201.0 $ 102.2
======== ========
(1) The deutsche mark notes ("Notes") were effectively converted into U.S.
dollar debt through the use of a currency exchange swap contract which included
both the principal and the interest. Reflected in the carrying value of the
debt was a currency swap contract payable at December 31, 1997 of $5.1.
Annual maturities of long-term debt for each of the next five years are:
1999 - $1.4; 2000 - $.6; 2001 - $.2; 2002 - $.1; and 2003 and beyond $200.1.
In May 1998, Avon issued $100.0 of bonds embedded with option features (the
"bonds") to pay down commercial paper borrowings. The bonds have a twenty-year
maturity; however, after five years, the bonds, at the holder's option, can be
sold back to the Company at par or can be called at par by the underwriter and
resold to investors as fifteen-year debt. The coupon rate on the bonds is 6.25%
for the first five years, but will be refinanced at market rates if the bonds
are called in year five.
In connection with the bond issuance, Avon entered into a five-year
interest rate swap contract with a notional amount of $50.0 to effectively
convert fixed interest on a portion of the bonds to a variable interest rate,
based on LIBOR.
During 1997, the Company issued $100.0 of 6.55% notes, due August 1, 2007,
to pay down commercial paper borrowings.
During 1996, the Company entered into an agreement, which expires in 2001,
with various banks to amend and restate the five-year, $600.0 revolving credit
and competitive advance facility agreement. Within this facility, the Company
is able to borrow, on an uncommitted basis, various foreign currencies. The new
agreement and the prior agreement are referred to, collectively, as the credit
facility.
The credit facility is primarily to be used to finance working capital,
provide support for the issuance of commercial paper and support the stock
repurchase program. At the Company's option, the interest
<PAGE>51
rate on borrowings under the credit facility is based on LIBOR, prime, or
federal fund rates. The credit facility has an annual facility fee of $.4. The
credit facility contains a covenant for interest coverage, as defined. The
Company is in compliance with this covenant.
At December 31, 1998 and 1997, there were no borrowings outstanding under
the credit facility.
The Company has bankers' acceptance facilities and uncommitted lines of
credit available of $65.0 (1997 - $205.0) with various banks which have no
compensating balances or fees. As of December 31, 1998 and 1997, there were no
borrowings under either the bankers' acceptance facilities or uncommitted lines.
The maximum borrowings under these combined facilities during 1998 and 1997
were $290.7 and $409.3, respectively, and the annual average borrowings during
each year were approximately $205.7 and $274.6, respectively, at average annual
interest rates of approximately 4.8% and 5.2%, respectively.
At December 31, 1998 and 1997, international lines of credit totaled $329.5
and $295.8, respectively, of which $53.9 and $29.4 were outstanding,
respectively. The maximum borrowings under these facilities during 1998 and
1997 were $63.6 and $38.8, respectively, and the annual average borrowings
during each year were $49.3 and $33.8, respectively, at average annual interest
rates of approximately 12.3% and 9.9%, respectively. Such lines have no
compensating balances or fees.
At December 31, 1998 and 1997, Avon also has letters of credit outstanding
totaling $15.5 and $15.5, respectively, which guarantee various insurance
activities. In addition, Avon has outstanding letters of credit for various
trade activities.
During 1998 and 1997, the Company entered into securities lending
transactions resulting in the borrowing of securities which were subsequently
sold for net proceeds approximating $58.1 and $58.6, respectively, used to repay
commercial paper borrowings. The borrowed securities are due to the lender no
later than December 29, 2000, but at the Company's option can be returned at any
time. The obligations are included in other non-current liabilities on the
balance sheet. The effective rates on the transactions are expected to be 5.5%.
and 6.5%, respectively.
5. Comprehensive Income
The following table reflects comprehensive income as of December 31:
1998 1997 1996
Net income $270.0 $338.8 $317.9
Other comprehensive loss
Change in equity due to foreign currency
translation adjustments (15.6) (59.6) (8.6)
Minimum pension liability adjustment (15.4) - -
------- ------- -------
Comprehensive income $239.0 $279.2 $309.3
======= ======= =======
Accumulated other comprehensive income at December 31 consisted of the
following:
1998 1997
Foreign currency translation
Adjustments $(285.9) $(270.3)
Minimum pension liability
Adjustment (15.4) -
-------- --------
Total $(301.3) $(270.3)
6. Income Taxes
Deferred tax assets (liabilities) resulting from temporary differences in the
recognition of income and expense for tax and financial reporting purposes at
December 31 consisted of the following:
1998 1997
Deferred tax assets:
Postretirement benefits $ 82.0 $ 69.3
Accrued expenses and reserves 58.7 44.0
Special and non-recurring charges 9.0 -
Employee benefit plans 54.5 40.0
Foreign operating loss carryforwards 29.1 32.5
Capital loss carryforwards 17.4 21.2
Postemployment benefits 11.0 10.6
All other 21.3 17.7
Valuation allowance (46.9) (55.7)
-------- --------
Total deferred tax assets 236.1 179.6
Deferred tax liabilities:
Depreciation (41.5) (35.6)
Prepaid retirement plan costs (55.2) (52.4)
Capitalized interest (10.6) (13.5)
Unremitted foreign earnings (17.4) (12.0)
All other (22.1) (9.0)
-------- --------
Total deferred tax liabilities (146.8) (122.5)
-------- --------
Net deferred tax assets $ 89.3 $ 57.1
======== ========
<PAGE>
Deferred tax assets (liabilities) at December 31 were classified as follows:
1998 1997
Deferred tax assets:
Prepaid expenses and other $ 86.9 $ 76.5
Other assets 44.2 16.1
------ ------
Total deferred tax assets 131.1 92.6
Deferred tax liabilities:
Income taxes (5.5) (4.3)
Deferred income taxes (36.3) (31.2)
------- -------
Total deferred tax liabilities (41.8) (35.5)
------- -------
Net deferred tax assets $ 89.3 $ 57.1
======= =======
The valuation allowance primarily represents reserves for foreign operating loss
and capital loss carryforwards. The basis used for recognition of deferred tax
assets included the profitability of the operations and related deferred tax
liabilities.
Income before taxes and minority interest for the years ended December 31
was as follows:
1998 1997 1996
United States $ 74.2 $ 153.6 $ 171.3
Foreign 381.7 381.3 339.1
------- ------- -------
Total $ 455.9 $ 534.9 $ 510.4
======= ======= =======
<PAGE>52
The provision for income taxes for the years ended December 31 was as
follows:
1998 1997 1996
Federal:
Current $ 16.7 $ 5.4 $ 30.9
Deferred (10.4) 21.3 1.0
-------- ------- --------
6.3 26.7 31.9
Foreign:
Current 176.2 169.7 152.4
Deferred .9 (7.7) (1.5)
-------- -------- --------
177.1 162.0 150.9
State and other:
Current 10.9 4.8 8.8
Deferred (3.5) 4.4 (.2)
-------- -------- --------
7.4 9.2 8.6
Total $ 190.8 $ 197.9 $ 191.4
======== ======== ========
The effective tax rate for the years ended December 31 was as follows:
1998 1997 1996
Statutory federal rate 35.0% 35.0% 35.0%
State and local taxes, net of federal tax benefit 1.0 1.1 1.1
Tax-exempt operations .8 (.5) (.7)
Taxes on foreign income, including translation 9.5 5.3 6.3
Other (4.4) (3.9) (4.2)
----- ----- -----
Effective tax rate 41.9% 37.0% 37.5%
===== ===== =====
During 1997, the Company reached final agreement with the Internal Revenue
Service with respect to its examination of the Company's income tax returns for
the years 1982 through 1989. As anticipated, payments, including related
interest, made under this settlement were approximately $42.4. Reserves
previously had been provided by the Company related to the agreement.
