FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ___ to ___
Commission file number 1-4881
AVON PRODUCTS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-0544597
------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
1345 Avenue of the Americas, New York, N.Y. 10105-0196
-------------------------------------------------------
(Address of principal executive offices)
(212) 282-5000
------------------
(Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
The number of shares of Common Stock (par value $.25) outstanding at July
31, 1999 was 260,792,530.
Table of Contents
Part I. Financial Information
Page
Numbers
--------
Introductory Note - Restatements.............................. 3
Item 1. Financial Statements
Consolidated Statements of Operations
Three Months Ended June 30, 1999 (Restated)
and June 30, 1998............................... 4
Six Months Ended June 30, 1999 (Restated)
and June 30, 1998............................... 5
Consolidated Balance Sheets
June 30, 1999 (Restated) and December 31, 1998..... 6
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 (Restated)
and June 30, 1998............................... 7
Notes to Consolidated Financial Statements (Restated) 8-15
Item 2. Management's Discussion and Analysis of the Results
of Operations and Financial Condition (Restated)... 16-24
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K..................... 25
Signatures.................................................... 26
2
Introductory Note--Restatements
In connection with the settlement of the previously disclosed
investigation by the Securities and Exchange Commission ("SEC") relating to the
write off of an order management software system known as the "FIRST" project,
Avon has restated its Consolidated Financial Statements as of December 31,
2001, 2000 and 1999 and for the years then ended and for each of the fiscal
quarters ended March 31, 1999 through March 31, 2002. Avon had written off
$14.8 pretax, or $10.0 after tax, of FIRST assets in the first quarter of 1999
and $23.9 pretax, or $14.5 after tax, of FIRST assets in the third quarter of
2001. Avon has restated its financial statements to reflect the additional
write off as of March 31, 1999 of all capitalized costs ($23.3 pretax, or $14.0
after tax), associated with the FIRST project as of that date and a reversal of
the charge recorded in the third quarter of 2001. Other FIRST-related activity
(capitalized costs and amortization) recorded during 1999-2002 has also been
restated. A description of the adjustments that comprise the restatements is
set forth in Notes 2 and 10 of the Notes to Consolidated Financial Statements
filed with this Form 10-Q/A.
The accompanying financial statements have been restated to reflect the
restatements discussed above as well as the accounting changes outlined in Note
2. No attempt has been made in this Form 10-Q/A to modify or update any
disclosures except as required to reflect the results of the restatements
discussed above and any changes made to prior period financial information for
which a Form 10-Q/A was not filed.
3
PART I. FINANCIAL INFORMATION
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
Three months ended
June 30
--------------------
1999 1998
(Restated Note 2) ------
---------------
(unaudited)
Net sales.................................. $1,258.1 $1,247.2
Other revenue.............................. 9.1 8.8
-------- --------
Total revenue.............................. 1,267.2 1,256.0
Costs, expenses and other:
Cost of sales............................ 451.7 465.6
Marketing, distribution and
administrative expenses................ 622.8 613.5
-------- --------
Operating profit .......................... 192.7 176.9
Interest expense......................... 8.9 8.2
Interest income.......................... (2.2) (5.9)
Other expense, net....................... .7 1.0
-------- --------
Total other expenses....................... 7.4 3.3
-------- --------
Income before taxes and minority interest.. 185.3 173.6
Income taxes............................... 66.6 63.9
-------- --------
Income before minority interest............ 118.7 109.7
Minority interest.......................... .8 1.7
-------- --------
Net income................................. $ 119.5 $ 111.4
======== ========
Earnings per share:
Basic .................................. $ .46 $ .42*
======== ========
Diluted................................. $ .45 $ .42*
======== ========
*Restated to reflect a two-for-one stock split distributed in September 1998.
The accompanying notes are an integral part of these statements.
4
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
Six months ended
June 30
--------------------
1999 1998
(Restated Note 2) ------
---------------
(unaudited)
Net sales.................................. $2,471.9 $2,430.6
Other revenue.............................. 18.3 17.6
-------- --------
Total revenue.............................. 2,490.2 2,448.2
Costs, expenses and other:
Cost of sales**.......................... 959.9 968.7
Marketing, distribution and
administrative expenses................ 1,273.7 1,249.8
Special charge........................... 90.4 70.5
Asset impairment charge.................. 38.1 -
-------- --------
Operating profit........................... 128.1 159.2
Interest expense......................... 17.9 16.3
Interest income.......................... (5.4) (8.2)
Other (income)expense, net............... (7.1) 4.1
-------- --------
Total other expenses....................... 5.4 12.2
-------- --------
Income before taxes and minority interest.. 122.7 147.0
Income taxes............................... 68.7 70.0
-------- --------
Income before minority interest............ 54.0 77.0
Minority interest.......................... 2.6 3.4
-------- --------
Net income................................. $ 56.6 $ 80.4
======== ========
Earnings per share:
Basic ................................. $ .22 $ .31*
======== ========
Diluted................................ $ .21 $ .30*
======== ========
*Restated to reflect a two-for-one stock split distributed in September 1998.
**1999 and 1998 include a one-time charge of $46.0 and $37.9, respectively, for
inventory write-downs.
The accompanying notes are an integral part of these statements.
