AVON PRODUCTS FOUNDATION, INC. INDEPENDENT AUDITORS’ REPORT ON FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2003 (WITH COMPARATIVE TOTALS FOR 2002)
Avon Products Foundation, Inc. Financial Statements December 31, 2003
TABLE OF CONTENTS PAGE (s) Independent auditors' report FINANCIAL STATEMENTS: Statement of financial position Statement of activities Statement of functional expenses Statement of cash flows Notes to financial statements 2 3 4 5 6-12 1
INDEPENDENT AUDITORS' REPORT The Board of Directors Avon Products Foundations, Inc. We have audited the accompanying statement of financial position of Avon Products Foundation, Inc. (the “Foundation”) as of December 31, 2003, and the related statements of activities, functional expenses and cash flows for the year then ended. These financial statements are the responsibility of the management of the Foundation. Our responsibility is to express an opinion on these financial statements based on our audit. The prior year summarized comparative information has been derived from the Foundation’s 2002 financial statements and, in our report dated July 28, 2003, we expressed an unqualified opinion on those financial statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Avon Products Foundation, Inc. as of December 31, 2003, and the change in its net assets and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
New York, New York April 16 , 2004
Avon Products Foundation, Inc. STATEMENT OF FINANCIAL POSITION December 31, 2003 (With comparative figures for 2002)
2003 ASSETS Cash and cash equivalents (Notes 2 and 3) Pledges receivable, net of allowance for uncollectible pledges of $20,000 in 2003 and $143,000 in 2002 Other receivables Due from Avon Products, Inc. (net) (Note 4) Deferred costs (Note 6) Total assets
2002
$
68,169,270
$
97,807,210
168,524 329,928 2,631,858 6,150,500 $ 77,450,080
1,174,802 4,668,829 $ 103,650,841
LIABILITIES AND NET ASSETS Liabilities: Accounts payable and accrued expenses Grants payable, net (Note 7) Total liabilities Net Assets: Unrestricted Temporarily restricted (Note 8) Total Net Assets Total Liabilities and Net Assets
$
1,109,152 40,972,691 42,081,843
$
565,555 58,165,308 58,730,863
15,021,357 20,346,880 35,368,237 $ 77,450,080
13,930,075 30,989,903 44,919,978 $ 103,650,841
The accompanying notes are an integral part of these financial statements. -2-
Avon Products Foundation, Inc. STATEMENT OF ACTIVITIES For the year ended December 31, 2003 (With comparative totals for 2002)
2003 Temporarily Restricted 2002 Total Total
Unrestricted Revenue: Special events income (Note 5) Contributions from Avon: Avon Walk for Breast Cancer - Special Events (Note 5) General Support - In-Kind Breast Cancer Crusade - Pink Ribbon Women's Economic Empowerment Yellow Ribbon Fund Heart of America Children's Charity Pledges Interest income Other income Net assets released from restrictions: Satisfaction of purpose restriction Satisfaction of time restriction Total revenue Program Services: Breast Cancer Crusade Women's Economic Empowerment Yellow Ribbon Fund Heart of America Children's Charity Total program expenses Supporting Services: Management and general Fundraising Total supporting service Total expenses Change in net assets Net assets, beginning of year Net assets, end of year $
$
-
$
26,928,695
$
26,928,695
$ 142,171,799
8,009,208 777,227 287,650 51,732,397 145,619 60,952,101
3,600,656 5,100,000 1,858,246 2,900,417 493,113 353,866 (51,732,397) (145,619) (10,643,023)
3,600,656 8,009,208 5,100,000 1,858,246 2,900,417 493,113 353,866 777,227 287,650 50,309,078
4,510,021 2,491,821 145,619 1,139,810 166,732 150,625,802
38,298,043 1,668,077 1,000,000 534,426 41,500,546
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38,298,043 1,668,077 1,000,000 534,426 41,500,546
44,586,325 1,996,555 2,705,864 49,288,744
8,128,421 10,231,852 18,360,273 59,860,819 1,091,282 13,930,075 15,021,357 $
(10,643,023) 30,989,903 20,346,880 $
8,128,421 10,231,852 18,360,273 59,860,819 (9,551,741) 44,919,978 35,368,237 $
71,998 71,852,150 71,924,148 121,212,892 29,412,910 15,507,068 44,919,978
The accompanying notes are an integral part of these financial statements.