In the fourth quarter of 1997, the Company recorded a benefit related to a
value-added tax settlement in the United Kingdom totaling $26.5, of which $20.6
and $5.9 have been reflected in other (income) expense, net and interest income,
respectively.
At December 31, 1998, Avon had foreign operating loss carryforwards of
approximately $87.8. The loss carryforwards expiring between 1999 and 2006 were
$64.3 and the loss carryforwards which do not expire were $23.5. Capital loss
carryforwards, which expire between 1999 and 2001 and may be used to offset
capital gains, if any, were approximately $49.7 at December 31, 1998.
7. Financial Instruments and Risk Management
Risk Management - The Company operates globally, with manufacturing and
distribution facilities in various locations around the world. The Company may
reduce its exposure to fluctuations in interest rates and foreign exchange rates
by creating offsetting positions through the use of derivative financial
instruments. The Company does not use derivative financial instruments for
trading or speculative purposes, nor is the Company a party to leveraged
derivatives.
The notional amount of forward exchange contracts and options is the amount
of foreign currency bought or sold at maturity. The notional amount of interest
rate swaps is the underlying principal amount used in determining the interest
payments exchanged over the life of the swap. The notional amounts are not a
direct measure of the Company's exposure through its use of derivatives.
Interest Rates - The Company periodically uses interest rate swaps to hedge
portions of interest payable on its debt. In addition, the Company may
periodically employ interest rate caps to reduce exposure, if any, to increases
in variable interest rates.
As discussed in Note 4, the Company entered into a five-year interest rate
swap contract with a notional amount of $50.0 to effectively convert fixed
interest on a portion of the bonds to variable interest rate based on LIBOR.
Foreign Currencies - The Company may periodically hedge foreign currency
royalties, net investments in foreign subsidiaries, firm purchase commitments
and contractual foreign currency cash flows or obligations, including third-
party and intercompany foreign currency transactions. The Company regularly
monitors its foreign currency exposures and ensures that hedge contract amounts
do not exceed the amounts of the underlying exposures.
At December 31, 1998, the Company held foreign currency forward contracts
with notional amounts totaling $285.9 (1997 - $319.1) and option contracts with
notional amounts totaling $32.6 (1997 - $80.0) to hedge foreign currency items.
All except $7.3 of these contracts have maturities prior to December 31, 1999.
Additionally, the Company also held forward contracts with notional amounts
totaling $45.0 (1997 - $44.2) which do not qualify as hedging transactions under
the current accounting definitions and, accordingly, have been marked to market.
The mark-to-market adjustments on these forward contracts at December 31, 1998
and 1997 were insignificant.
<PAGE>53
These forward and option contracts to purchase and sell foreign currencies,
including cross-currency contracts to sell one foreign currency for another
currency at December 31 are summarized below:
1998 1997
Buy Sell Buy Sell
Brazilian real $ - $ 45.0 $ - $ -
British pound 37.9 57.7 29.1 56.5
Canadian dollar - 39.1 - 30.8
Chinese renminbi - 5.0 - -
French franc - - - 13.8
German mark 71.8 - 77.2 12.4
Indonesian rupiah - - 3.7 5.0
Irish punt - - 13.0 2.9
Italian lira 7.3 - 7.8 3.7
Japanese yen 1.5 67.3 12.0 53.3
Malaysian ringgit - - - 6.0
Mexican peso - - - 40.0
Philippine peso - - - 15.0
Russian ruble - - - 20.0
Spanish peseta 1.3 - - 7.0
Taiwanese dollar - 18.5 - 20.2
Thai baht - - - 5.1
Other currencies 6.8 4.3 4.1 4.7
------ ------ ------ ------
Total $126.6 $236.9 $146.9 $296.4
At December 31, 1998, the Company has entered into forward contracts to purchase
approximately 3,469,200 shares of Avon common stock at an average price of
$36.31 per share at December 31, 1998. The contracts mature over the next three
years and provide for physical or net share settlement to the Company.
Accordingly, no adjustment for subsequent changes in fair value has been
recognized.
Credit and Market Risk - The Company attempts to minimize its credit exposure to
counterparties by entering into interest rate swap and cap contracts only with
major international financial institutions with "A" or higher credit ratings as
issued by Standard & Poor's Corporation. The Company's foreign currency and
interest rate derivatives are comprised of over-the-counter forward contracts or
options with major international financial institutions. Although the Company's
theoretical credit risk is the replacement cost at the then estimated fair value
of these instruments, management believes that the risk of incurring losses is
remote and that such losses, if any, would not be material.
Non-performance of the counterparties to the balance of all the currency
and interest rate swap agreements would not result in a significant write off at
December 31, 1998. Each agreement provides for the right of offset between
counterparties to the agreement. In addition, Avon may be exposed to market
risk on its foreign exchange and interest rate swap agreements as a result of
changes in foreign exchange and interest rates. The market risk related to the
foreign exchange agreements should be substantially offset by changes in the
valuation of the underlying items being hedged.
Fair Value of Financial Instruments - For purposes of the following disclosure,
the fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced sale or liquidation. The aggregate fair value amounts presented are
not intended to, and do not, represent the underlying fair value of Avon.
The methods and assumptions used to estimate fair value are as follows:
Grantor trust - The fair value of these investments, principally fixed income
funds and equity securities, is based on the quoted market prices for issues
listed on exchanges.
Debt maturing within one year and long-term debt and other financing - The fair
value of all debt and other financing is estimated based on the quoted market
prices for issues listed on exchanges.
Forward stock purchases and foreign exchange forward and option contracts - The
fair value of forward and option contracts is estimated based
on quoted market prices from banks.
Interest rate swap and currency swap agreements - The fair value of interest
rate swap and currency swap agreements is estimated based on quotes from the
market makers of these instruments and represents the estimated amounts that
Avon would expect to receive or pay to terminate the agreements.