5
AVON PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions)
June 30 December 31
1999 1998
(Restated Note 2) -----------
---------------
(unaudited)
ASSETS
Current assets:
Cash and equivalents.................... $ 73.8 $ 105.6
Accounts receivable..................... 471.4 492.6
Inventories............................. 535.4 538.4
Prepaid expenses and other.............. 202.0 204.8
-------- --------
Total current assets.................... 1,282.6 1,341.4
-------- --------
Property, plant and equipment, at cost.. 1,373.6 1,392.8
Less accumulated depreciation........... 710.8 722.9
-------- --------
662.8 669.9
-------- --------
Other assets........................... 411.8 422.2
-------- -------
Total assets........................... $2,357.2 $2,433.5
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Debt maturing within one year.......... $ 312.5 $ 55.3
Accounts payable....................... 286.1 416.9
Accrued compensation................... 131.9 161.3
Other accrued liabilities.............. 332.7 308.2
Sales and other taxes.................. 91.4 106.2
Income taxes........................... 284.6 281.6
-------- --------
Total current liabilities.............. 1,439.2 1,329.5
-------- --------
Long-term debt......................... 204.5 201.0
Employee benefit plans................. 385.7 390.0
Deferred income taxes.................. 37.8 36.3
Other liabilities...................... 183.5 191.6
Shareholders' equity:
Common stock........................... 88.1 87.8
Additional paid-in capital............. 804.3 780.0
Retained earnings...................... 681.6 719.1
Accumulated comprehensive income....... (341.5) (301.3)
Treasury stock, at cost................ (1,126.0) (1,000.5)
-------- --------
Total shareholders' equity............. 106.5 285.1
-------- --------
Total liabilities and shareholders' equity $2,357.2 $2,433.5
======== ========
The accompanying notes are an integral part of these statements.
6
AVON PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Six months ended
June 30
--------------------
1999 1998
(Restated Note 2) ------
---------------
(unaudited)
Cash flows from operating activities:
Net income...................................... $ 56.6 $ 80.4
Adjustments to reconcile net income to net cash
provided by (used in)operating activities:
Special and non-recurring charges............... 93.1 81.9
Asset impairment charge......................... 38.1 -
Depreciation and amortization................... 39.5 34.0
Provision for doubtful accounts................. 43.6 43.0
Translation gains............................... (.7) (.4)
Deferred income taxes........................... (18.4) (11.0)
Amortization of debt discount................... (3.3)
Other........................................... 2.0 2.5
Changes in assets and liabilities:
Accounts receivable........................... (58.5) (79.7)
Inventories................................... (67.6) (75.5)
Prepaid expenses and other.................... (1.9) (19.8)
Accounts payable and accrued liabilities...... (120.7) (107.1)
Income and other taxes........................ (2.7) (1.1)
Noncurrent assets and liabilities............. 8.4 (13.3)
------ ------
Net cash provided(used)by operating activities.. 7.5 (66.1)
------ ------
Cash flows from investing activities:
Capital expenditures........................... (69.1) (73.8)
Disposal of assets............................. 5.2 5.8
Other investing activities..................... (15.3) (.4)
------ ------
Net cash used by investing activities.......... (79.2) (68.4)
------ ------
Cash flows from financing activities:
Cash dividends................................. (95.7) (91.0)
Debt, net (maturities of three months or less). 254.8 163.9
Proceeds from short-term debt.................. 22.1 46.7
Retirement of short-term debt.................. (19.5) (103.6)
Proceeds from long-term debt................... - 100.0
Retirement of long-term debt................... (.2) (.4)
Repurchase of common stock..................... (125.5) (48.7)
Proceeds from exercise of stock options........ 21.4 12.3
------ ------
Net cash provided by financing activities...... 57.4 79.2
------ ------
Effect of exchange rate changes on cash
and equivalents............................ (17.5) 1.4
------ ------
Net decrease in cash and equivalents........... (31.8) (53.9)
Cash and equivalents beginning of period....... 105.6 141.9
------ ------
Cash and equivalents end of period............. $ 73.8 $ 88.0
====== ======
The accompanying notes are an integral part of these statements.
7
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
1. ACCOUNTING POLICIES
The accompanying Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
contained in Avon's 1998 Annual Report to Shareholders. The interim statements
are unaudited but include all adjustments, consisting of normal recurring
accruals, that management considers necessary to fairly present the results for
the interim periods. Results for interim periods are not necessarily indicative
of results for a full year. The year end balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles.
In May 1999, the Financial Accounting Standards Board issued an Exposure
Draft delaying the effective date of Financial Accounting Standard ("FAS") No.
133, Accounting for Derivative Instruments and Hedging Activities, by one year.
FAS No. 133 is now effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000 (January 1, 2001 for the Company). FAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether
a derivative is designated as part of a hedge transaction. For fair-value hedge
transactions in which the Company is hedging changes in the fair value of an
asset, liability, or firm commitment, changes in the fair value of the
derivative instrument are included in the income statement along with the
offsetting changes in the hedged item's fair value. For cash-flow hedge
transactions, in which the Company is hedging the variability of cash flows
related to a variable-rate asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be reported in
other comprehensive income. The gains and losses on the derivative instrument
that are reported in other comprehensive income will be reclassified to
earnings in the periods in which earnings are impacted by the variability of
the cash flows of the hedged item. The ineffective portion of all of the hedges
will be recognized in current-period earnings. The Company has not yet
determined the impact that the adoption of FAS No. 133 will have on its
earnings or statement of financial position.
To conform to the 1999 presentation, certain reclassifications were made
to prior years financial information.
