AVON PRODUCTS FOUNDATION, INC. FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004
AVON PRODUCTS FOUNDATION, INC. FINANCIAL STATEMENTS DECEMBER 31, 2005
TABLE OF CONTENTS
Page Independent Auditors' Report Financial Statements Statements of Financial Position Statements of Activities Statements of Functional Expenses Statements of Cash Flows Notes to Financial Statements 1
2 3 4 5 6-12
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, 2005, and the related statements of activities, functional expenses and cash flows for the year then ended. These financial statements are the responsibility of the Foundation's management. 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 2004 financial statements and, in our report dated April 7, 2005 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, 2005, and the changes 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 February 28, 2006
500 Mamaroneck Avenue, Harrison, New York 10528 914.381.8900 tel 914.381.8910 fax www.odmd.com
AVON PRODUCTS FOUNDATION, INC. STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 2005 (with comparative amounts as of December 31, 2004) ASSETS 2005 Cash and cash equivalents Pledges receivable, net of allowance for uncollectible pledges of $124,493 in 2005 and $116,264 in 2004 Other receivables Prepaid expenses Due from Avon Products, Inc. Deferred program costs Total assets $ 42,183,266 Restated 2004 $ 64,950,783
634,841 135,752 50,000 328,881 9,040,511 $ 52,373,251
44,361 417,984 50,000 1,176,189 7,004,692 $ 73,644,009
LIABILITIES AND NET ASSETS Liabilities Accounts payable and accrued expenses Due to Avon Products, Inc. Grants payable, net Total liabilities Net assets Unrestricted Temporarily restricted Total net assets Total liabilities and net assets
$
327,788 61,804 12,707,529 13,097,121
$
665,317 702,842 28,171,420 29,539,579
831,016 38,445,114 39,276,130 $ 52,373,251
4,973,247 39,131,183 44,104,430 $ 73,644,009
See notes to financial statements. 2
AVON PRODUCTS FOUNDATION, INC. STATEMENTS OF ACTIVITIES YEAR ENDED DECEMBER 31, 2005 (with summarized totals for the year ended December 31, 2004)
Unrestricted Revenue Special events income Contributions from Avon: Special Events Breast Cancer Crusade Scholarship/Women's Empowerment Domestic Violence Emergency Relief Fund General Support - In-Kind 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 Scholarship/Women's Empowerment Domestic Violence Emergency Relief Fund Total program expenses Supporting Services Management and general Fundraising Total supporting service Total expenses Change in net assets before litigation settlement Litigation Settlement Change in net assets Net assets, beginning of year, as restated Net assets, end of year $ $ 1,629,971 3,881,197 1,855,293 311,062 48,345,952 1,328,015 57,351,490 35,851,928 1,858,823 1,031,872 2,705,347 41,447,970 4,067,465 8,478,286 12,545,751 53,993,721 3,357,769 7,500,000 (4,142,231) 4,973,247 831,016
2005 Temporarily Restricted $ 33,885,922 4,007,779 5,505,181 1,660,000 941,327 2,171,425 668,264 148,000 (48,345,952) (1,328,015) (686,069) (686,069) (686,069) 39,131,183 $ 38,445,114
2004 Total $ 35,515,893 4,007,779 5,505,181 1,660,000 941,327 2,171,425 3,881,197 668,264 1,855,293 459,062 56,665,421 35,851,928 1,858,823 1,031,872 2,705,347 41,447,970 4,067,465 8,478,286 12,545,751 53,993,721 2,671,700 7,500,000 (4,828,300) 44,104,430 $ 39,276,130 Total $ 35,925,045 3,189,796 6,514,016 1,660,000 300,000 172,636 5,352,241 1,328,015 846,521 370,641 55,658,911 29,968,854 1,703,876 817,167 884,706 33,374,603 5,244,687 8,303,428 13,548,115 46,922,718 8,736,193 8,736,193 35,368,237 $ 44,104,430
See notes to financial statements. 3
AVON PRODUCTS FOUNDATION, INC. STATEMENTS OF FUNCTIONAL EXPENSES YEAR ENDED DECEMBER 31, 2005 (with summarized totals for the year ended December 31, 2004) Program Services Scholarship/ Domestic Women's Violence Empowerment Fund $ 1,688,608 1,688,608 107,664 5,413 2,127 7,993 17,052 6,960 18,463 4,543 170,215 1,858,823 $ 532,035 532,035 306,428 16,737 6,576 24,715 52,725 21,520 57,088 14,048 499,837 Supporting Services Emergency Relief Fund $ 2,566,904 $ Management and General $ 651,269 6,384 13,911 46,278 2,316 289,300 22,981 5,704 649,789 78,640 1,766,572 54,767 2,865 1,124 4,226 9,016 3,680 2,222,813 2,402 2,300,893 4,067,465 Total Fundraising $ 917,030 546,420 283,820 123,052 370,055 486,423 290,030 3,237,959 1,784,813 85,901 87,428 3,529 41,343 $ Total 651,269 917,030 552,804 297,731 169,330 370,055 486,423 292,346 3,527,259 1,784,813 108,882 93,132 653,318 78,640 41,343 $ 2005 651,269 30,510,790 1,229,983 552,804 305,725 487,181 370,055 4,756,672 275,270 2,877,195 4,327,345 2,742,946 108,882 131,584 653,318 78,640 52,865 $ 2004 621,236 22,936,577 1,042,201 810,078 259,756 434,140 453,680 5,389,507 271,862 1,478,115 3,580,665 3,375,526 73,539 128,563 591,067 78,925 45,040