The asset and (liability) amounts recorded in the balance sheet (carrying
amount) and the estimated fair values of financial instruments at December 31
consisted of the following:
1998 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and equivalents $105.6 $105.6 $141.9 $141.9
Grantor trust 72.2 72.7 61.1 62.7
Debt maturing within one year (55.3) (55.3) (127.0) (127.6)
Long-term debt and other financing (316.6) (322.2) (160.3) (162.7)
Currency swap contract on
long-term debt - - (5.1) (1.7)
Forward stock purchases and
foreign exchange forward and
option contracts 1.7 23.8 5.0 10.3
Interest rate swap receivable .1 1.6 - .1
Interest rate swap payable - - (.7) (2.2)
<PAGE>54
8. Stock Option Plans
A summary of the Company's stock option activity, weighted-average exercise
price and related information for the years ended December 31 is as follows:
1996 1997 1998
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
(in 000's) Price (in 000's) Price (in 000's) Price
Outstanding -
beginning
of year 4,818 $14.23 5,750 $16.28 7,070 $22.29
Granted 1,788 19.81 2,860 30.68 1,664 32.40
Exercised (846) 12.08 (1,426) 14.47 (1,412) 17.59
Forfeited (10) 12.47 (114) 27.50 (195) 26.87
------ ------ ------- ------ ------- ------
Outstanding -
end of year 5,750 $16.28 7,070 $22.29 7,127 $25.46
====== ====== ======= ====== ======= ======
Options exer-
cisable -
end of year 1,150 $13.02 1,360 $15.27 2,943 $18.74
====== ====== ======= ====== ======= ======
Exercise prices for options outstanding as of December 31, 1998 consisted
of 2,996,596 options at a price range of $13 to $23, 2,515,599 options at a
price range of $30 to $32 and 1,614,678 options at a price range of $31 to $41,
with weighted-average remaining contractual lives of approximately six years,
seven years and nine years, respectively.
The 1993 Stock Incentive Plan ("1993 Plan") provides for several types of
equity-based incentive compensation awards. Under the 1993 Plan, the maximum
number of shares that may be awarded is 14,100,000 shares, of which no more than
8,000,000 shares may be used for restricted share and stock bonus grants.
Awards, when made, may also be in the form of stock options, stock appreciation
rights, dividend equivalent rights or performance unit awards. Stock options
granted to officers and key employees shall be at a price no less than fair
market value on the date the option is granted. During 1998, 1997 and 1996,
restricted shares with aggregate value and vesting and related amortization
periods were granted as follows: 1998 - 499,000 valued at $16.0 vesting over one
to three years; 1997- 36,000 shares valued at $1.2 vesting over one to three
years; and 1996 - 78,000 shares valued at $1.7 vesting over two to four years.
Effective January 1, 1997, the 1997 Long-Term Incentive Plan ("1997 LTIP")
was authorized under the 1993 Plan. The 1997 LTIP provides for the grant of two
forms of incentive awards, performance units for potential cash incentives and
ten-year stock options. Performance units are earned over the three-year
performance period (1997-1999), based on the degree of attainment of performance
objectives. Options are awarded annually over the three-year performance period
and vest in thirds over the three-year period following each option grant date.
As discussed above, these options are granted at the fair market value on the
date the option is granted.
Effective January 1, 1994, the 1994 Long-Term Incentive Plan ("1994 LTIP") was
authorized under the 1993 Plan authorizing the grant of two forms of incentive
awards, performance units for potential cash incentives and ten-year stock
options. As of December 31, 1996, required performance goals under the 1994
LTIP were achieved and, accordingly, the cash incentives totaling $31.0 were
paid in early 1997.
Compensation expense under all plans in 1998 was $17.8 (1997 - $15.6; 1996 -
$14.7). The unamortized cost as of December 31, 1998 was $10.5 (1997 - $2.0).
The accrued cost of the performance units in 1998 was $24.1 (1997 - $12.7).
The Company has adopted the disclosure provisions of FAS No. 123, but, as
permitted by the statement, has continued to apply APB No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
employee stock option plans. Under APB No. 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
If the Company had elected to recognize compensation cost for the plans
based on the fair value at the grant dates, consistent with the method
prescribed by FAS No. 123, net income and earnings per share would have been the
pro forma amounts indicated below:
1998 1997 1996
Pro forma net income $263.0 $332.5 $314.9
Pro forma earnings per share:
Basic $ 1.00 $ 1.26 $ 1.18
Diluted $ .99 $ 1.25 $ 1.17
Pro forma information regarding net income and earnings per share is
required by FAS No. 123, and has been determined as if the
<PAGE>55
Company had accounted for its employee stock options under the fair value method
of FAS No. 123. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model which was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option pricing models require the
input of highly subjective assumptions, including the expected stock price
volatility. The weighted-average assumptions used for 1998 were the risk-free
interest rate of approximately 5.5%; dividend yield of 2%; expected volatility
of the market price of the Company's common stock of 25% to 30%; and a weighted-
average expected life of the options of approximately five years. The weighted-
average assumptions used for 1997 and 1996 were the risk-free interest rate of
approximately 6.3% and 5.5%, respectively, dividend yield of 2% and 3%,
respectively, expected volatility of the market price of the Company's common
stock of 25% and 20%, respectively; and a weighted-average expected life of the
options of approximately five and three years, respectively.
9. Shareholders' Equity
Stock Split - On July 22, 1998, the Company declared a two-for-one stock split
in the form of a 100% stock dividend which was distributed in September 1998 to
shareholders of record as of the close of business on August 24, 1998.
Accordingly, the stock split has been recognized by reclassifying the par value
of the additional shares resulting from the split from retained earnings to
common stock and treasury stock. The effect of this stock split was not
retroactively reflected in the consolidated balance sheet and in the statement
of changes in shareholders' equity for 1997 and prior periods. All references
to the number of share and per share amounts elsewhere in the consolidated
financial statements and related footnotes have been restated to reflect the
effect of the split for all periods presented.
Share Rights Plan - Avon has a 1988 Share Rights Plan under which one right has
been declared as a dividend for each outstanding share of its common stock.
Each right, which is redeemable at $.005 at any time at Avon's option, entitles
the shareholder, among other things, to purchase one share of Avon common stock
at a price equal to one-half of the then current market price, if certain events
have occurred. The right is exercisable if, among other events, one party
obtains a beneficial ownership of 20% or more of Avon's voting stock.
Dividends - On February 5, 1998, Avon increased the regular dividend on common
shares to an annual rate of $.68 per share with the first quarterly dividend at
the rate of $.17 per share having been paid on March 2, 1998.
On February 1, 1997, Avon increased the regular dividend on common shares
to an annual rate of $.63 per share, with the first quarterly dividend at the
rate of $.1575 per share having been paid on March 3, 1997.
On February 1, 1996, Avon increased the regular dividend on common shares
to an annual rate of $.58 per share, with the first quarterly dividend at the
rate of $.145 per share having been paid on March 1, 1996.
Stock Repurchase Programs - During 1994, Avon's Board authorized a stock
repurchase program under which Avon would buy back up to 10% of its then
outstanding common stock, or approximately 28.0 million shares. As of February
1997, when the plan ended, the cumulative number of shares repurchased was 25.3
million shares at a total cost of $424.4 which are included in Treasury Stock.
Under a new repurchase program, which began in February 1997, the Company
repurchased approximately 6.7 million shares at a total cost of approximately
$217.2 as of December 31, 1998. Under this new program, the Company may buy
back up to $1,100.0 of its currently outstanding common stock through open
market purchases over a period of up to five years.
