Avon 2000 Annual Report Download - page 30

See Note 2 of the Notes to Consolidated Financial
Statements. On March 1, 2001, the Company purchased
260,000 shares of Avon common stock at a purchase price
of $11.5 under these contracts.
Credit and Market Risk > The Company attempts to mini-
mize 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 deriva-
tives 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 incur-
ring losses is remote and that such losses, if any, would
not be material.
Non-performance of the counterparties to the bal-
ance of all the currency and interest rate swap agreements
would not result in a significant write-off at December 31,
2000. 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 instru-
ment is the amount at which the instrument could be
exchanged in a current transaction between willing par-
ties, other than in a forced sale or liquidation. The aggre-
gate 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, princi-
pally 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 quoted market prices.
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 agreements > The fair value of interest
rate 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:
2000 1999
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and equivalents $ 122.7 $ 122.7 $ 117.4 $ 117.4
Grantor trust 70.1 70.1 75.4 75.4
Debt maturing
within one year* (105.4) (105.4) (412.4) (412.4)
Long-term debt, net
of related discount
or premium (1,108.8) (1,139.3) (701.1) (675.6)
Share repurchase
commitments (51.0) (14.8) — (12.3)
Foreign exchange
forward and
option contracts 0.6 (4.2) 9.8 4.3
Interest rate swap
and cap receivable
(payable) 0.3 20.0 .5 (13.4)
* Other financing activities are included in Debt maturing within one year
in 1999.
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