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Avon Products Foundation, Inc. STATEMENT OF FUNCTIONAL EXPENSES For the year ended December 31, 2003 (With comparative totals for 2002)
Breast Cancer Crusade Salaries and benefits * $ 1,330,454 Grants 27,109,809 Special events * 335,329 Equipment 341,337 Communications * 291,377 Travel and meals * 133,492 Supplies * 126,840 Facilities * 128,900 Advertising 5,423,601 Public relations 578,823 Printing 834,318 Professional services * 529,129 Event services 1,033,242 Insurance Taxes and licenses Bank fees Bad debt 12,840 Others * 88,552 Total expenses $ 38,298,043
Program Services Women's Yellow Economic Ribbon Empowerment Fund $ 90,686 1,406,754 1,312 36,367 5,034 28,942 47,326 51,656 $ 1,000,000 -
Supporting Services Heart of America Children's Charity $ 12,955 497,096 188 5,195 718 4,134 6,761 7,379 534,426 M anagement and General $ 488,892 111,468 215,996 1,377 26,162 3,678 350 1,915 46,128 5,925,617 361,014 23,716 116,385 655,496 150,227 Total Fundraising $ 1,585 2,179,968 231,724 490,487 244,698 415,738 4,886 597,062 3,527,147 2,466,849 67,940 3,768 $ Total 488,892 113,053 2,395,964 233,101 516,649 248,376 416,088 4,886 1,915 643,190 9,452,764 2,827,863 91,656 116,385 655,496 153,995 2003 $ 1,922,987 30,013,659 448,382 2,737,301 525,978 691,703 380,968 578,064 5,428,487 580,738 1,477,508 10,035,980 3,861,105 91,656 116,385 655,496 12,840 301,582 $ 59,860,819 $ 2002 1,643,503 46,088,290 72,102,150 46,977 24,413 82,690 749,253 34,241 20,296 107,704 143,207 170,168
Total $ 1,434,095 30,013,659 335,329 341,337 292,877 175,054 132,592 161,976 5,423,601 578,823 834,318 583,216 1,033,242 12,840 147,587 $ 41,500,546
$ 1,668,077
$ 1,000,000
$
$ 8,128,421
$ 10,231,852
$ 18,360,273
$ 121,212,892
* See Note 4 regarding in-kind contributions.
The accompanying notes are an integral part of these financial statements.
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Avon Products Foundation, Inc. STATEMENT OF CASH FLOWS For the year ended December 31, 2003 (With comparative figures for 2002)
2003 Cash flows from operating activities: Change in net assets Adjustments to reconcile change in net assets to net cash (used in) provided by operating activities: Decrease in pledges receivable, net Decrease in advances to event producer (Increase) decrease in other receivable Increase in due from Avon Products, Inc. (net) (Increase) decrease in deferred costs Increase in accounts payable and accrued expenses (Decrease) increase in grants payable, net Net cash (used) provided by operating activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year $ $ (9,551,741) $
2002 29,412,910
1,006,278 (329,928) (2,631,858) (1,481,671) 543,597 (17,192,617) (29,637,940) (29,637,940) 97,807,210 68,169,270 $
1,013,293 6,815,763 122,188 2,826,199 548,035 14,586,225 55,324,613 55,324,613 42,482,597 97,807,210
The accompanying notes are an integral part of these financial statements. -5-
Avon Products Foundation, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 2003 NOTE 1. ORGANIZATION: Avon Products Foundation, Inc. (the "Foundation") was incorporated in the State of New York in 1955 by Avon Products, Inc. (“Avon”). The Foundation became a public charity in 2001. The primary purpose of the Foundation is to support organizations and programs that provide women and girls with economic opportunity and to fund access to care and finding a cure for breast cancer. The Foundation is exempt from Federal income taxes pursuant to Section 501(c) (3) of the Internal Revenue Code. Programs: The major program activities of the Foundation are: a. Breast Cancer Crusade The Avon Breast Cancer Crusade funds breast cancer education awareness and outreach programs and medical research and programs that assist people diagnosed with breast cancer, particularly the underserved, with financial assistance and other enabling services to improve their access to clinical care. In 2003, the Foundation received its financial support from Avon and the general public through the newly launched Avon Walk for Breast Cancer (“AWBC”). This weekend event was designed to raise awareness and funds in eight major cities across the United States. Funds raised by AWBC were awarded as grants from the Foundation. b. Women’s Economic Empowerment The Foundation supports women and girls in many ways, including career guidance and training, community programs against domestic violence, mentoring, shelters, counseling and other health and economic opportunity programs. The Foundation has a Scholarship program for children of Avon associates and children in communities where Avon has facilities to provide tuition awards of up to $3,000 annually to selected high school students who have been admitted to accredited colleges and universities in the United States.