Savings Plan - In 1998, Avon contributed 62,520 (1997 - 87,344) shares of
treasury stock to an employees' savings plan and recognized expense for its fair
value. In addition, during 1997, the Company contributed an additional 120,000
shares, for which the expense had been accrued at December 31, 1996. The expense
recognized for the plan in 1998 was $4.5 (1997 - $2.6; 1996 - $7.0).
Board of Directors Remuneration - Effective May 1, 1997, the Company
discontinued the Board retirement plan, which was applicable only to non-
management directors. Directors retiring after that date have had the actuarial
value of their accrued retirement benefits converted to a one-time grant of
common stock which is restricted as to transfer until retirement. Shares
totaling 52,786 were issued to directors as a result of the discontinuance of
the plan. As a replacement for such plan, effective on and after May 1, 1997,
each non-management director is annually granted options to purchase 4,000
shares of common stock, at an exercise price based on the fair market price of
the stock on the date of grant. The annual grant made in 1998 and 1997
consisted of a total of 36,000 and 40,000 options with an exercise price of
$41.31 and $30.82, respectively.
Also effective as of May 1, 1997, the annual retainer paid to non-
management directors was changed to consist of $.025 cash plus an annual grant
of shares having a value of $.025 based on the average closing market price of
the stock for the ten days preceding the date of grant. These shares are also
restricted as to transfer until the director retires from the Board. The annual
grant made in 1998 and 1997 consisted of a total of 5,472 and 8,520 shares,
respectively.
10. Employee Benefit Plans
Retirement Plans - Avon and certain subsidiaries have contributory and
noncontributory retirement plans for substantially all employees. Benefits under
these plans are generally based on an employee's years of service and average
compensation near retirement. Plans are funded on a current basis except where
funding is not required. Plan assets consist primarily of equity securities,
corporate and government bonds, commingled funds and investments in limited
partnerships.
Effective July 1998, the defined benefit retirement plan covering U.S.-based
employees was converted to a cash balance plan with benefits determined by
compensation credits related to age and
<PAGE>56
service and interest credits based on individual account balances and prevailing
interest rates. Additional amendments include an increased company matching
contribution to the savings plan and a ten year transitional benefit arrangement
for certain employees covered under the existing defined benefit retirement
plan.
Postretirement Benefits - Avon provides health care, in excess of Medicare
coverage, and life insurance benefits for the majority of employees who retire
under Avon's retirement plans in the United States and certain foreign
countries. The cost of such health care benefits is shared by Avon and its
retirees.
The following provides a reconciliation of benefit obligations, plan assets and
funded status of these plans:
Pension Postretirement
Benefits Benefits
1998 1997 1998 1997
Change in benefit obligation:
Beginning balance $(889.9) $(874.6) $(197.1) $(196.0)
Service cost (35.4) (35.2) (3.3) (3.0)
Interest cost (64.5) (63.1) (13.0) (13.0)
Actuarial (loss) gain (83.0) (35.9) 1.4 (5.6)
Benefits paid 84.9 61.8 10.2 20.5
Plan amendments - 26.9 - -
Other (11.9) 30.2 - -
-------- -------- -------- --------
Ending balance $(999.8) $(889.9) $(201.8) $(197.1)
Change in plan assets:
Beginning balance $ 785.5 $ 690.7 $ - $ -
Actual return on - -
plan assets 102.9 117.3 - -
Company contributions 61.3 48.0 10.2 20.5
Plan participant - -
contributions 1.5 1.2 - -
Benefits paid (84.9) (61.8) (10.2) (20.5)
Other (3.2) (9.9) - -
-------- -------- -------- --------
Ending balance $ 863.1 $ 785.5 $ - $ -
Funded status of the plan $(136.7) $(104.4) $(201.8) $(197.1)
Unrecognized actuarial
loss(gain) 139.3 99.3 (6.2) (6.2)
Unrecognized prior
service cost (9.6) (7.2) - -
Unrecognized net transition
obligation(asset) 1.3 (3.0) - -
-------- -------- -------- --------
Prepaid (Accrued)
benefit cost $ (5.7) $ (15.3) $(208.0) $(203.3)
Amount recognized in the
statements:
Prepaid benefit $ 138.0 $ 115.2 $ - $ -
Accrued liability (143.7) (130.5) (208.0) (203.3)
Additional minimum liability (19.7) (18.1) - -
Intangible asset 4.3 18.1 - -
Accumulated other
comprehensive income 15.4 - - -
-------- -------- -------- --------
$ (5.7) $ (15.3) $(208.0) $(203.3)
At December 31, 1998 and 1997, the weighted-average discount rates used in
determining the pension benefit obligation were 6.7% and 7.0%, respectively. At
December 31, 1998 and 1997, the weighted-average discount rates used in
determining the postretirement benefit obligation were 7.0% and 7.2%,
respectively.
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for pension and postretirement benefit plans with accumulated
benefits obligations in excess of plan assets were $435.4, $397.7, and $30.7,
respectively, as of December 31, 1998 and $412.4, $380.1, and $31.8,
respectively as of December 31, 1997.
Net periodic benefit cost for the years ended December 31 was determined as
follows:
Pension Postretirement
Benefits Benefits
1998 1997 1996 1998 1997 1996
Service cost $ 35.4 $ 35.2 $ 36.6 $ 3.3 $ 3.0 $ 3.3
Interest cost 64.5 63.1 61.4 13.0 13.0 14.0
Expected return on plan assets (64.0) (58.9) (58.9) - - -
Amortization of transition
(liability) asset (6.8) (6.8) (6.6) - - -
Amortization of prior
service cost (.4) 3.6 3.7 - - -
Amortization of actuarial
losses (gains) 12.3 7.7 8.9 - - -
Settlements or curtailments - 4.6 .3 - - -
Other .3 - 1.0 - - -
------ ------ ------ ----- ----- -----
Net periodic benefit cost $ 41.3 $ 48.5 $ 46.4 $16.3 $16.0 $17.3
The weighted-average assumptions used to determine the data for the years ended
December 31 are as follows:
Pension Postretirement
Benefits Benefits
1998 1997 1996 1998 1997 1996
Discount rate 7.1% 7.4% 7.3% 7.2% 7.7% 7.2%
Rate of compensation increase 4.0 4.7 4.5 4.5 4.5 4.5
Rate of return on assets 9.2 9.2 9.3 N/A N/A N/A
<PAGE>57
For 1998, the assumed rate of future increases in the per capita cost of
health care benefits (the health care cost trend rate) was 8.1% for pre-65
claims (7.8% for post-65 claims) and will gradually decrease each year
thereafter to 5.0% in 2005 and beyond. The healthcare cost trend rate
assumption has a significant effect on the amounts reported. A one-percentage
point change in the assumed health care cost trend rates would have the
following effects:
1 Percentage 1 Percentage
(In millions) Point Increase Point Decrease
Effect on total of service
and interest cost components 2.4 2.0
Effect on postretirement benefit
obligation 22.9 19.1
Supplemental Executive Retirement and Life Insurance Plans - Avon has a
Supplemental Executive Retirement Plan ("SERP") which is a defined benefit plan
under which Avon will pay supplemental pension benefits to key executives
in addition to amounts received under Avon's retirement plan. The annual cost of
this plan has been included in the determination of the net periodic benefit
cost shown above and in 1998 amounted to $6.1 (1997 - $5.5; 1996 - $5.5). Such
benefits will be paid from Avon's assets. The accumulated benefit obligation
under this plan at December 31, 1998 was $21.9 (1997 - $22.8) and is primarily
included in Employee Benefit Plans.
