Avon 2003 Annual Report Download - page 76

relief for alleged violations of the California Business and Professions Code,
breach of contract, unjust enrichment and “money had and received.” The
Company filed a demurrer to the complaint, asserting that it failed to state a
cause of action. In December 2003, the court sustained the Company’s demur-
rer based on the initial plaintiff’s failure to allege actual damages, but gave the
plaintiff time to amend her complaint and produce a plaintiff who had actually
suffered damages. On January 23, 2004, plaintiff Blakemore and three other
plaintiffs served an amended class action complaint on behalf of Avon Sales
Representatives who “received products from Avon they did not order, there-
after returned the unordered products to Avon, and did not receive credit for
those returned products.” The amended complaint seeks unspecified com-
pensatory and punitive damages, restitution and injunctive relief for alleged
fraudulent concealment, breach of contract, unjust enrichment and violation of
the California Business and Professions Code. The Company believes that
this action is a dispute over purported customer service issues and is an
inappropriate subject for consideration as a class action. While it is not pos-
sible 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.
On December 20, 2002, a Brazilian subsidiary of the Company received a series
of excise and income tax assessments from the Brazilian tax authorities assert-
ing that the establishment in 1995 of separate manufacturing and distribution
companies in that country was done without a valid business purpose. The
assessments assert tax deficiencies during portions of the years 1997 and 1998
of approximately $71.0 at the exchange rate on the date of this filing, plus penal-
ties and accruing interest totaling approximately $121.0 at the exchange rate on
the date of this filing. On July 1, 2003, the Brazilian subsidiary of the Company
was informed that the first-level appellate body had rejected the basis for
income tax assessments representing approximately 78% of the total assess-
ment, or $150.0 (including interest), but that rejection is subject to mandatory
second-level appellate review. The balance of the assessment relating to
excise taxes (approximately $42.0) was not affected. On December 26, 2003
an additional assessment was received in respect of excise taxes for the bal-
ance of 1998, totaling approximately $76.0 at the exchange rate on the date of
this filing and asserting a different theory of liability based on purported market
sales data. In the event that the assessments are upheld or reinstated in the ear-
lier stages of review, it may be necessary for the Company to provide security to
pursue further appeals, which, depending on the circumstances, may result in a
charge to income. It is not possible to make a reasonable estimate of the amount
or range of expense that could result from an unfavorable outcome in respect
of these or any additional assessments that may be issued for subsequent
periods. The structure adopted in 1995 is comparable to that used by many
companies in Brazil, and the Company believes that it is appropriate, both
operationally and legally, and that the assessments are unfounded. This
matter is being vigorously contested and in the opinion of the Company’s out-
side counsel the likelihood that the assessments ultimately will be upheld
is remote. Management believes that the likelihood that the assessments
will have a material impact on the Consolidated Financial Statements is
also remote.
Polish subsidiaries of the Company have been responding to Protocols of
Inspection served by the Polish tax authorities in respect of 1999 and 2000 tax
audits. The Protocols asserted tax deficiencies, penalties and accruing interest
totaling approximately $30.0 at the exchange rate on the date of this filing:
$16.5 primarily relating to the documentation of certain sales, and $13.5 related
to excise taxes. On July 29, 2003, the Company accepted a final assessment of
approximately $.6 in respect of the excise tax matter, and on December 29,
2003, the Company accepted a final assessment of approximately $.5 in
respect of the documentation of sales matter.
In 1998, the Argentine tax authorities denied certain past excise tax credits
taken by Avon’s subsidiary in Argentina and assessed this subsidiary for the
95