2. RESTATEMENTS AND ACCOUNTING CHANGES
Restatements
In connection with the settlement of a previously disclosed investigation
by the Securities and Exchange Commission relating to the write off of an order
management software system known as the "FIRST" project, Avon has restated its
Consolidated Financial Statements as of December 31, 2001, 2000 and 1999 and
for the years then ended and for each of the fiscal quarters ended March 31,
1999 through March 31, 2002. See Introductory Note-Restatements and Note 10 of
the Notes to Consolidated Financial Statements, "Asset Impairment Charge".
The accompanying financial statements have been restated to reflect the
restatements discussed above as well as the accounting changes outlined in this
Note. No attempt has been made in this Form 10-Q/A to modify or update any
disclosures except as required to reflect the results of the restatements
discussed above and any changes made to prior period financial information for
which a Form 10-Q/A was not filed.
The principal adjustments comprising the restatements are as follows:
o Reclassification of $14.8 of pre-tax charges recorded in the first
quarter of 1999 related to the write off of a portion of the FIRST
project, out of the "Special charges" line and into the "Asset
impairment charge" line;
o An additional Asset impairment charge of $23.3 pretax in the first
quarter of 1999 to reflect the write off of all capitalized costs
associated with the FIRST project as of March 31, 1999;
8
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
o Reversal of the third quarter 2001 Asset impairment charge of
$23.9 pretax related to the abandonment of the FIRST project; and
o Restatement of all other activity related to the FIRST project,
consisting of costs incurred and capitalized subsequent to March 31,
1999 and amortization, recorded from the second quarter of 1999
through the first quarter of 2002.
These adjustments resulting from the restatements are reflected in
Management's Discussion & Analysis and the following notes: Special and
Non-Recurring Charges, Earnings per Share, Comprehensive Income, Segment
Information and Asset Impairment Charge.
The effects of these restatements on the Consolidated Financial Statements
are set forth below:
Consolidated Statements of Operations
Three Months ended June 30, 1999 Six Months ended June 30,1999
-------------------------------- -----------------------------
As As As As
Reported(1) Restated(2) Reported(1) Restated(2)
----------- ----------- ---------- ----------
Marketing, distribution and
administrative expenses $ 619.7 $ 622.8 $1,270.6 $1,273.7
Special charges - - 105.2 90.4
Asset impairment charge - - - 38.1
Operating profit 195.8 192.7 154.5 128.1
Income before taxes and minority
Interest 188.4 185.3 149.1 122.7
Income taxes 67.8 66.6 79.2 68.7
Income before minority interest 120.6 118.7 69.9 54.0
Net income 121.4 119.5 72.5 56.6
Earnings per share:
Basic $ .46 $ .46 $ .28 $ .22
Diluted $ .46 $ .45 $ .27 $ .21
Consolidated Balance Sheet
As of June 30, 1999
--------------------------------------------
As As
Reported(3) Restated(2)
----------- -----------
Property, plant and equipment, at cost $1,376.3 $1,373.6
Other assets 424.5 411.8
Total assets 2,372.6 2,357.2
Other accrued liabilities 332.2 332.7
Total current liabilities 1,438.7 1,439.2
Retained earnings 697.5 681.6
Total liabilities and
shareholder's equity 2,372.6 2,357.2
(1) As reported (as prior period comparative data) in the Company's Form 10-K
for the year ended December 31, 2000, which includes the effect of the
accounting changes outlined below.
(2) Includes the effects of restatements and accounting changes.
(3) As reported in the Company's Form 10-Q for the quarter ended June 30,
1999.
Accounting Changes
In addition, the Form 10-Q/A reflects the following changes to prior
period financial information for which a Form 10-Q/A was not previously filed.
These changes are primarily the result of the previously disclosed adoption of
new accounting pronouncements and are unrelated to the restatements described
above and the FIRST project:
9
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
o Accounting changes made to reported 1999 financial information as a
result of the adoption of Emerging Issues Task Force ("EITF") 00-10,
"Accounting for Shipping and Handling Fees and Costs". The adoption of
EITF 00-10 resulted in increases in Marketing, distribution and
administrative expenses and Other Revenue of $9.1 and $18.3 for the
three and six months ending June 30, 1999, respectively, and $8.8 and
$17.6 for the three and six months ending June 30, 1998,
respectively. The adoption of this EITF had no impact on Net income
or Earnings per share.
o Reclassifications made to reported financial information to conform
with the 1999 full year presentation.
3. INFORMATION RELATING TO THE STATEMENT OF CASH FLOWS
"Net cash provided (used) by operating activities" includes the following
cash payments for interest and income taxes:
Six months ended
June 30
----------------
1999 1998
---- ----
Interest................................. $19.5 $18.9
Income taxes, net of refunds received.... 73.1 82.0
4. EARNINGS PER SHARE
Basic earnings per share ("EPS") are computed by dividing net income by the
weighted-average number of shares outstanding during the year. Diluted earnings
per share are calculated to give effect to all potentially dilutive common
shares that were outstanding during the year.
For the three and six months ended June 30, 1999 and 1998, the number of
shares used in the computation of basic and diluted earnings per share are as
follows:
Three Months ended Six Months ended
June 30 June 30
------------------ ----------------
1999 1998* 1999 1998*
---- ---- ---- ----
Basic EPS
Weighted-average shares 261.54 263.55 261.77 263.56
Incremental shares from
assumed conversion of
stock options 3.47 3.16 3.09 2.76
------ ------ ------ ------
Diluted EPS
Adjusted weighted-
average shares 265.01 266.71 264.86 266.32
------ ------ ------ ------
*Restated to reflect a two-for-one stock split distributed in September 1998.