Avon also maintains a Supplemental Life Insurance Plan ("SLIP") under which
additional death benefits ranging from $.35 to $2.0 are provided to certain
active and retired officers. Avon has acquired corporate-owned life insurance
policies to provide partial funding of
the benefits. The cash surrender value of these policies at December 31, 1998
was $22.4 (1997 - $20.6) and is held in a grantor trust. During 1997, certain
retirees elected to receive a cash distribution from the SLIP approximating
$10.0 which was funded by corporate-owned life insurance policies.
Avon has established a grantor trust to provide funding for the benefits payable
under the SERP and SLIP. The trust is irrevocable and assets contributed to the
trust can only be used to pay such benefits with certain exceptions. The assets
held in the trust at December 31, 1998, amounted to $94.5 (1997 - $81.7),
consisting of a fixed income portfolio, a managed portfolio of equity securities
and corporate-owned life insurance policies. These assets are included in Other
Assets.
Postemployment Benefits - Avon provides postemployment benefits which include
salary continuation, severance benefits, disability benefits, continuation of
health care benefits and life insurance coverage to former employees after
employment but before retirement. At December 31, 1998, the accrued cost for
postemployment benefits was $33.5 (1997 - $35.0) and is included in Employee
Benefit Plans.
11. Segment Information
The Company's reportable segments are based on geographic operations and include
a North American business unit and International business units in Latin
America, Pacific and Europe regions. The segments have similar business
characteristics and each offers similar products through common customer access
methods.
The accounting policies of the reportable segments are the same as those
described in Note 1 of the Notes to the Consolidated Financial Statements. The
Company evaluates the performance of its operating segments based on operating
profits or losses. Segment revenues reflect direct sales of products to
representatives based on their geographic location. Intersegment sales and
transfers are not significant. Each segment records direct expenses related to
its employees and its operations. The Company does not allocate income taxes,
foreign exchange gains or losses, or corporate overhead expenses to operating
segments. Identifiable assets are primarily those directly used in the
operations of each segment. "Other" assets include corporate cash, investments,
deferred tax assets and certain intangibles.
Summarized financial information concerning the Company's reportable segments as
of December 31, is shown in the following table. Net sales and operating profit
by reportable segment are presented on page 32.
Identifiable Assets:
1998 1997 1996
North America
US $ 497.2 $ 516.0 $ 473.3
Other* 111.9 118.3 86.1
-------- -------- --------
Total 609.1 634.3 559.4
International
Latin America 530.8 481.4 461.7
Europe 390.1 361.9 376.4
Pacific 379.9 376.7 382.4
-------- -------- --------
Total 1,300.8 1,220.0 1,220.5
Corporate and other 523.6 418.6 442.5
-------- -------- --------
Total identifiable assets $2,433.5 $2,272.9 $2,222.4
<PAGE>58
Capital Expenditures:
1998 1997 1996
North America
US $ 32.1 $ 24.0 $ 19.9
Other* 11.7 5.2 2.8
-------- -------- --------
Total 43.8 29.2 22.7
International
Latin America 33.5 21.4 14.7
Europe 28.8 17.5 21.3
Pacific 28.1 41.2 28.0
-------- -------- --------
Total 90.4 80.1 64.0
Corporate and Other 55.3 60.1 16.9
-------- -------- --------
Total capital expenditures $ 189.5 $ 169.4 $ 103.6
Depreciation and Amortization:
1998 1997 1996
North America
US $ 19.2 $ 17.9 $ 16.0
Other* 2.4 2.2 1.9
-------- -------- --------
Total 21.6 20.1 17.9
International
Latin America 12.0 10.7 10.2
Europe 14.9 14.8 14.4
Pacific 11.2 15.3 13.0
-------- -------- --------
Total 38.1 40.8 37.6
Corporate and Other 12.3 11.2 9.0
-------- -------- --------
Total depreciation
and amortization $ 72.0 $ 72.1 $ 64.5
*Includes operating information for Puerto Rico, Dominican Republic, Canada and
Discovery Toys.
The following table presents consolidated net sales by classes of principal
products, as of December 31.
1998 1997 1996
Cosmetics, fragrance and toiletries $3,181.6 $3,093.9 $2,946.8
Gift and decorative 1,050.6 1,049.7 934.1
Apparel 572.0 565.6 556.3
Fashion jewelry and accessories 408.5 370.2 377.0
-------- -------- --------
Total $5,212.7 $5,079.4 $4,814.2
Foreign Exchange - Financial statement translation of subsidiaries operating in
highly inflationary economies and foreign currency transactions resulted in
(gains) losses in 1998 netting to ($1.1) (1997 - $2.2; 1996 - $3.1), which are
included in other (income) expense, net and income taxes. In addition, cost of
sales and expenses include the unfavorable impact of the translation of
inventories and prepaid expenses at historical rates in countries with highly
inflationary economies in 1998 of $15.8 (1997 - $6.0; 1996 - $12.6).
12. Leases and Commitments
Minimum rental commitments under noncancellable operating leases, primarily for
equipment and office facilities at December 31, 1998, consisted of the
following:
Year
1999 $ 65.5
2000 51.2
2001 38.4
2002 28.6
2003 22.9
Later years 230.1
Sublease rental income (6.3)
-------
Total $430.4
Rent expense in 1998 was $84.7 (1997 - $88.2; 1996 - $89.7). Various
construction and information systems projects were in progress at December 31,
1998 with an estimated cost to complete of approximately $87.4.
13. Special and Non-Recurring Charges
In October 1997, the Company announced a worldwide business process redesign
program to streamline operations and improve profitability through margin
improvement and expense reductions. The special and non-recurring charges
associated with this program totaled $154.4 pretax ($122.8 net of tax, or $.46
per share on a basic and diluted basis) for the year ended December 31, 1998.
For the year ended December 31, 1998, special and non-recurring charges by
business segment are as follows:
Special Cost of
Charges Sales Charge Total
North America $ 58.9 $25.7 $ 84.6
Latin America 2.3 4.0 6.3
Europe 14.2 4.0 18.2
Pacific 23.1 4.2 27.3
Corporate 18.0 - 18.0
------ ----- ------
Total $116.5 $37.9 $154.4
<PAGE>59
For the year ended December 31, 1998, special and non-recurring charges by
category of expenditures are as follows:
Special Cost of
Charges Sales Charge Total
Employee severance
costs $ 56.4 $ - $ 56.4
Inventories - 37.9 37.9
Write-down of assets
to net realizable
value 31.8 - 31.8
Field program buy-out 14.4 - 14.4
Other 13.9 - 13.9
------ ----- ------
$116.5 $37.9 $154.4
Employee severance costs are expenses, both domestic and international,
associated with the realignment of the Company's global operations. The
workforce will be reduced by approximately two thousand employees, or 7% of the
total. Approximately one-half of the employees to be terminated relate to the
facility closures. As of December 31, 1998, approximately 90% of the two
thousand employees have been terminated.
