Avon 2001 Annual Report Download - page 16

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forward rate, interest rate cap contracts and treasury lock
agreements only with major international financial insti-
tutions with “A” or higher credit ratings as issued by
Standard & Poor’s Corporation. Avon’s foreign currency
and interest rate derivatives are comprised of over-the-
counter forward contracts, swaps or options with major
international financial institutions. Although Avon’s
theoretical credit risk is the replacement cost at the then
estimated fair value of these instruments, management
believes that the risk of incurring credit risk losses is
remote and that such losses, if any, would not be material.
Non-performance of the counterparties on the balance
of all the foreign exchange and interest rate swap and for-
ward rate agreements would not result in a material write-
off at December 31, 2002. In addition, in the event of non-
performance by such counterparties, Avon would be exposed
to market risk on the underlying items being hedged as a
result of changes in foreign exchange and interest rates.
Accounting Changes
See Note 2, Accounting Changes, for a discussion regard-
ing recent accounting standards, including the following:
• Emerging Issues Task Force “EITF” 00-14, “Accounting
for Certain Sales Incentives,”
• EITF 00-25, “Accounting for Consideration from a
Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor’s Products,”
• FAS No. 133, “Accounting for Derivative Instruments
and Hedging Activities,”
• FAS No. 141, “Business Combinations,”
• FAS No. 142, “Goodwill and Other Intangible Assets,”
• FAS No. 143, “Accounting for Asset Retirement
Obligations,”
• FAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,”
• FAS No. 146, “Accounting for Costs Associated with
Exit or Disposal Activities,”
• FAS No. 148, “Accounting for Stock-Based
Compensation-An Amendment of FAS No. 123,”
• FASB Interpretation No. 45, “Guarantor’s Accounting
and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others,” and
• SAB No. 101, “Revenue Recognition in Financial
Statements.”
Contingencies
Avon is a defendant in a class action suit commenced in
1991 on behalf of certain classes of holders of Avon’s
Preferred Equity-Redemption Cumulative Stock
(“PERCS”). Plaintiffs allege various contract and securities
law claims related to the PERCS (which were fully
redeemed in 1991) and seek aggregate damages of approx-
imately $145.0, plus interest. A trial of this action took
place in the United States District Court for the Southern
District of New York and concluded in November 2001.
At the conclusion of the trial, the judge reserved decision
in the matter. Avon believes it presented meritorious
defenses to the claims asserted. However, it is not possible
to predict the outcome of litigation and it is reasonably
possible that the trial, and any possible appeal, could be
decided unfavorably. Management is unable to make a rea-
sonable estimate of the amount or range of loss that could
result from an unfavorable outcome but, under some of the
damage theories presented, an adverse award could be
material to the Consolidated Financial Statements.
Avon is a defendant in an action commenced in the
Supreme Court of the State of New York by Sheldon Solow
d/b/a Solow Building Company, the landlord of the
Company’s former headquarters in New York City.
Plaintiff seeks aggregate damages of approximately $80.0,
plus interest, for the Company’s alleged failure to restore
the leasehold premises at the conclusion of the lease term
in 1997. A trial of this matter was scheduled for February
2002, but was stayed pending the determination of (i) an
interlocutory appeal by plaintiff of an order that denied
the plaintiff’s motion for summary judgment and granted
partial summary judgment in favor of the Company on
one of the plaintiff’s claims; and (ii) an appeal by plaintiff
of a decision in an action against another former tenant
that dismissed plaintiff’s claims after trial. In January
2003, both appeals were decided against the plaintiff.
Trial has not yet been re-scheduled. While it is not possi-
ble to predict the outcome of litigation, management
believes that there are meritorious defenses to the claims
asserted and that this action should not have a material
adverse effect on the Consolidated Financial Statements.
This action is being vigorously contested.
Avon Products Foundation, Inc. (the “Avon
Foundation”) is a defendant in an arbitration proceeding
brought by Pallotta TeamWorks (“Pallotta”) on September
3, 2002, before Judicial Arbitration and Mediation
Services, Inc. (“JAMS”). Pallotta asserts claims of breach of
contract, misappropriation of opportunity, tortious inter-
ference with prospective contractual arrangement and
unfair competition arising out of the Avon Foundation’s
decision to use another party to conduct breast cancer
fundraising events, and seeks unspecified damages and
attorneys’ fees. In January 2003, Pallotta’s misappropria-
tion claim was dismissed by the arbitrator. In February
2003, Pallotta’s unfair competition claim was also dis-
missed by the arbitrator. The Avon Foundation believes
that it has meritorious defenses to the claims asserted by
Pallotta and has filed a number of counterclaims, and ini-
tiated a separate arbitration proceeding before JAMS. The
Avon Foundation is a registered 501(c)(3) charity and is a
distinct entity from Avon Products, Inc., which is not a
party to these proceedings. While it is not possible to pre-
dict the outcome of litigation, management believes that
these proceedings should not have a material adverse effect
on the Consolidated Financial Statements.
On December 20, 2002, a Brazilian subsidiary of
the Company received a series of tax assessments from
the Brazilian tax authorities asserting that the establish-
ment in 1995 of separate manufacturing and distribution