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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- EXCHANGE ACT OF 1934
For the transition period from__________________ to _______________
Commission file number 333-23451
REV HOLDINGS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3933701
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
35 EAST 62ND STREET, NEW YORK, NEW YORK 10021
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212-572-8600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the registrant's common stock was 1,000
shares as of June 30, 2002, all of which were held by an affiliate of Mafco
Holdings Inc.
Total Pages - 28
REV HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
ASSETS 2002 2001
--------------- ---------------
Current assets: (Unaudited)
Cash and cash equivalents................................................. $ 32.0 $ 103.3
Marketable securities..................................................... - 2.2
Trade receivables, less allowances of $15.6
and $15.4, respectively............................................. 209.2 203.9
Inventories............................................................... 161.4 157.9
Prepaid expenses and other................................................ 45.5 45.6
--------------- ---------------
Total current assets................................................ 448.1 512.9
Property, plant and equipment, net.............................................. 131.6 142.8
Other assets.................................................................... 143.7 143.9
Intangible assets, net.......................................................... 198.1 198.5
--------------- ---------------
Total assets........................................................ $ 921.5 $ 998.1
=============== ===============
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current liabilities:
Short-term borrowings - third parties..................................... $ 22.6 $ 17.5
Accounts payable.......................................................... 88.3 87.0
Accrued expenses and other................................................ 260.0 285.4
--------------- ---------------
Total current liabilities........................................... 370.9 389.9
Long-term debt - third parties.................................................. 1,735.2 1,700.0
Long-term debt - affiliates..................................................... 33.5 28.6
Other long-term liabilities..................................................... 258.0 261.1
Stockholder's deficiency:
Common stock, par value $1.00 per share; 1,000
shares authorized, issued and outstanding........................... - -
Additional paid-in-capital................................................ 306.7 306.7
Accumulated deficit since June 24, 1992................................... (1,712.8) (1,627.1)
Accumulated other comprehensive loss...................................... (70.0) (61.1)
--------------- ---------------
Total stockholder's deficiency...................................... (1,476.1) (1,381.5)
--------------- ---------------
Total liabilities and stockholder's deficiency...................... $ 921.5 $ 998.1
=============== ===============
See Accompanying Notes to Unaudited Consolidated Condensed
Financial Statements.
2
REV HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------- ----------------------------------
2002 2001 2002 2001
----------------- ----------------- --------------- ----------------
Net sales.................................... $ 308.2 $ 322.1 $ 583.6 $ 635.7
Cost of sales................................ 119.8 143.0 228.8 274.6
----------------- ----------------- --------------- ----------------
Gross profit 188.4 179.1 354.8 361.1
Selling, general and administrative expenses. 180.8 182.5 347.5 359.4
Restructuring costs.......................... 3.2 7.9 7.2 22.5
----------------- ----------------- --------------- ----------------
Operating income (loss)................. 4.4 (11.3) 0.1 (20.8)
----------------- ----------------- --------------- ----------------
Other expenses (income):
Interest expense........................ 41.6 39.1 83.3 90.0
Interest income......................... (1.3) (0.6) (1.8) (1.5)
Amortization of debt issuance costs..... 1.9 1.2 3.8 3.9
Foreign currency losses (gains), net.... 2.4 0.2 1.8 (0.2)
Loss on sale of assets and brand, net... - 7.1 1.0 7.1
Miscellaneous, net...................... 0.2 - 0.9 0.8
----------------- ----------------- --------------- ----------------
Other expenses, net................ 44.8 47.0 89.0 100.1
----------------- ----------------- --------------- ----------------
Loss before income taxes..................... (40.4) (58.3) (88.9) (120.9)
Provision (benefit) for income taxes......... 1.0 1.3 (3.2) 1.8
----------------- ----------------- --------------- ----------------
Net loss..................................... $ (41.4) $ (59.6) $ (85.7) $ (122.7)
================= ================= =============== ================
See Accompanying Notes to Unaudited Consolidated Condensed
Financial Statements.