Inventory-related charges represent losses to write down the carrying value
of non-strategic inventory prior to disposal. These charges result from the
closure of facilities, discontinuation of certain product lines, size-of-line
reductions and a change in strategy for product dispositions.
The write-down of assets relates to the closure of a Far East buying office
and manufacturing facilities in Puerto Rico and the Dominican Republic. As a
result of ongoing government restrictions, the Company has also decided to close
certain branches and a regional office in China. Also, write-downs include
assets (primarily fixed and intangible assets) associated with the divestiture
of the Discovery Toys business unit, which was effective January 15, 1999.
The field program buy-out represents costs to revamp the Company's
representative recruitment program in the U.S.
"Other" category primarily represents lease and contract termination costs,
litigation costs, and other costs associated with the facility closures.
The liability balance at December 31, 1998 is as follows:
Special Cost of
Charges Sales Charge Total
Provision $116.5 $37.9 $154.4
Cash expenditures:
Severance (43.6) - (43.6)
Field program buy-out (12.6) - (12.6)
Other (9.8) - (9.8)
Non-cash write-offs (22.0) (37.9) (59.9)
------- ------ -------
Total $ 28.5 $ - $ 28.5
The balance at December 31, 1998 relates primarily to employee severance
costs that will be paid during 1999.
The Company expects to record additional charges in 1999 as plans are
finalized.
14. Contingencies
Various lawsuits and claims (asserted and unasserted), arising in the ordinary
course of business or related to businesses previously sold, are pending or
threatened against Avon.
In 1991, a class action lawsuit was initiated against Avon on behalf of
certain classes of holders of Avon's Preferred Equity-Redemption Cumulative
Stock ("PERCS"). This lawsuit alleges various contract and securities law claims
relating to the PERCS (which were fully redeemed that year). Avon has rejected
the assertions in this case, believes it has meritorious defenses to the claims
and is vigorously contesting this lawsuit.
In the opinion of Avon's management, based on its review of the information
available at this time, the difference, if any, between the total cost of
resolving such contingencies and reserves recorded by Avon at December 31, 1998
should not have a material adverse impact on Avon's consolidated financial
position, results of operations or cash flows.
15. Subsequent Event
On February 4, 1999, Avon's Board approved an increase in the quarterly
cash dividend to $.18 per share from $.17. The first dividend at the new rate
will be paid on March 1, 1999 to shareholders of record on February 16, 1999.
On an annualized basis, the new dividend rate will be $.72 per share.
<PAGE>60
Report of Management
The accompanying consolidated financial statements of Avon Products, Inc. have
been prepared by management in conformity with generally accepted accounting
principles and necessarily include amounts that are based on judgments and
estimates. The audit report of PricewaterhouseCoopers LLP, independent
accountants, on these financial statements is the result of their audits of
these consolidated financial statements, which were performed in accordance with
generally accepted auditing standards.
Avon maintains an internal control structure and related systems, policies
and procedures designed to provide reasonable assurance that assets are
safeguarded, transactions are executed in accordance with appropriate
authorization and accounting records may be relied upon for the preparation of
financial information. Avon also maintains an internal audit department that
evaluates and formally reports to management on the adequacy and effectiveness
of controls, policies and procedures.
The audit committee of the board of directors, comprised solely of outside
directors, has an oversight role in the area of financial reporting and internal
controls. This committee meets several times during the year with management,
PricewaterhouseCoopers LLP and the internal auditors to monitor the proper
discharge of each of their respective responsibilities. PricewaterhouseCoopers
LLP and the internal auditors have free access to management and to the audit
committee to discuss the results of their activities and the adequacy of
controls.
It is management's opinion that Avon's policies and procedures, reinforced
by the internal control structure, provide reasonable assurance that operations
are managed in a responsible and professional manner with a commitment to the
highest standard of business conduct.
Charles R. Perrin Robert J. Corti
Chief Executive Officer Executive Vice President,
Chief Financial Officer
Report of Independent Accountants
To the Shareholders of Avon Products, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in shareholders' equity and cash
flows present fairly, in all material respects, the financial position of Avon
Products, Inc. and its subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
Avon's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 4, 1999
<PAGE>61
Eleven-Year Review
In millions, except per share and employee data
1998 1997 1996 1995
Income data
Net sales $5,212.7 $5,079.4 $4,814.2 $4,492.1
Operating Profit 479.5 544.1 544.8 507.5
Interest expense 41.0 41.8 40.0 41.3
Income from continuing
operations before taxes,
minority interest and
cumulative effect of
accounting changes 455.9(3) 534.9 510.4 465.0
Income from continuing
operations before
minority interest and
cumulative effect of
accounting changes 265.1(3) 337.0 319.0 288.6
Income from
continuing operations 270.0(3) 338.8 317.9 286.1
Income (loss) from
discontinued
operations, net - - - (29.6)
Cumulative effect
of accounting
changes, net - - - -
Net income (loss) 270.0(3) 338.8 317.9 256.5
Earnings (loss) per share
- basic (1) (2)
Continuing operations $ 1.03(3) $ 1.28 $ 1.19 $ 1.05
Discontinued operations - - - (.11)
Cumulative effect of
accounting changes - - - -
Net income (loss) 1.03(3) 1.28 1.19 .94
Earnings (loss) per share
- diluted (1) (2)
Continuing operations $ 1.02(3) $ 1.27 $ 1.18 $ 1.05
Discontinued operations - - - (.11)
Cumulative effect of
accounting changes - - - -
Net income (loss) 1.02(3) 1.27 1.18 .94
Cash dividends per share
Common $ .68 $ .63 $ .58 $ .53
Preferred - - - -
Balance sheet data
Working capital $ 11.9 $ (11.9) $ (41.7) $ (30.3)
Capital expenditures 189.5 169.4 103.6 72.7
Property, plant and
equipment, net 669.9 611.0 566.6 537.8
Total assets 2,433.5 2,272.9 2,222.4 2,052.8
Debt maturing within one year 55.3 132.1 97.1 47.3
Long-term debt 201.0 102.2 104.5 114.2
Total debt 256.3 234.3 201.6 161.5
Shareholders' equity 285.1 285.0 241.7 192.7
Number of employees
United States 8,000 8,100 7,800 8,000
International 25,900 26,900 25,900 23,800
------ ------ ------ ------
Total employees 33,900 35,000 33,700 31,800
====== ====== ====== ======
<PAGE>62
1994 1993 1992 1991
Income data
Net sales $4,266.5 $3,844.1 $3,660.5 $3,441.0
Operating Profit 495.6 433.2 345.2 434.7
Interest expense 50.8 45.2 43.7 75.4
Income from continuing
operations before taxes,
minority interest and
cumulative effect of
accounting changes 433.8 394.6 290.0(5) 352.9
Income from continuing
operations before
minority interest and
cumulative effect of
accounting changes 270.3 243.8 169.4(5) 209.3
Income from
continuing operations 264.8 236.9 164.2(5) 204.8
Income (loss) from
discontinued
operations, net (23.8) 2.7 10.8 (69.1)
Cumulative effect
of accounting
changes, net (45.2)(4) (107.5)(4) - -
Net income (loss) 195.8 132.1 175.0(5) 135.7
Earnings (loss) per share
- basic (1) (2)
Continuing operations $ .94 $ .82 $ .57(5) $ .65(6)
Discontinued operations (.09) .01 .04 (.24)
Cumulative effect of
accounting changes (.16) (.37) - -
Net income (loss) .69 .46 .61(5) .41(6)
Earnings (loss) per share
- diluted (1) (2)
Continuing operations $ .93 $ .82 $ .57(5) $ .71(6)
Discontinued operations (.08) .01 .04 (.24)
Cumulative effect of
accounting changes (.16) (.37) - -
Net income (loss) .69 .46 .61(5) .47(6)
Cash dividends per share
Common $ .48 $ .43 $ .38 $ 1.10(8)
Preferred - - - .253
Balance sheet data
Working capital $ 9.3 $ 23.1 $ (99.5) $ (135.3)
Capital expenditures 99.9 58.1 62.7 61.2
Property, plant and
equipment, net 528.4 476.2 476.7 468.5
Total assets 1,978.3 1,918.7 1,692.6 1,693.3
Debt maturing within one year 61.2 70.4 37.3 143.8
Long-term debt 116.5 123.7 177.7 208.1
Total debt 177.7 194.1 215.0 351.9
Shareholders' equity 185.6 314.0 310.5 251.6
Number of employees
United States 7,900 8,000 8,700 9,200
International 22,500 21,500 20,700 20,900
------ ------ ------ ------
Total employees 30,400 29,500 29,400 30,100
====== ====== ====== ======
<PAGE>
Avon Products, Inc.