Breast Cancer Crusade Staffing Grants Equipment Communications Travel and meals Supplies Facilities Public awareness Public relations Printing Professional services Other Services Insurance Taxes and licenses Bank fees Agency Labor Other Total direct expenses Staffing Communications Travel and meals Supplies Facilities Public awareness Public relations Professional services Agency Labor Total in-kind expenses Total expenses $ 25,723,243 312,953 7,994 317,851 4,270,249 275,270 2,584,849 800,086 958,133 38,452 11,522
Total 30,510,790 312,953 7,994 317,851 4,270,249 275,270 2,584,849 800,086 958,133 38,452 11,522
$ 35,300,602 $ 319,223 18,044 7,088 26,645 80,438 23,200 61,544 15,144 551,326
$ $
$ $
$ 2,566,904 $ 85,956 4,541 1,785 6,707 14,308 5,840 15,493 3,813 138,443
$ 40,088,149 $ 819,271 44,735 17,576 66,060 164,523 57,520 152,588 37,548 1,359,821
$ $
$ 8,257,803 $ 123,418 8,400 3,300 12,404 26,461 10,800 28,650 7,050 220,483
$ 10,024,375 $ 178,185 11,265 4,424 16,630 35,477 14,480 2,251,463 9,452
$ 50,112,524 $ 997,456 56,000 22,000 82,690 200,000 72,000 2,404,051 47,000
$ 41,570,477 $ 918,940 56,073 57,000 160,000 82,690 148,301 157,000 3,727,237 45,000
$
$ $
$
$
$
$ $
$
$ 2,521,376 $ 12,545,751
$ 3,881,197 $ 53,993,721
$ 5,352,241 $ 46,922,718
$ 35,851,928
$ 1,031,872
$ 2,705,347
$ 41,447,970
$ 8,478,286
See notes to financial statements. 4
AVON PRODUCTS FOUNDATION, INC. STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, 2005 (with comparative amounts for the year ended December 31, 2004)
2005 Cash flows from operating activities Change in net assets Adjustments to reconcile change in net assets to net cash (used in) operating activities Net changes in operating assets and liabilities Pledges receivable, net Other receivable Prepaid expense Due from Avon Products, Inc. Deferred costs Accounts payable and accrued expenses Due to Avon Products, Inc. Grants payable, net Net cash (used in) operating activities Net decrease in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year
2004
$ (4,828,300)
$ 8,736,193
(590,480) 282,232 847,308 (2,035,819) (337,529) (641,038) (15,463,891) (22,767,517) (22,767,517) 64,950,783 $ 42,183,266
124,163 (88,056) (50,000) 1,980,040 (854,192) (443,835) 178,471 (12,801,271) (3,218,487) (3,218,487) 68,169,270 $ 64,950,783
See notes to financial statements. 5
AVON PRODUCTS FOUNDATION, INC. NOTES TO FINANCIAL STATEMENTS 1. Organization Avon Products Foundation, Inc. (the "Foundation") was incorporated in the State of New York in 1955 by Avon Products, Inc. (“Avon”). The mission of the Foundation is to improve the lives of women and it brings this mission to life through two key philanthropic pillars: breast cancer and domestic violence. The Foundation also manages scholarships and women’s empowerment programs and special emergency relief funds for Avon Products, Inc. The Foundation is treated as a public charity and 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 The Avon Breast Cancer Crusade funds breast cancer education, awareness, outreach programs, medical research and programs that assist people diagnosed with breast cancer, particularly the underserved, with services to improve their access to clinical care. The Foundation received its financial support from Avon and the general public through the Avon Walk for Breast Cancer (“AWBC”), other special events and donations. b. Domestic Violence In its comitment to ending domestic violence, the Foundation supports awareness, education, direct services and prevention programs. In July 2004, the Foundation announced the new Speak Out Against Domestic Violence program, which expanded the domestic violence program and developed new community outreach and support for victims. c. Scholarships/Women’s Empowerment Scholarships The Foundation has a U.S. college scholarship program for children of Avon associates, Avon independent sales representatives, children and grandchildren of Avon independent sales representatives and in 2005 for children residing in and around the Newark, Delaware and Suffern, New York school districts. Economic Advancement The Foundation supports a range of women’s empowerment causes, including programs that advance women's issues, including career development mentoring, educational support, counseling and life-skills training.