10
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
The Company purchased approximately 2,756,500 shares of common stock for
$125.5 during the first six months of 1999, as compared to approximately
1,432,300 shares of common stock for $48.7 during the first six months of 1998,
under a previously announced share repurchase program.
5. INVENTORIES
June 30 December 31
1999 1998
---- ----
Raw materials................ $163.1 $140.6
Finished goods............... 372.3 397.8
------ ------
$535.4 $538.4
====== ======
6. DIVIDENDS
Cash dividends paid per share of common stock were $.18 and $.36 for the
three and six months ended June 30, 1999, respectively, and $.17 and $.34 for
the corresponding 1998 period. On February 4, 1999, the Company increased the
annual dividend rate to $.72 from $.68.
7. CONTINGENCIES
Various lawsuits and claims (asserted and unasserted), arising in the
ordinary course of business or related to businesses previously sold, are
pending or threatened against Avon.
In 1991, a class action suit was initiated against Avon on behalf of
certain classes of holders of Avon's Preferred Equity-Redemption Cumulative
Stock ("PERCS"). This lawsuit alleges various contract and securities law
claims relating to the PERCS (which were fully redeemed that year). Avon has
rejected the assertions in this case, believes it has meritorious defenses to
the claims and is vigorously contesting this lawsuit. A trial has been
preliminary scheduled to commence as early as December 1999.
In the opinion of Avon's management, based on its review of the information
available at this time, the difference, if any, between the total cost of
resolving such contingencies and reserves recorded by Avon at June 30, 1999
should not have a material adverse impact on Avon's consolidated financial
position, results of operations, or cash flows.
8. COMPREHENSIVE INCOME
For the three and six months ended June 30, 1999 and 1998, the components
of comprehensive income are as follows:
Three Months ended Six Months ended
June 30 June 30
------------------ ---------------
1999 1998 1999 1998
---- ---- ---- ----
Net Income $119.5 $111.4 $ 56.6 $ 80.4
Other comprehensive income
(loss):
Change in equity due to
foreign currency
translation and
transaction adjustments 1.4 (13.8) (40.2) (17.7)
------ ------ ------- ------
Comprehensive income $120.9 $ 97.6 $ 16.4 $ 62.7
====== ====== ======= ======
9. SPECIAL AND NON-RECURRING CHARGES
In October 1997, the Company announced a worldwide business process
redesign program in order 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 six months ended June 30, 1999, special and non-recurring charges
related to this program totaled $136.4 pretax ($111.9 net of tax, or $.43 per
share on a basic and diluted basis).
For the six months ended June 30, 1999, special and non-recurring charges
by business segment are as follows:
North America $ 33.6
Latin America 14.7
Europe 69.8
Pacific 11.8
Corporate 6.5
-------
Total $ 136.4
-------
11
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
For the six months ended June 30, 1999, special and non-recurring charges
by category of expenditures are as follows:
Employee Severance Costs $ 57.0
Inventories 46.0
Write-down of Assets to
Net Realizable Value 11.6
Recognition of Foreign Currency
Translation Adjustment 9.8
Other 12.0
-------
Total $ 136.4
-------
Employee severance costs are expenses, both domestic and international,
associated with the realignment of the Company's global operations. Certain
employee severance costs were accounted for in accordance with the Company's
existing FAS 112, ("Employers' Accounting for Postemployment Benefits"),
severance plans. Remaining severance costs were accounted for in accordance
with other existing accounting literature. The workforce will be reduced by
1,374 associates, or 4% of the total. Approximately 65% of the employees to be
terminated relate to facility reorganizations and closures.
Inventory related charges represent losses to write-down the carrying value
of non-strategic inventory prior to disposal. The charges primarily result from
a new business strategy for product dispositions which fundamentally changes
the way the Company markets and sells certain inventory. This new strategy,
approved and effective in March 1999, is meant to complement other redesign
initiatives, with the objective of reducing inventory clearance sales, building
core brochure sales and building global brands.
The write-down of assets (primarily fixed and other assets) mainly relates
to the restructuring of operations in Western Europe, including the closure of
a jewelry manufacturing facility in Ireland. By centralizing certain key
functional areas and exiting unprofitable situations, the Company plans to
increase operating efficiencies and ultimately, profit growth in the long-term.
12
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
The recognition of foreign currency translation adjustment relates to the
closure of the jewelry manufacturing facility.
The "Other" category primarily represents contract termination costs,
legal and consulting fees and other costs associated with the facility
closures.
The liability balance at June 30, 1999 is as follows:
Special Cost of
Charge Sales Charge Total
------- ------------ -----
Balance at December 31, 1998 $ 28.5 $ - $ 28.5
Provision 90.4 46.0 136.4
Cash expenditures (43.3) (43.3)
Non-cash write offs (24.5) (46.0) (70.5)
------ ----- ------
Balance at June 30, 1999 $ 51.1 $ - $ 51.1
====== ===== ======
The balance at June 30, 1999 relates primarily to employee severance costs
that will be paid during 1999 and 2000.