1990 1989 1988
Income data
Net sales $3,291.6 $2,998.3 $2,835.2
Operating Profit 413.3 372.6 317.6
Interest expense 77.5 118.0 112.9
Income from continuing
operations before taxes,
minority interest and
cumulative effect of
accounting changes 305.6 252.9 208.3
Income from continuing
operations before
minority interest and
cumulative effect of
accounting changes 180.3 134.1 121.1
Income from
continuing operations 174.1 126.5 112.3
Income (loss) from
discontinued
operations, net 21.2 (71.9) (536.8)
Cumulative effect
of accounting
changes, net - - 20.0(4)
Net income (loss) 195.3 54.6 (404.5)
Earnings (loss) per share
- basic (1) (2)
Continuing operations $ .61 $ .41(7) $ .38(7)
Discontinued operations .09 (.33) (2.16)
Cumulative effect of
accounting changes - - .08
Net income (loss) .70 .08(7) (1.70)(7)
Earnings (loss) per share
- diluted (1) (2)
Continuing operations $ .58 $ .40(7) $ .38(7)
Discontinued operations .07 (.32) (2.16)
Cumulative effect of
accounting changes - - .08
Net income (loss) .65 .08(7) (1.70)(7)
Cash dividends per share
Common $ .25 $ .25 $ .38
Preferred .50 .50 .25
Balance sheet data
Working capital $ 71.6 $ 56.3 $ 51.0
Capital expenditures 36.3 33.3 46.0
Property, plant and
equipment, net 467.2 472.5 529.1
Total assets 2,010.1 1,994.1 2,362.6
Debt maturing within one year 207.1 151.7 205.6
Long-term debt 334.8 673.2 917.9
Total debt 541.9 824.9 1,123.5
Shareholders' equity 393.4 228.3 239.3
Number of employees
United States 9,500 9,400 9,700
International 20,300 19,900 18,400
------ ------ ------
Total employees 29,800 29,300 28,100
====== ====== ======
(1) Two-for-one stock splits were distributed in September 1998 and June 1996.
All per share data in this report, unless indicated, have been restated to
reflect the splits.
(2) Effective for the year ended December 31, 1997, the Company adopted FAS No.
128, "Earnings per Share". FAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and replaces the presentation of
previously disclosed EPS with both basic and diluted EPS. Based upon the
Company's capitalization structure, the EPS amounts calculated in accordance
with FAS No. 128 approximated the Company's EPS amounts in accordance with
Accounting Principles Board Opinion No. 15, "Earnings per Share". All prior
period EPS data have been restated in accordance with FAS No. 128.
(3) In 1998, Avon began a worldwide business process redesign program in order
to streamline operations and recorded special and non-recurring charges of
$154.4 ($122.8 net of tax, or $.46 per share on a basic and diluted basis).
Excluding the special and non-recurring charges, net income in 1998 increased
16% to $392.8 from $338.8.
(4) Effective January 1, 1994, Avon adopted Statement of Financial Accounting
Standards ("FAS") No. 112, "Employers' Accounting for Postemployment Benefits",
for all applicable operations, and FAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions", for its foreign benefit plans.
Effective January 1, 1993, Avon adopted FAS No. 106 for its U.S. retiree health
care and life insurance benefit plans and FAS No. 109, "Accounting for Income
Taxes". Effective January 1, 1988, Avon adopted FAS No. 96, "Accounting for
Income Taxes".
(5) In 1992, Avon began the restructuring of its worldwide manufacturing and
distribution facilities and recorded a provision of $96.0 ($64.4 after tax, or
$.22 per share on a basic and diluted basis). Income from continuing operations
in 1993 increased 4% from $228.6, or $.79 per share on a basic and diluted
basis, excluding the 1992 restructuring charge.
(6) For 1991, in management's opinion, per share amounts assuming dilution,
even though the result is antidilutive, provide the most meaningful comparison
of per share data because they show the full effect of the conversion of 72
preferred shares into approximately 51.84 common shares on June 3, 1991.
(7) In 1989 and 1988, the calculation of earnings per share was assumed to be
antidilutive and, accordingly, earnings per share were not adjusted for the
conversion of preferred shares into additional common shares.
(8) Includes special dividend of $.75 paid in 1991.
EXHIBIT 21
<PAGE>
EXHIBIT 21
AVON PRODUCTS, INC. AND SUBSIDIARIES
Subsidiaries of the Registrant
Avon Products, Inc. ("Avon"), a New York corporation, consolidates
all majority owned subsidiaries. The principal consolidated
subsidiaries, all of which are wholly owned by Avon or its wholly
owned subsidiaries, except as indicated, are listed below. Included on
the list below are subsidiaries which individually are not significant
subsidiaries but primarily represent subsidiaries in countries in
which the Company has direct selling operations. The names of Avon's
other consolidated subsidiaries, which are primarily wholly owned by
Avon or its wholly owned subsidiaries, are not listed because all such
subsidiaries, considered in the aggregate as a single subsidiary,
would not constitute a significant subsidiary.