3
REV HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDER'S DEFICIENCY
AND COMPREHENSIVE LOSS
(DOLLARS IN MILLIONS)
ADDITIONAL ACCUMULATED
PAID-IN-CAPITAL OTHER TOTAL
(CAPITAL ACCUMULATED COMPREHENSIVE STOCKHOLDER'S
DEFICIENCY) DEFICIT LOSS (a) DEFICIENCY
--------------- ------------- ----------------- --------------
Balance, January 1, 2001 ............................ $ (391.8) $ (1,442.3) $ (29.8) $ (1,863.9)
Capital contribution from indirect parent....... 699.5 (d) 699.5
Net distribution from affiliate................. (0.9)(b) (0.9)
Comprehensive loss:
Net loss................................ (122.7) (122.7)
Currency translation adjustment......... (3.6)(c) (3.6)
Revaluation of foreign currency forward
exchange contracts...................... 0.6 0.6
--------------
Total comprehensive loss........................ (125.7)
--------------- ------------- ----------------- --------------
Balance, June 30, 2001............................... $ 306.8 $ (1,565.0) $ (32.8) $ (1,291.0)
=============== ============= ================= ==============
Balance, January 1, 2002............................. $ 306.7 $ (1,627.1) $ (61.1) $ (1,381.5)
Comprehensive loss:
Net loss................................ (85.7) (85.7)
Currency translation adjustment......... (8.4) (8.4)
Revaluation of foreign currency forward
exchange contracts...................... (0.5) (0.5)
--------------
Total comprehensive loss........................ (94.6)
--------------- ------------- ----------------- --------------
Balance, June 30, 2002............................... $ 306.7 $ (1,712.8) $ (70.0) $ (1,476.1)
=============== ============= ================= ==============
- --------------------
(a) Accumulated other comprehensive loss includes unrealized losses (gains)
on revaluations of foreign currency forward exchange contracts of $0.5
and $(0.6) as of June 30, 2002 and 2001, respectively, cumulative net
translation losses of $23.4 and $29.8 as of June 30, 2002 and 2001,
respectively, and adjustments for the minimum pension liability of $46.1
and $3.6 as of June 30, 2002 and 2001, respectively.
(b) Represents net distributions in capital from the Charles of the Ritz
business.
(c) The currency translation adjustment as of June 30, 2001 includes a
reclassification adjustment of $7.1 for realized losses on foreign
currency adjustments associated primarily with the sale of the Colorama
brand in Brazil.
(d) Represents primarily capital contributions from indirect parent to
cancel REV Holdings Senior Secured Discount Notes due 2001 (the "Old REV
Holdings Notes").
See Accompanying Notes to Unaudited Consolidated Condensed
Financial Statements.
4
REV HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
SIX MONTHS ENDED
JUNE 30,
-------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 2002 2001
------------- -------------
Net loss........................................................................ $ (85.7) $ (122.7)
Adjustments to reconcile net loss to net cash
(used for) provided by operating activities:
Depreciation and amortization.............................................. 60.1 62.4
Loss on sale of brand and assets, net...................................... 1.0 7.1
Amortization of debt discount.............................................. - 15.7
Change in assets and liabilities, net of acquisitions and dispositions:
(Increase) decrease in trade receivables.............................. (8.2) 5.8
Increase in inventories............................................... (4.8) (7.4)
Increase in prepaid expenses and
other current assets..................................... (0.6) (4.7)
Increase in accounts payable.......................................... 1.3 20.5
Decrease in accrued expenses and other
current liabilities...................................... (22.9) (4.6)
Purchase of permanent displays........................................ (34.6) (29.3)
Other, net............................................................ (12.9) (3.2)
------------- -------------
Net cash used for operating activities.......................................... (107.3) (60.4)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................ (4.8) (9.4)
Sale of marketable securities................................................... 1.8 -
Net proceeds from the sale of brand and certain assets.......................... - 35.2
------------- -------------
Net cash (used for) provided by investing activities............................ (3.0) 25.8
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings - third parties........................... 4.8 0.3
Proceeds from the issuance of long-term debt - third parties.................... 47.1 157.5
Repayment of long-term debt - third parties..................................... (14.0) (161.1)
Capital contribution from indirect parent....................................... - 22.0
Net distribution from affiliate................................................. - (0.9)
Payment of debt issuance costs.................................................. - (2.4)
Advance under the Keepwell Agreement............................................ 4.9 -
------------- -------------
Net cash provided by financing activities....................................... 42.8 15.4
------------- -------------
Effect of exchange rate changes on cash and cash equivalents.................... (3.8) (2.7)
------------- -------------
Net decrease in cash and cash equivalents.................................. (71.3) (21.9)
Cash and cash equivalents at beginning of period........................... 103.3 56.3
------------- -------------
Cash and cash equivalents at end of period................................. $ 32.0 $ 34.4
============= =============
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest.............................................................. $ 81.1 $ 68.4
Income taxes, net of refunds.......................................... 2.0 2.2
Supplemental schedule of noncash financing activities:
Noncash capital contribution from indirect parent to cancel the Old REV
Holdings Notes and pursuant to the amended tax sharing agreements.... $ - $ 677.5
See Accompanying Notes to Unaudited Consolidated Condensed
Financial Statements.