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Avon Products Foundation, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 2003 NOTE 1. ORGANIZATION: (Continued) c. Heart of America Children’s Charity In an effort to assist the victims of the September 11th tragedies, the Foundation established the Avon Heart of America Children's Charity in 2001. A pin called "Heart of America" was created and sold through Avon. Avon made a contribution of $2.5 million in 2002 and $493,113 in 2003 from the profits to the Avon Heart of America Children's Charity to be disbursed by the Foundation for the benefit of the children affected by the events of September 11th. These funds were directed to educational institutions, afterschool programs and children's programs that will provide counseling, safety education, and childcare. d. Yellow Ribbon Fund In response to the military action in Iraq, the Foundation established the Yellow Ribbon Fund in 2003. A new pin called “The Yellow Ribbon Pin” was created and sold through Avon. Avon made a contribution of $2.9 million in 2003 from the profits to the Yellow Ribbon Fund to provide direct financial assistance and emotional support to the families whose loved ones are far from home or to the families who have lost loved ones in the line of duty. Funds may also be directed to various institutions and programs that provide counseling and education to these families. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation The financial statement presentation is in conformity with accounting principles generally accepted in the United States of America for nonprofit organizations, which requires the Foundation to report information regarding its financial position and activities according to three classes of net assets: unrestricted, temporarily restricted, and permanently restricted net assets. There are no permanently restricted net assets as of December 31, 2003.
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Avon Products Foundation, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 2003 NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued) Functional Allocation of Expenses The costs of providing the various programs and supporting services have been summarized on a functional basis in the statement of activities. Accordingly, certain costs have been allocated among the programs and supporting services in reasonable ratios determined by management. Certain 2002 special event expenses were not presented on the statement of functional expenses by their natural classification due to incomplete information provided by the previous consultant. Cash and Cash Equivalents The Foundation considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates. Comparative Data The financial statements include prior-year summarized comparative information in total but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with accounting principles generally accepted in the United States of America. Accordingly, such information should be read in conjunction with the Foundation’s financial statements for the year ended December 31, 2002 from which the summarized information was derived. Grants Grants are recorded when a commitment is made and approved by the Board of Directors. Multi-year grants are recorded at present value using the risk-free interest rate.
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Avon Products Foundation, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 2003 NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued) Advertising Advertising costs consisted primarily of direct-mail campaigns, local and national print and point-of-sale materials. The Foundation expensed advertising costs as incurred. At December 31, 2003, advertising expense was $5,428,487. NOTE 3. CONCENTRATION RISK: The Foundation maintains cash balances at financial institutions insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $100,000. The cash in these accounts from time to time exceeds the Federal Deposit Insurance Coverage and subjects the Foundation to concentration of credit risk. However, the Foundation monitors this risk on a regular basis. NOTE 4. RELATED PARTY TRANSACTIONS: Contributions Avon made a pledge of $13,952,432 to the Foundation in 2003. The Foundation received $10,796,203 of this amount during the year. The balance of $3,156,229 is reflected as a receivable at December 31, 2003. This receivable was subsequently collected in 2004. The Foundation has outstanding obligations to Avon for reimbursement of the salaries, accrued compensated absences and other expenses of the finance department amounting to $524,371 as of December 31, 2003. In-Kind Contributions Avon provides the Foundation with a substantial amount of support, including office space, telephone, management and administrative personnel. This support of $8,009,208 is reflected in the financial statements as contributions and expenses for the year ended December 31, 2003. The net effect of these transactions does not result in a change in the Foundation’s net asset balances. The Foundation also received the support of its Board of Directors and creative staff as in-kind contributions from Avon, the value of which is not readily determinable and has not been reflected in the accompanying financial statements.