10. ASSET IMPAIRMENT CHARGE
In the first quarter of 1999, Avon originally recorded a Special charge of
$151.2 pretax, which included the write off of $14.8 in pre-tax costs ($10.0
after tax) associated with a portion of the order management software system
known as the FIRST project. The balance of the FIRST project's development
costs had been carried as an asset until the third quarter of 2001, when Avon
recorded a pre-tax charge of $23.9 ($14.5 after tax) to write off the carrying
value of costs related to that project. The non-cash charge recorded in the
third quarter of 2001 included software development costs, certain hardware,
software interfaces and other related costs. Prior to the write off, the
capitalized software was included in Property, plant and equipment, at cost and
Other assets on the Consolidated Balance Sheet.
The decision to abandon the FIRST project was based on various factors,
including project management and implementation issues and costs, costs for
ongoing support, and changes in Avon business strategies.
The FIRST project, and the Special charge reported by Avon in the first
quarter of 1999 that included the write off of $14.8 in pre-tax costs
associated with FIRST, were the subject of a formal investigation by the SEC
commenced in August 2000. Avon has settled that matter with the SEC and, as
part of that settlement, has restated its financial statements to reflect the
additional write off as of March 31, 1999 of all capitalized costs ($23.3
pretax, and $14.0 after tax) associated with the FIRST project as of that date
for a total first quarter write off of $38.1 pretax ($24.0 after tax). Avon has
also reversed the charge recorded in the third quarter of 2001, and has
restated all other FIRST-related activity recorded during 1999-2002.
See the Introductory Note - Restatements and Note 2 of the Notes to
Consolidated Financial Statements, "Restatements and Accounting Changes".
13
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
11. SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable
segments is as follows:
Three Months Ended June 30
--------------------------
1999 1998
---- ----
Net Operating Net Operating
Sales Profit Sales Profit
------- --------- ------- ---------
North America:
U.S. $ 430.0 $ 91.0 $ 414.7 $ 81.7
Other* 61.5 9.6 66.9 9.9
-------- -------- -------- --------
Total 491.5 100.6 481.6 91.6
-------- -------- -------- --------
International:
Latin America 400.7 92.5 414.0 86.4
Pacific 169.2 22.8 145.5 11.0
Europe 196.7 31.8 206.1 28.9
-------- -------- -------- --------
Total 766.6 147.1 765.6 126.3
-------- -------- -------- --------
Total from operations $1,258.1 $ 247.7 $1,247.2 $ 217.9
-------- -------- -------- --------
Global expenses (55.0) (41.0)
-------- --------
Operating profit $ 192.7 $ 176.9
======== ========
*Includes operating information for Puerto Rico, Dominican Republic, Canada and
for Discovery Toys.
14
AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except share data)
Six Months Ended June 30
------------------------
1999 1998
---- ----
Net Operating Net Operating
Sales Profit Sales Profit
------- --------- ------- --------
North America:
U.S. $ 858.8 $ 168.5 $ 819.0 $ 150.5
Other* 124.0 19.6 127.0 15.5
-------- -------- -------- --------
Total 982.8 188.1 946.0 166.0
-------- -------- -------- --------
International:
Latin America 770.8 154.6 788.3 145.2
Pacific 326.5 36.4 297.7 21.0
Europe 391.8 45.8 398.6 44.0
------- -------- -------- --------
Total 1,489.1 236.8 1,484.6 210.2
-------- -------- -------- --------
Total from operations $2,471.9 $ 424.9 $2,430.6 $ 376.2
-------- -------- -------- --------
Global expenses (122.3) (108.6)
Special and
non-recurring charges (136.4) (108.4)
Asset impairment charge (38.1) -
-------- --------
Operating profit $ 128.1 $ 159.2
======== ========
*Includes operating information for Puerto Rico, Dominican Republic, Canada and
for Discovery Toys.
12. OTHER FINANCING ACTIVITIES
At June 30, 1999, the Company had entered into forward contracts to
purchase approximately 2,608,200 shares of Avon common stock at an average rate
of $36.67 per share as of June 30, 1999. The contracts mature over the next
2-1/2 years and provide for physical or net settlement to the Company.
Accordingly, no adjustment for subsequent changes in fair value has been
recognized.
15
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
ITEM 2. Management's Discussion and Analysis of the Results of Operations and
Financial Condition (Restated)
All share and per share data in this report have been restated to reflect
a two-for-one stock split distributed in September 1998.
Results of Operations
Consolidated
Consolidated net sales for the second quarter and six-month period of 1999
increased 1% and 2%, respectively, over the same periods of 1998. The sales
growth was due to increases in North America primarily in the U.S. and Pacific;
while sales declined in Latin America and Europe versus the prior year.
Excluding the impact of foreign currency exchange, consolidated net sales rose
9% and 10% in the second quarter and six-month period of 1999, repectively,
over the comparable periods of the prior year.
Cost of sales as a percentage of net sales increased 1.4 percentage points
in the second quarter and 1.1 percentage points in the six-month period of 1999
compared to the same periods of 1998. The cost of sales for the six months
ended June 30, 1999 and 1998 include one-time charges of $46.0 and $37.9,
respectively, for inventory write-downs related to the Company's BPR program.
See Note 9 for further detail. Excluding these charges, the gross margin
increased 1.3 points on a June year-to-date basis. The higher gross margin
resulted from improvements in all regions, most significantly in the U.S,
Brazil, Japan, the United Kingdom, Germany and Central Europe.