5
REV HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(1) BASIS OF PRESENTATION
REV Holdings Inc. (together with its subsidiaries, "REV Holdings" or
the "Company") is a holding company, formed in 1997, that conducts its business
exclusively through its indirect subsidiary, Revlon Consumer Products
Corporation and its subsidiaries (together, "Products Corporation"). Products
Corporation was formed in April 1992 and, on June 24, 1992, succeeded to the
assets and liabilities of the cosmetic and skin care, fragrances and personal
care products business of its then parent company, whose name was changed from
Revlon, Inc. to Revlon Holdings Inc. ("Holdings"). REV Holdings has had no
business operations of its own and its only material asset is its ownership of
approximately 83% of the outstanding shares of capital stock of Revlon, Inc.
(which represents approximately 97.3% of the voting power of those outstanding
shares), which, in turn, owns all of the capital stock of Products Corporation.
The Company is an indirect wholly owned subsidiary of Holdings and an indirect
wholly owned subsidiary of MacAndrews & Forbes Holdings Inc. ("MacAndrews
Holdings"), a corporation wholly owned indirectly through Mafco Holdings Inc.
("Mafco Holdings" and, together with MacAndrews Holdings, "MacAndrews & Forbes")
by Ronald O. Perelman.
The accompanying Consolidated Condensed Financial Statements are
unaudited. In management's opinion, all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation have been made.
The Unaudited Consolidated Condensed Financial Statements include the
accounts of the Company after elimination of all material intercompany balances
and transactions. The Company has made a number of estimates and assumptions
relating to the assets and liabilities, the disclosure of contingent assets and
liabilities and the reporting of revenues and expenses to prepare these
financial statements in conformity with accounting principles generally accepted
in the United States. Actual results could differ from those estimates. The
Unaudited Consolidated Condensed Financial Statements should be read in
conjunction with the consolidated financial statements and related notes
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
The results of operations and financial position, including working
capital, for interim periods are not necessarily indicative of those to be
expected for a full year.
In November 2001, the FASB Emerging Issues Task Force (the "EITF")
reached consensus on EITF Issue 01-9 entitled, "Accounting for Consideration
Given by a Vendor to a Customer or a Reseller of the Vendor's Products" (the
"Guidelines"), which addresses when sales incentives and discounts should be
recognized, as well as where the related revenues and expenses should be
classified in the financial statements. The Company adopted the earlier portion
of these new Guidelines (formerly EITF Issue 00-14) addressing certain sales
incentives effective January 1, 2001, and accordingly, all prior period
financial statements reflect the implementation of the earlier portion of the
Guidelines. The second portion of the Guidelines (formerly EITF Issue 00-25)
addresses vendor income statement characterization of consideration to a
purchaser of the vendor's products or services, including the classification of
slotting fees, cooperative advertising arrangements and buy-downs. Certain
promotional payments that were classified in SG&A expenses are now classified as
a reduction of net sales. The impact of the adoption of the second portion of
the Guidelines on the consolidated financial statements reduced both net sales
and SG&A expenses by equal and offsetting amounts. Such adoption did not have
any impact on the Company's reported operating loss or net loss. The Company
adopted the second portion of the Guidelines effective January 1, 2002, and
accordingly, all prior period financial statements reflect the implementation of
the second portion of the Guidelines.
In July 2001, the FASB issued Statement No. 141, Business Combinations,
and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting
6
REV HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
be used for all business combinations initiated after June 30, 2001, as well as
all purchase method business combinations completed after June 30, 2001.
Statement 141 also specifies criteria that must be met in order for intangible
assets acquired in a purchase method business combination to be recognized and
reported apart from goodwill. Statement 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of Statement 142. Statement 142 requires that intangible assets with
finite useful lives be amortized over their respective estimated useful lives to
their estimated residual values, and reviewed for impairment in accordance with
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
The Company adopted the provisions of Statement 141 in July 2001 and Statement
142 effective January 1, 2002. In connection with the adoption of Statement 142,
the Company performed a transitional goodwill impairment test as required and
has determined that no goodwill impairment existed at January 1, 2002. The
Company has also evaluated the lives of all of its intangible assets. As a
result of this evaluation, the Company has determined that none of its
intangible assets, other than goodwill, have indefinite lives and that the
existing useful lives are appropriate. (See Note 4).
In October 2001, the FASB issued Statement No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets. Statement 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The Statement also extends the reporting requirements to report separately as
discontinued operations, components of an entity that have either been disposed
of or classified as held for sale. The Company adopted the provisions of
Statement 144 effective January 1, 2002 and such adoption had no effect on its
financial statements.