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AVON PRODUCTS FOUNDATION, INC. NOTES TO FINANCIAL STATEMENTS (Continued) 1. Organization (Continued) d. Emergency Relief Funds Through donations from Avon and the sale of selected Avon Products from time to time, the Foundation provides support in emergency and crisis situations, such as the following: Heart of Asia Relief Fund In response to the tsunami tragedy in Asia, the Foundation created the Heart of Asia Relief Fund in late 2004 to assist in the relief and rebuilding efforts. Support was directed to longterm aid organizations that provide medical care, shelter, food distribution, education for children and help to reunite families and create stronger communities. Yellow Ribbon Fund In response to the military action in Iraq and Afghanistan, the Foundation established the Yellow Ribbon Fund in 2003 to provide direct financial assistance and emotional support to the families who have lost loved ones in the line of duty and to armed services members who suffered injuries in the line of duty. Funds are directed to various institutions and programs that provide support, including counseling, rehabilitation, housing for families while recuperating service people undergo treatment, and education for those wounded and their families. Heart of America In an effort to assist the victims of the September 11th tragedies, the Foundation established the Avon Foundation Heart of America Charity in 2001 for the benefit of the children affected by the events of September 11th. These funds were directed to educational institutions, after-school programs and children's programs that will provide counseling, safety education, and childcare. In 2005 in response to the devastation of Hurricanes Katrina and Rita, the Heart of America campaign was renewed with the sale of a special keychain. Support has been directed to recovery and rebuilding efforts, as well as to domestic violence and breast cancer victims and causes that suffered relocation or damages as a result of the unprecedented storms. 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, 2005.
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AVON PRODUCTS FOUNDATION, INC. NOTES TO FINANCIAL STATEMENTS (Continued) 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. Cash and Cash Equivalents The Foundation considers all highly liquid investments with a maturity of three months or less at the time of purchase 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, 2004 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, which generally approximates the rate of the two year treasury bill. Public Awareness Public awareness costs consisted primarily of television, radio, direct-mail campaigns, local and national print and point-of-sale materials. The Foundation expensed public awareness costs as incurred. At December 31, 2005, public awareness expense was $4,756,672.
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AVON PRODUCTS FOUNDATION, INC. NOTES TO FINANCIAL STATEMENTS (Continued) 3. Reclassifications and Change in Presentation of Prior Years Net Assets Certain amounts in the 2004 summarized comparative information have been reclassified to conform with 2005 financial statement presentations. During the years from 2000 through 2004, the Foundation erroneously classified certain in-kind expenses as expenses satisfying the requirements for release of temporarily restricted revenue when in fact the related in-kind contribution had already been classified as unrestricted revenue. The cumulative effect of this resulted in a $11,303,559 overstatement of unrestricted net assets, and a $11,303,559 understatement of temporarily restricted net assets. The financial statements for 2004 have been retroactively reclassified for the changes from the amounts previously reported. There is no change in the total net assets as of December 31, 2004. 4. Concentration Risk Financial instruments that potentially subject the Foundation to concentration of credit risk consist principally of cash and cash equivalents. The Foundation places its cash with high quality financial institutions. Cash accounts at banks are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $100,000. Amounts in excess of the insured limits were approximately $5,765,000 at December 31, 2005. Cash equivalents consist of investments in money market funds with two money managers the balances of which totaled approximately $36,580,000 at December 31, 2005. The Foundation monitors this risk on a regular basis. 5. Related Party Transactions Contributions Avon made a pledge of $14,285,712 to the Foundation in 2005. The Foundation received $13,956,831 of this amount during the year. The balance of $328,881 is reflected as a receivable at December 31, 2005. This receivable was subsequently collected in 2006. The Foundation under an administrative services arrangement has outstanding obligations to Avon for reimbursement of the salaries, accrued compensated absences and other expenses of the finance department amounting to $61,804 as of December 31, 2005.