Marketing, distribution and administrative expenses increased $9.3 (2%)
and $23.9 (2%) in the second quarter and six-month period of 1999,
respectively, over the same periods of 1998 primarily due to increases in the
U.S. and Mexico as well as higher global expenses, partially offset by lower
expenses in Brazil. Marketing, distribution, and administrative expenses
increased as a percentage of Total revenue to 49.1% in the second quarter of
1999 from 48.8% in 1998. Second quarter 1999 expense ratio improvements in
Brazil and Central Europe were more than offset by unfavorable expense ratios
throughout remaining major markets in Latin America, the United Kingdom,
Germany, and Japan.
The six months ended 1999 and 1998 results include special charges of
$90.4 and $70.5, respectively, which were recorded in the first quarter of 1999
and 1998 for the Company's BPR program. These charges are primarily related to
employee severance benefits worldwide, as well as facility reorganizations. See
Note 9 for further detail.
An Asset impairment charge of $38.1 pretax was recorded in the six months
ended June 30, 1999 related to the write off of an order management software
system. See Note 10 for further detail.
Interest expense increased to $8.9 in the second quarter of 1999 as
compared with $8.2 in 1998, and to $17.9 in the first half of 1999 compared
with $16.3 in 1998. Interest income decreased $3.7 and $2.8 in the second
quarter and six-month period of 1999, respectively, compared to prior year due
to a Mexico tax refund claim in June 1998.
Other expense (income), net of $.7 in the second quarter of 1999 decreased
slightly and other income of $7.1 for the six-month period of 1999 was $11.2
favorable over the six-month period of 1998 due primarily to favorable net
foreign exchange resulting from gains on Brazilian currency forward contracts.
16
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
The effective tax rate for the second quarter 1999 was 35.9% versus 36.8%
for the second quarter 1998 due to the earnings mix and tax rates of
international subsidiaries. Excluding the special and non-recurring charges,
the effective tax rate was 36.1% in the first half of 1999 compared to 33.7% in
the first half of 1998.
Minority interest decreased $.9 and $.8 in the second quarter and
six-month period of 1999, respectively, compared to 1998, primarily due to
lower losses in Japan in 1999.
The following discussion addresses net sales and operating profit by
reportable segment as presented in Note 11:
North America
Net sales grew 2% and 4% in the second quarter and six-month period of
1999, respectively, over the same periods in 1998. The U.S. business, which
represents almost 90% of the North American segment, reported sales growth of
4% in the second quarter and 5% in the first half of 1999 driven by a higher
average order size. The U.S. sales improvement resulted from strong growth in
the fashion jewelry and accessories and home entertainment categories,
partially offset by declines in apparel. The growth in fashion jewelry and
accessories was driven by strong sales of sterling silver items as well as the
introduction of licensed luggage, American Tourister, and excellent performance
in watches and handbags. The improvement in home entertainment resulted from
increased sales of inspirational and religious products. Apparel sales
decreased due to underperformance on new product introductions and
demonstration products, partially offset by successes in casual wear and
sleepwear. Sales of cosmetics, fragrance and toiletries ("CFT") decreased 2% in
the second quarter due to the underperformance of the new Skin-So-Soft Bug
Guard launch which failed to match the strength of last year's new product
launch. Gift and decorative sales were level in the second quarter of 1999
compared with second quarter of 1998.
However, successful holiday promotions, including a strong Easter program
and entry into the Blues Clues children's market contributed to a double-digit
increase in the gift and decorative category for the first half of 1999.
Operating profit in North America increased 10% and 13% in the second
quarter and first half of 1999, respectively, compared with the same periods in
1998. This improvement is primarily attributable to a higher gross margin in
the U.S. due to supply chain cost improvements and pricing and product category
management. Operating expenses in North America increased in line with the
sales increase.
International
Sales growth in the second quarter of 1999 in the Pacific region (16%) was
offset by sales declines in Latin America (-3%) and Europe (-5%). For the first
half of 1999, the sales improvement in the Pacific (10%) was also offset by
sales declines in Latin America (-2%) and in Europe (-2%). However, excluding
the effect of foreign currency exchange, sales increased 13% during both the
second quarter and first half of 1999.
The sales improvement in the Pacific region for both the second quarter
and first half of 1999 was driven by double digit increases in units, customers
served and active Representatives in the Philippines and Taiwan. Japan's sales
increased as well due to favorable currency impact. Local currency sales in
Japan decreased due to a lower average order size. Excluding the effect of
foreign currency exchange, sales
17
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
in the Pacific increased 10% and 5% in the second quarter and first half of
1999, respectively. The sales decline in Latin America resulted from
significant decreases in Brazil as a result of the real devaluation, and in
Argentina and Chile as a result of weak economic conditions. Local currency
sales and units were up over 20% in Brazil for the second quarter and first
half of 1999. Active Representatives in Brazil were also up double-digits
driven by recruiting and retention strategies in place including strong
training and incentive programs. Excluding the impact of exchange, sales in
Latin America increased 16% and 19% in the second quarter and first half of
1999, respectively. In Europe, sales were down in Russia due to the ruble
devaluation in August 1998 and the continued economic crisis. Additionally,
sales decreased in most markets in Western Europe, mainly in Germany due to a
weak economic environment and in Italy and France due to unit declines. These
declines were partially offset by improvements in the United Kingdom due to a
higher average order size and increased franchise and distributorship sales in
1999, and in Central Europe, primarily Poland, due to dramatic increases in
units, customers served and active Representatives. Excluding the impact of
exchange, Europe sales grew 8% in both the second quarter and first half of
1999.
International operating profit increased 16% and 13% in the second quarter
and six-month period of 1999, respectively, compared to the same periods in
1998.
