Avon 2007 Annual Report Download - page 84

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
certified the issue to the Court of Appeal on an interlocutory
basis. In April 2006, the Court of Appeal denied our motion and
instructed the trial court to consider the issue at a subsequent
point in the proceedings. In September 2007, plaintiffs filed a
motion seeking class certification on behalf of “all Avon Sales
Representatives who, since March 24, 1999, and while residing
in California, received products from Avon they did not order,
returned the unordered products to Avon, paid for the
unordered products, and/or paid shipping costs for their return
and did not receive reimbursement therefore by Avon or Avon
initially made reimbursement therefore by means of a credit and
later reversed the credit.” Avon intends to oppose that motion.
We believe 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 possible 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 our consolidated financial posi-
tion, results of operations or cash flows. This action is being
vigorously contested.
In December 2002, our Brazilian subsidiary received a series of
excise and income tax assessments from the Brazilian tax author-
ities asserting that the establishment in 1995 of separate manu-
facturing 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 $117.5 at the exchange rate on December 31,
2007, plus penalties and accruing interest totaling approximately
$216.6 at the exchange rate on December 31, 2007. In July
2003, a first-level appellate body rejected the basis for income
tax assessments representing approximately 77% of the total
assessment, or $257.9 (including interest). In March 2004, that
rejection was confirmed in a mandatory second-level appellate
review. The remaining assessments relating to excise taxes
(approximately $76.2) were not affected and are awaiting a
decision at the first administrative level. In December 2003, an
additional assessment was received in respect of excise taxes for
the balance of 1998, totaling approximately $153.9 at the
exchange rate on December 31, 2007, and asserting a different
theory of liability based on purported market sales data. In Jan-
uary 2005, an unfavorable 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
$340.5 at the exchange rate on December 31, 2007, and assert-
ing the same theory of liability as in the December 2003 assess-
ment. We appealed that assessment. In September 2005, an
unfavorable first administrative level decision was received with
respect to the appeal of the December 2004 assessment, and a
further appeal is being taken. The assessments issued in 2003
and 2004 are awaiting a decision at the second administrative
level. In the event that assessments are upheld in the earlier
stages of review, it may be necessary for us 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 we believe that it is
appropriate, both operationally and legally, and that the assess-
ments are unfounded. This matter is being vigorously contested
and in the opinion of our outside 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 our consolidated financial position, results of
operations or cash flows is correspondingly remote.
Kendall v. Employees’ Retirement Plan of Avon Products and the
Retirement Board is a purported class action commenced in April
2003 in the United States District Court for the Southern District
of New York. Plaintiff is a retired employee of Avon who, before
retirement, had been on paid disability leave for approximately
19 years. The initial complaint alleged that the Employees’
Retirement Plan of Avon Products (the “Retirement Plan”) vio-
lated the Employee Retirement Income Security Act (“ERISA”)
and, as a consequence, unlawfully reduced the amount of plain-
tiff’s pension. Plaintiff sought a reformation of the Retirement
Plan and recalculation of benefits under the terms of the Retire-
ment Plan, as reformed for plaintiff and for the purported class.
In November 2003, plaintiff filed an amended complaint alleging
additional Retirement Plan violations of ERISA and seeking,
among other things, elimination of a social security offset in the
Retirement Plan. The purported class includes “all Plan partic-
ipants, whether active, inactive or retired, and their beneficiaries
and/or Estates, with one hour of service on or after January 1,
1976, whose accrued benefits, pensions or survivor’s benefits
have been or will be calculated and paid based on the Plan’s
unlawful provisions.” In February 2004, we filed a motion to
dismiss the amended complaint. In September 2007, the trial
court granted our motion to dismiss and plaintiff thereafter
appealed that decision to the United States Court of Appeals for
the Second Circuit. While it is not possible to predict the out-
come of litigation, management believes that there are merito-
rious defenses to the claims asserted and that this action should
not have a material adverse effect on our consolidated financial
position, results of operations or cash flows. This action is being
vigorously contested.
In August 2005, we reported the filing of class action complaints
for alleged violations of the federal securities laws in actions
entitled Nilesh Patel v. Avon Products, Inc. et al. and Michael