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Avon Products Foundation, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 2003 NOTE 5. SPECIAL EVENTS: The Avon Breast Cancer Crusade (the “Crusade”) was launched in the United States in 1993 by Avon to support non-profit, community-based breast cancer education and early detection programs. One fundraising program of the Crusade in 2003 was the AWBC; a new series of weekend fundraising walks in selected cities across the United States. The Foundation secured the services of a new consultant to produce the 2003 AWBC. The AWBC events are dedicated to supporting non-profit breast health programs in every region of the country and medical research at leading academic institutions. Grants to these types of organizations are awarded by the Foundation. There were eight AWBC events held in 2003. Total AWBC event expenses represent reimbursements by the Foundation to vendors for claims submitted, and bank fees and insurance costs related to the AWBC events. In addition, in 2003, the Foundation was the beneficiary of the Kiss Goodbye to Breast Cancer Awards concert. In 2003, special events provided the Foundation with total income of $30,529,351 (including $145,619 of 2003 special events income pledged in 2002), total expenses of $10,231,852, resulting in net proceeds of $20,297,499, representing 66% returned to breast cancer programs. During 2003, the Foundation made grants totaling $27,109,808 to various institutions, organizations and individuals involved in breast cancer research, education and support services. Subsequent to the end of the year, an additional $3,489,170 was awarded to beneficiaries. The Foundation conducted activities that included direct-mail campaigns and special events. The costs of conducting those activities included a total of $8,962,857 of joint costs. These joint costs were allocated as follows: Breast Cancer Crusade Fundraising Total NOTE 6. DEFERRED COSTS: During 2003, planning and preparation began for the 2004 season of AWBC events. The Foundation directs all aspects of this event. As a result, expenses related to the 2004 events have been reflected as deferred costs. Contributions received and pledges made towards the 2004 events have been recorded as temporarily restricted. -10$7,822,416 1,140,441 $8,962,857
Avon Products Foundation, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 2003 NOTE 7. GRANTS PAYABLE: The Foundation has entered into longer-term commitments with certain research/care organizations. Payments to these organizations at December 31, 2003 are due to be made as follows: Less than one year One to five years Less: Present value discount Grants payable, net NOTE 8. TEMPORARILY RESTRICTED NET ASSETS: Temporarily restricted net assets are available as follows: Time restriction: Breast Cancer Crusade Purpose restriction: Breast Cancer Crusade Women’s Economic Empowerment Yellow Ribbon Fund $ 353,866 17,902,428 190,169 1,900,417 $ 20,346,880 NOTE 9. TUITION COMMITMENTS: The Foundation sponsors a scholarship program for Avon associates and residents. The Foundation intends to provide continuing support for participating students until completion of their college education, contingent upon fulfilling certain requirements of the award. The anticipated future tuition cost for the students to complete their studies over a four-year period is approximately $289,500. The Foundation intends to obtain the necessary funds to support the participating students through future grants from Avon Products, Inc. The Scholarship program is administered by the Educational Testing Service. $ 23,550,001 17,827,164 41,377,165 404,474 $ 40,972,691
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Avon Products Foundation, Inc. NOTES TO FINANCIAL STATEMENTS December 31, 2003 NOTE 10. CONTINGENCIES: The 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”). The Pallotta arbitration demand asserts breach of contract, misappropriation of opportunity, tortuous interference with prospective contractual arrangement and unfair competition arising out of the Foundation’s decision to use another party to conduct breast cancer fundraising events, and seeks unspecified damages and attorneys’ fees. The arbitrator dismissed Pallotta’s misappropriation claim in January 2003, its unfair competition claim in February 2003 and its tortuous interference claim in July 2003. A hearing on the remaining claim commenced in July 2003. The Foundation believes that it has meritorious defenses to the claims asserted by Pallotta and has filed a number of counterclaims. The Foundation as a registered 501(c)(3) charity is a separate and distinct entity from Avon, which is not a party to these proceedings. Management or its counsel is unable to make a meaningful 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 financial statements of the Foundation.
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