Avon 2015 Annual Report Download - page 32

PART I
Risks Related to the Planned Separation of North America and the Preferred Stock
Investment in the Company
The planned separation of our North America business and the issuance of our Series C
Preferred Stock to an affiliate of Cerberus may not be successfully completed or may be
delayed, either of which could adversely affect our business, prospects, financial condition,
liquidity, results of operations and cash flows.
On December 17, 2015, we entered into a separation agreement (the “Separation Agreement”) pursuant to which we will transfer our
North America business into a new company (“NewCo” and such transfer, the “Separation”) of which we will control 19.9% of the voting
and economic rights, and Cleveland NA Investor LLC (“Cleveland NA”) (an affiliate of Cerberus Capital Management (“Cerberus”)) will
control 80.1% of the voting and economic rights. Concurrently with our entry into the Separation Agreement, we entered into an
investment agreement (the “Investment Agreement”) pursuant to which we will issue and sell to Cleveland Apple Investor LLC (“Cleveland
Investor”) (an affiliate of Cerberus) 435,000 shares of newly issued Series C Preferred Stock, par value $1.00 per share (the “Series C
Preferred Stock”), for an aggregate purchase price of $435 million (the “Investment Transaction” and together with the Separation, the
“Cerberus Transactions”).
The closing of the Separation and the Investment Transactions are each conditioned upon certain customary closing conditions, including
receipt of required regulatory approvals, compliance by the parties with their respective obligations under each agreement and accuracy of
the parties’ representations and warranties. Additionally, the closing of the Cerberus Transactions are conditioned on the substantially
concurrent closing of the Investment Transactions and the Separation, respectively. The Separation Agreement and the Investment
Agreement each contain certain customary termination rights, including that the transactions may be terminated if they have not been
completed on or prior to May 3, 2016. We currently expect the Cerberus Transactions to close concurrently prior to May 3, 2016; however,
there can be no assurances that the Cerberus Transactions will close within the anticipated timetable or at all.
Additionally, the process of closing the Cerberus Transactions may be disruptive to our business operations, may distract our management
team from their day-to-day responsibilities, may make it more difficult to retain employees and may impair our ability to recognize and take
advantage of new opportunities for our remaining business. Any of these risks or uncertainties, including the failure of the Cerberus
Transactions either to close or to close within the expected timeframe, could adversely affect our business, prospects, financial condition,
liquidity, results of operations and cash flows.
Transfer of certain U.S. pension obligations and related assets in connection with the
Separation may have a material adverse effect on the funded status of our U.S. defined
benefit pension plan and our pension funding obligations in respect of our retained pension
liabilities.
In connection with the Separation, we will transfer certain liabilities under our U.S. defined benefit pension plan to a defined benefit pension
plan sponsored by NewCo. The liabilities transferred are in respect of current and former employees of our North America business, as well
as in respect of individuals who were previously employees outside of the North America business and who have an accrued benefit under
our U.S. defined benefit pension plan. Our U.S. defined benefit pension plan will continue to retain liabilities in respect of employees who
are actively employed outside of the North America business and certain employees of the North America business who are on disability
leave at the time of the Separation.
In connection with the transfer of liabilities from our U.S. defined benefit pension plan to the defined benefit pension plan maintained by
NewCo, we will be required to transfer a portion of the assets held in our U.S. defined benefit pension plan to the NewCo defined benefit
pension plan. The amount of assets transferred will be determined under Section 4044 of the Employee Retirement Income Security Act of
1974, as amended, and Section 414(l) of the Internal Revenue Code of 1986, as amended, which contain comprehensive rules on allocation
of pension plan assets to categories of benefit liabilities under a defined benefit pension plan. Depending on the amount of liabilities
transferred to the NewCo defined benefit pension plan, the amount of liabilities retained by our U.S. defined benefit pension plan, and the
assets allocated to benefits under both plans, the transfer of assets to the NewCo defined benefit pension plan could result in a significant
increase in the percentage of the underfunded position of our U.S. defined benefit pension plan.
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