Operating profit growth in the Pacific of 107% and 73% in the second
quarter and first half of 1999,respectively, resulted from U.S. dollar sales
growth in nearly all markets and operating margin improvements, most
significantly in Japan and China. Japan's gross margin improved due to product
cost savings initiatives in CFT and improved sourcing decisions for non-CFT as
well as a business-wide product profitability screening process that led to the
elimination of many low-margin products. Additionally, business process
redesign ("BPR") efforts continue to generate significant savings across all
expense areas in Japan. China's improvement in 1999 reflects the suspension of
operations for most of the second quarter of 1998 due to governmental
restrictions on direct-selling companies. Philippines and Taiwan also reported
strong increases in operating profit driven primarily by the sales growth,
discussed above. As a result, the operating margin in the Pacific was up 5.9
points and 4.1 points for the second quarter and first half of 1999,
respectively, over prior year.
In Latin America, operating profit improvements of 7% in the second
quarter and 6% in the first half of 1999 were driven by increases in Brazil and
Mexico. Aggressive cost reduction efforts combined with strict expense
management contributed to Brazil's double-digit improvement in operating
profit. Mexico's improvement resulted mainly from the sales increase, partially
offset by increased advertising expense in 1999. These improvements were
partially offset by operating profit declines in Argentina and Chile due to the
sales shortfalls and weak economic conditions.
The Brazilian real devalued significantly in January 1999 and, as a
result, negatively affected Brazil's U.S. dollar results in 1999. Brazil's
second quarter and first half 1999 sales, although up over 20% in local
currency, were down approximately 20% in U.S. dollars due to the devaluation.
In response to this situation, several actions have been taken by local
management to offset the devaluation, including a focused effort directed at
vendor negotiations and local sourcing to reduce imports.
18
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Operating profit in Europe increased 10% and 4% in the second quarter and
six-month period, respectively. This improvement was driven by increases in the
United Kingdom, Central Europe and Italy. The United Kingdom continues to focus
on developing the business through optimization of the most profitable sales
mix through brand awareness, image enhancement and expense control. The United
Kingdom, Central Europe and Italy reported significant growth in operating
margins due to higher gross margins which resulted from a continuing focus on
pricing strategies and improved profitability of non-CFT categories. These
improvements were partially offset by declines in Russia resulting from the
ruble devaluation during the second half of 1998. Management in Russia will
continue to manage expenses tightly and seek to increase market share and
improve margins through pricing flexibility and tight expense management.
Global Expenses
Global expenses increased 34% and 13% in the second quarter and first half
of 1999, respectively, over the same periods in 1998 primarily due to increased
investments in global marketing, research and development and information
technology systems, as well as costs related to the work on the Company's new
strategic initiatives.
Liquidity and Capital Resources
Cash Flows
Excluding changes in debt, there was a net decrease in cash of $289.0 in
the first half of 1999 compared with a decrease of $260.5 in the comparable
period of 1998. The $28.5 variance primarily reflects increased repurchases of
common stock, an unfavorable effect of foreign currency exchange and increased
cash used for investing activities due to the acquisition of the remaining
interest in a manufacturing facility in Poland. These uses of cash were
partially offset by lower net cash used by operations reflecting a favorable
consolidated working capital level and higher net income (adjusted for the
non-cash portion of the special charges).
During the first half of 1999, the Company purchased approximately 2,756,500
shares of common stock for $125.5 compared with $48.7 spent for the repurchase
of approximately 1,432,300 shares during the comparable period in 1998.
Capital Resources
Total debt increased $260.7 to $517.0 from $256.3 at December 31, 1998,
principally due to normal seasonal working capital requirements during the
first half of 1999 and to support the continuing stock buyback program. Total
debt of $517.0 at June 30, 1999 was $77.5 higher than total debt of $439.5 at
June 30, 1998 due to increased share repurchases. In addition, at June 30, 1999
and December 31, 1998, other non-current liabilities included approximately
$109.4 and $112.4, respectively, related to securities lending activities.
At June 30, 1999, there were no borrowings under the amended and restated
revolving credit and competitive advance facility agreement. This agreement is
also used to support the Company's commercial paper borrowings of which $244.7
was outstanding at June 30, 1999.
At June 30, 1999, there were $10.0 of borrowings outstanding under
uncommitted lines of credit.
19
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Management currently believes that cash from operations and available
financing alternatives are adequate to meet anticipated requirements for
working capital, dividends, capital expenditures, the stock repurchase program
and other cash needs.
Working Capital
As of June 30, 1999, current liabilities exceeded current assets by
$156.6, while at December 31, 1998 current assets exceeded current liabilities
by $11.9. The increase of current liabilities over current assets was primarily
due to the increase in net debt (debt less cash and equivalents), as discussed
in the Debt section, and other accrued liabilities, mainly due to the accrual
for special and non-recurring charges, partially offset by a decrease in
accounts payable and accrued compensation due to the payment of 1998 incentive
programs.
Although current liabilities exceeded current assets at June 30, 1999,
management believes this is due to the Company's direct selling business format
which results in lower receivable and working capital levels as well as the
Company's practice of repurchasing shares with available cash. Avon's liquidity
results from its ability to generate significant cash flows from operations and
its ample unused borrowing capacity. Actions that would eliminate the working
capital deficit are not anticipated at this time. Avon's credit agreements do
not contain any provisions or requirements with respect to working capital.