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AVON PRODUCTS FOUNDATION, INC. NOTES TO FINANCIAL STATEMENTS (Continued) 5. Related Party Transactions (Continued) In-Kind Contributions Avon provides the Foundation with a substantial amount of support including the following: Staffing $ 997,456 Travel & Meals 56,000 Supplies 22,000 Facilities 82,690 Public Awareness 200,000 Public Relations 72,000 Professional Service 2,404,051 Agency Labor 47,000 $ 3,881,197 The support of $3,881,197 is reflected in the financial statements as contributions and expenses for the year ended December 31, 2005. The Foundation also received valuable management support from the Board of Directors and Associates of Avon Products, Inc. which do not meet the requirements for measurement and recognition in the financial statements. 6. Special Events One fundraising program in 2005 was the Avon Walk for Breast Cancer (“AWBC”) comprised of eight weekend fundraising walks in the United States. A second fundraising th program in 2005 was the 50 Anniversary gala. In 2005, all special events provided the Foundation with total income of $40,851,687, $36,843,908 from the public (including $1,328,015 of 2005 special events income pledged in 2004) and $4,007,779 from Avon. 7. Joint Costs The Foundation conducted activities that included direct-mail campaigns and special events. The costs of conducting those activities included a total of $10,628,487 of joint costs. These joint costs were allocated as follows: Breast Cancer Crusade Scholarships/Women’s Empowerment Domestic Violence Emergency Relief Fund Management and General Fundraising Total $ 8,322,589 159,156 433,472 127,381 87,841 1,498,048 $ 10,628,487
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AVON PRODUCTS FOUNDATION, INC. NOTES TO FINANCIAL STATEMENTS (Continued) 8. Grants Payable The Foundation has entered into longer-term commitments with certain research/care organizations. Payments to these organizations at December 31, 2005 are due to be made as follows: Less than one year One to three years Less: Present value discount Grants payable, net $ 11,023,590 1,758,100 12,781,690 74,161 $ 12,707,529
9.
Temporarily Restricted Net Assets Temporarily restricted net assets are available as follows: Time restriction: Breast Cancer Crusade Purpose restriction: Breast Cancer Crusade Scholarships/Women’s Empowerment Domestic Violence Emergency Relief Fund $ 668,264 35,909,634 498,316 441,326 927,574 $ 38,445,114 The time restriction relates to contributions received and pledges made towards the 2006 events received in 2005.
10.
Deferred Program Costs Expenses related to the 2006 events have been reflected as deferred program costs at December 31, 2005.
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AVON PRODUCTS FOUNDATION, INC. NOTES TO FINANCIAL STATEMENTS (Continued) 11. Tuition Commitments The Foundation sponsors multiyear scholarship programs for children of Avon associates and in 2005 for children residing in and around the Newark, Delaware and Suffern, New York school districts. 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 $270,200. 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. 12. Contingencies The Foundation has been a defendant in an arbitration proceeding brought by Pallotta Team Works (“plaintiff”) in September 2002, before Judicial Arbitration and Mediation Services, Inc. The plaintiff asserted claims arising out of the Foundation’s decision to use another party to conduct breast cancer fundraising events. In July 2005 the arbitrator issued a Partial Final Award in this matter, awarding the plaintiff $3 million in net damages, after an offset for Foundation counterclaims. The arbitrator also instructed the parties to reach agreement on three outstanding issues: (i) pre-award interest; (ii) costs and attorney’s fees; and (iii) possible liabilities under the plaintiff’s lease agreements. In October 2005 the Foundation entered into a settlement with the plaintiff and paid the plaintiff $7.5 million in exchange for a release of the plaintiff’s claims. 13. Subsequent Event On February 27, 2006, Avon Products, Inc. authorized a special contribution of $5,000,000 to the Foundation. This contribution will be reflected in the Foundation's financial statements when paid.
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