Incorporation
Company Country or State
Cosmetics Avon S.A.C.I. Argentina
Avon Cosmetics Pty. Limited Australia
Avon Products Pty. Limited Australia
Avon Cosmetics Vertriebsgesellschaft m.b.h Austria
Arlington Limited Bermuda
Avon International (Bermuda) Ltd. Bermuda
Productos Avon Bolivia Ltda. Bolivia
Avon Cosmeticos, Ltda. Brazil
Avon Industrial Ltda. Brazil
Nucleo de Atualiza cao Techologia Avon Ltda. (Nata) Brazil
Tortola Interlagos Investments Inc. British VI
Avon Canada, Inc. Canada
Avon Fashions, Inc. - Avon Mode Inc. Canada
Cosmeticos Avon S.A. Chile
Avon Products (Guangzhou) Ltd. (73.845%), China
Avon Manufacturing (Guangzhou) Ltd. (73.845%) China
Avon Kosmetika d.o.o. Croatia
Avon Cosmetics, Spolecnosti S. Rucenlm Omezenym Czech Republic
Avon Capital Corporation Delaware
Avon International Operations, Inc. Delaware
Avon-Lomalinda, Inc. Delaware
Manila Manufacturing Company Delaware
Productos Avon S.A. Dominican Republic
Productos Avon Ecuador S.A. Ecuador
<PAGE>
Productos Avon, S.A. El Salvador
Avon S.A. France
Avon Cosmetics GmbH Germany
Productos Avon de Guatemala, S.A. Guatemala
Productos Avon, S.A. Honduras
Avon Cosmetics (FEBO) Limited Hong Kong
Avon Cosmetics Hungary KFT Hungary
Avon Service Center, Inc. Illinois
Avon Beauty Productos India Private Limited India
P.T. Avon Indonesia (85%) Indonesia
Albee Dublin Finance Company Ireland
Avon Limited Ireland
Avon Cosmetics Ireland Limited Ireland
Avon Cosmetics S.p.A. Italy
Avon Products Company Limited (66%) Japan
Live and Life Company Limited Japan
Avon Cosmetics (Malaysia) Sendirian Berhad Malaysia
Beautifont (Malaysia) Sendirian Berhad Malaysia
Maximen Corporation Sdn Bhd Malaysia
Avon Cosmetics, S.A. de C.V. Mexico
Avonova, S. A. de C.V. Mexico
M.I. Holdings, Inc. Missouri
Avon Americas, Ltd. New York
Avon Overseas Capital Corporation New York
Avon Cosmetics Limited New Zealand
Productos Avon de Nicaragua, S.A. Nicaragua
Avon Cosmetics A/S Norway
Productos Avon S.A. Panama
Productos Avon S.A Peru
Cosmeticos Aliados S.A. Peru
Avon Cosmetics, Inc. Philippines
Avon Products Mfg., Inc. Philippines
Beautifont Products, Inc. Philippines
Avon Cosmetics Polska Sp. z.o.o. Poland
Esmeralda Sp. z.o.o. (30%) Poland
Avon Cosmeticos, Lda. Portugal
Avon Cosmetics Spal s.r.o. Slovak Republic
Avon Cosmetics (Romania) SRL Romania
Avon Beauty Products Co. (ABPC) Russia Russia
Justine/Avon PTY. Ltd. South Africa
Avon Cosmetics, S.A. Spain
Avon Cosmetics (Taiwan) Ltd. Taiwan
Avon Products Limited Taiwan
Avon Cosmetics (Thailand) Ltd. Thailand
California Manufacturing Company Ltd. Thailand
<PAGE>
Exzacibasi Avon Kosmetik Urunleri Turkey
Sanayi ve Ticaret A.S. (50%) (Joint Venture)
Avon Cosmetics (Ukraine) Ukraine
Avon Cosmetics Export Limited United Kingdom
Avon Cosmetics Limited United Kingdom
Avon European Holdings Ltd. United Kingdom
Avon Fashions (UK) Limited United Kingdom
Avon S.U. Export Limited United Kingdom
Cosmeticos Avon De Uruguay S.A. Uruguay
Avon Cosmetics de Venezuela, C.A. Venezuela
Albee Holdings C.A. Venezuela
EXHIBIT 24
<PAGE>
FORM 10-K
POWER OF ATTORNEY
________________________
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, WARD M. MILLER, JR. and
MARTIN H. MICHAEL and each of them, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, in his or her name, place and stead, in any and all
capacities, to sign the 1998 Annual Report on Form 10-K of Avon
Products, Inc. and any and all amendments thereto, and to file the
same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto
such attorneys-in-fact and agents full power and authority to do and
perform each and every act, as fully to all intents and purposes as
they might or could do in person, thereby ratifying and confirming all
that such attorneys-in-fact and agents, or any of them, or their
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have executed this power of
attorney as of February 4, 1999.
Signature Title
/s/James E. Preston Chairman of the Board
James E. Preston and Director
/s/Charles R. Perrin Chief Executive Officer and Director-
Charles R. Perrin Principal Executive Officer
/s/Robert J. Corti Executive Vice President,
Robert J. Corti Chief Financial Officer-
Principal Financial Officer
/s/Janice Marolda Vice President and Controller-
Janice Marolda Principal Accounting Officer
<PAGE>
Signature Title
/s/Andrea Jung President and
Andrea Jung Chief Operating Officer
and Director
/s/Susan J. Kropf Executive Vice President,
Susan J. Kropf President, Avon North
America and Director
/s/Brenda C. Barnes Director
Brenda C. Barnes
/s/Richard S. Barton Director
Richard S. Barton
/s/Remedios Diaz Oliver Director
Remedios Diaz Oliver
/s/Edward T. Fogarty Director
Edward T. Fogarty
/s/Stanley C. Gault Director
Stanley C. Gault
/s/George V. Grune Director
George V. Grune
/s/Ann S. Moore
Ann S. Moore Director
/s/Paula Stern
Paula Stern Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27
Exhibit 27
Avon Products, Inc.
Financial Data Schedule
This schedule contains summary financial information extracted from theAvon
Products, Inc. financial statements as of December 31, 1998 and for the year
then ended included in the Form 10-K as of December 31, 1998 and is qualified in
its entirety by reference to such financial statements.
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 106
<SECURITIES> 0
<RECEIVABLES> 493
<ALLOWANCES> (49)
<INVENTORY> 538
<CURRENT-ASSETS> 1,341
<PP&E> 1,393
<DEPRECIATION> (723)
<TOTAL-ASSETS> 2,434
<CURRENT-LIABILITIES> 1,330
<BONDS> 201
0
0
<COMMON> 88
<OTHER-SE> 197
<TOTAL-LIABILITY-AND-EQUITY> 2,434
<SALES> 5,213
<TOTAL-REVENUES> 5,213
<CGS> 2,053
<TOTAL-COSTS> 4,642
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 91
<INTEREST-EXPENSE> 41
<INCOME-PRETAX> 456
<INCOME-TAX> 191
<INCOME-CONTINUING> 270
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 270
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 1.02
</TABLE>
