Avon 2004 Annual Report Download - page 27

In December 2002, a Brazilian subsidiary of the Company
received a series of excise and income tax assessments
from the Brazilian tax authorities asserting that the
establishment in 1995 of separate manufacturing and
distribution companies in that country was done with-
out a valid business purpose. The assessments assert tax
deficiencies during portions of the years 1997 and 1998
of approximately $86.0 at the exchange rate on the date
of this filing, plus penalties and accruing interest total-
ing approximately $146.0 at the exchange rate on the
date of this filing. In July 2003, a first-level appellate body
rejected the basis for income tax assessments repre-
senting approximately 76% of the total assessment, or
$177.0 (including interest). In March 2004, that rejection
was confirmed in a mandatory second-level appellate
review. The remaining assessments relating to excise taxes
(approximately $55.0) were not affected. In December
2003, an additional assessment was received in respect
of excise taxes for the balance of 1998, totaling approx-
imately $99.0 at the exchange rate on the date of this
filing and asserting a different theory of liability based on
purported market sales data. In January 2005, an unfa-
vorable first administrative level decision was received
with respect to the appeal of that assessment and a
further appeal has been taken. In December 2004, an
additional assessment was received in respect of excise
taxes for the period from January 1999 to December
2001, totaling approximately $199.0 at the exchange
rate on the date of this filing and asserting the same
theory of liability as in the December 2003 assessment.
The Company is appealing that assessment. In the event
that assessments are upheld in the earlier 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 addi-
tional 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 outside counsel the likelihood that
the assessments ultimately will be upheld is remote.
Management believes that the likelihood that the assess-
ments will have a material impact on the Consolidated
Financial Statements is also remote.
Scheufler v.Estee Lauder,Inc.,et al. is a purported class
action commenced in February, 2005 in the Superior
Court of California for the County of San Diego. The
action names Avon and other defendants and seeks
injunctive relief and restitution for alleged violations
of the California Unfair Competition Law and the Cali-
fornia False Advertising Law, and for negligent and
intentional misrepresentation. The purported class
includes individuals “who have purchased skin care
products from defendants that have been falsely adver-
tised to have an ‘anti-aging’ or youth inducing benefit
or effect”. While it is not possible to predict the outcome
of litigation, management believes that there are meri-
torious defenses to the claims asserted and that this
action should not have a material adverse effect on the
Consolidated Financial Statements. This action will be
vigorously contested.
Various other lawsuits and claims, arising in the ordinary
course of business or related to businesses previously
sold, are pending or threatened against Avon. In the
opinion of Avon’s management, based on its review of
the information available at this time, the total cost of
resolving such other contingencies at December 31,
2004, should not have a material adverse effect on the
Consolidated Financial Statements.
Accounting Changes
See Critical Accounting Estimates and Note 2, Accounting
Changes, for a discussion regarding recent accounting
standards, including FAS 123(R), “Share-Based Payments.”