Financial Instruments and Risk Management Strategies
The Company operates globally, with manufacturing and distribution
facilities in various locations around the world. The Company may reduce its
exposure to fluctuations in interest rates and foreign exchange rates by
creating offsetting positions through the use of derivative financial
instruments. The Company currently does not use derivative financial
instruments for trading or speculative purposes, nor is the Company a party to
leveraged derivatives.
The Company periodically uses interest rate swaps to hedge portions of
interest payable on its debt. In addition, the Company may periodically employ
interest rate caps to reduce exposure, if any, to increases in variable
interest rates.
At June 30, 1999, the Company had a five-year interest rate swap contract
with a notional amount of $50.0 to effectively convert fixed interest on a
portion of the $100.0 bonds to a variable interest rate, based on LIBOR.
The Company may periodically hedge foreign currency royalties, net
investments in foreign subsidiaries, firm purchase commitments and contractual
foreign currency cash flows or obligations, including third-party or
inter-company foreign currency transactions. The Company regularly monitors its
foreign currency exposures and ensures that hedge contract amounts do not
exceed the amounts of the underlying exposures.
At June 30, 1999, the Company held foreign currency forward contracts with
notional amounts totaling $315.6 and option contracts with notional amounts
totaling $3.7 to hedge foreign currency items. Only $9.0 of these contracts
have maturities after 1999. Also outstanding at June 30, 1999 were foreign
contracts totaling $35.0 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 June 30, 1999 was insignificant. The
20
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
Company's risk of loss on the options in the future is limited to premiums
paid, which are insignificant.
At June 30, 1999, the Company has entered into forward contracts to
purchase approximately 2,608,200 shares of Avon common stock at an average rate
of $36.67 per share as of June 30, 1999. The contracts mature over the next
2-1/2 years and provide for physical or net share settlement to the Company.
Accordingly, no adjustment for subsequent changes in fair value has been
recognized.
The Company attempts to minimize its credit exposure to counterparties by
entering into interest rate swap and cap contracts only with major
international financial institutions with "A" or higher credit ratings as
issued by Standard & Poor's Corporation. The Company's foreign currency and
interest rate derivatives are comprised of over-the-counter forward contracts
or options with major international financial institutions. Although the
Company's theoretical credit risk is the replacement cost at the then estimated
fair value of these instruments, management believes that the risk of incurring
losses is remote and that such losses, if any, would not be material.
Other Information
Euro
A single currency called the euro was introduced in Europe on January 1,
1999. Eleven of the fifteen member countries of the European Union adopted the
euro as their common legal currency on that date. Fixed conversion rates
between these participating countries' existing currencies (the "legacy
currencies") and the euro were established as of that date. The legacy
currencies are scheduled to remain legal tender as denominations of the euro
until June 30, 2002 after which they will be withdrawn from circulation. During
this transition period, parties may settle transactions using either the euro
or a participating country's legal currency. Beginning in January 2002, new
euro-denominated bills and coins will be issued.
Avon operating subsidiaries affected by the euro conversion have
established plans to address issues raised by the euro currency conversion.
These issues include, among others, the need to adapt information technology
systems, business processes and equipment to accommodate euro-denominated
transactions, the impact of one common currency on pricing and recalculating
currency risk. Avon does not expect system and equipment conversion costs to be
material. Due to the numerous uncertainties associated with the market impact
of the euro conversion, the Company cannot reasonably estimate the effects one
common currency will have on pricing and the resulting impact, if any, on
results of operations, financial condition or cash flows.
Year 2000
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.
21
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
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 been completed for all phases.
The Applications Software section includes the conversion of both
in-house developed and vendor-supplied software applications. 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 has been completed. Currently, the Company is verifying the integrity of
internal and external system interfaces. This activity is scheduled to be
completed by September 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 August 1999. Follow-up reviews will
also be scheduled for the remainder of 1999.
22
AVON PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in millions, except share data)
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 completed the remediation and testing of embedded systems. From
an international standpoint, the Company has completed the assessment and
remediation phases and is currently testing critical equipment. Testing is
scheduled to be completed by September 1999.
Costs
The total estimated cost associated with achieving worldwide Year 2000
compliance will be approximately $32.7, of which $25.0 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 are scheduled to be
completed by September 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 "CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995" on page
24.
23
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this report which are not historical facts or
information are forward-looking statements, including, but not limited to, the
information set forth in "Other Information" herein. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, levels of activity, performance or
achievement of the Company, or industry results, to be materially different
from any future results, levels of activity, performance or achievement
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions; the
ability of the Company to implement its business strategy; the Company's access
to financing and its management of foreign currency risks; the Company's
ability to successfully identify new business opportunities; the Company's
ability to attract and retain key executives; the Company's ability to achieve
anticipated cost savings and profitability targets; changes in the industry;
competition; the effect of regulatory and legal restrictions imposed by foreign
governments; the effect of regulatory and legal proceedings and other factors
discussed in Item 1 of the Company's Form 10-K/A. As a result of the foregoing
and other factors, no assurance can be given as to the future results and
achievements of the Company. Neither the Company nor any other person assumes
responsibility for the accuracy and completeness of these statements.
24
AVON PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
There are no exhibits.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the second quarter of 1999.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVON PRODUCTS, INC.
-------------------
(Registrant)
Date: August 12, 2002 By /s/ JANICE MAROLDA
-------------------------------
Janice Marolda
Vice President,
Controller
Principal Accounting Officer
Signed both on behalf of the
registrant and as principal
accounting officer.
26