Certain amounts in the prior year's financial statements have been
reclassified to conform to the current year's presentation.
2. INVENTORIES
JUNE 30, DECEMBER 31,
2002 2001
-------------- --------------
Raw materials and supplies............................... $ 49.3 $ 44.9
Work-in-process.......................................... 10.7 10.1
Finished goods........................................... 101.4 102.9
-------------- --------------
$ 161.4 $ 157.9
============== ==============
(3) OTHER ASSETS
The Company capitalizes the cost of permanent display fixtures and
amortizes such cost over the estimated useful life of the assets of three to
five years. Beginning in the first quarter of 2002, the Company decided to
roll-out new permanent display units, replacing existing permanent display
fixtures at an accelerated rate. As a result, the useful lives of those
permanent display fixtures to be replaced were shortened to their new estimated
useful lives, resulting in accelerated amortization of $6.9 and $9.7 during the
three months and six months ended June 30, 2002, respectively.
(4) INTANGIBLE ASSETS, NET
Intangible assets, net of $198.1 and $198.5 at June 30, 2002 and
December 31, 2001, respectively, consists of trademarks, net, patents, net and
goodwill, net. The amounts outstanding for these intangible assets at June 30,
2002 and December 31, 2001 were as follows: for trademarks, net, $6.8 and $6.8,
respectively; for patents, net, $5.4 and $5.8, respectively; and for goodwill,
net, $185.9 at both June 30, 2002 and December 31, 2001. Amortization expense
for the three-months and six-months ended June 30,
7
REV HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
2002 and 2001 was $0.4 and $0.8, respectively, and $2.3 and $4.6, respectively.
Amortization of goodwill ceased on January 1, 2002 upon adoption of Statement
142. Excluding amortization expense related to goodwill of $1.9 and $3.8
recognized during the three-months and six-months ended June 30, 2001,
respectively, net loss would have been $57.7 and $118.9, respectively. The
Company's intangible assets other than goodwill continue to be subject to
amortization, which is anticipated to be approximately $1.6 annually through
December 31, 2007.
(5) RESTRUCTURING AND OTHER COSTS, NET
During the third quarter of 2000, the Company initiated a new
restructuring program in line with the original restructuring plan developed in
late 1998, designed to improve profitability by reducing personnel and
consolidating manufacturing facilities. The 2000 restructuring program focused
on the Company's plans to close its manufacturing operations in Phoenix, Arizona
and Mississauga, Canada and to consolidate its cosmetics production into its
plant in Oxford, North Carolina. The 2000 restructuring program also includes
the remaining obligation for excess leased real estate in the Company's
headquarters, consolidation costs associated with the Company closing its
facility in New Zealand, and the elimination of several domestic and
international executive and operational positions, each of which were effected
to reduce and streamline corporate overhead costs. In the first quarter of 2001,
the Company recorded a charge of $14.6 related to previous restructuring
programs, as well as the 2000 restructuring program, principally for additional
employee severance and other personnel benefits, relocation and to consolidate
worldwide operations. In the second quarter of 2001, the Company continued to
implement the 2000 restructuring program and recorded a charge of $7.9,
principally for additional employee severance and other personnel benefits and
other costs related to the consolidation of worldwide operations.
During the second quarter of 2002 and the six months ended June 30,
2002, the Company continued to implement the 2000 restructuring program, as well
as other restructuring actions, and recorded a charge of $3.2 and $7.2,
respectively, principally for additional employee severance and other personnel
benefits, primarily resulting from reductions in the Company's worldwide sales
force, relocation and other costs related to the consolidation of worldwide
operations.
In connection with the 2000 restructuring program, termination benefits
for 2,436 employees were included in the Company's restructuring charges,
substantially all of whom have been terminated as of June 30, 2002. The
remaining employees from the 2000 restructuring program are expected to be
terminated within one year from the date of their notification.
Details of the activity described above during the six-month period
ended June 30, 2002 are as follows:
BALANCE UTILIZED, NET BALANCE
AS OF --------------------------- AS OF
1/1/02 EXPENSES, NET CASH NONCASH 6/30/02
----------- -------------- ------------ ---------- -------------
Employee severance and other
personnel benefits................. $ 15.1 $ 5.9 $ (11.5) $ - $ 9.5
Relocation............................... - 0.3 (0.3) - -
Leases and equipment write-offs.......... 7.4 0.7 (1.5) - 6.6
Other obligations........................ 0.3 0.3 (0.2) - 0.4
----------- ---------- ---------- ----------- -----------
$ 22.8 $ 7.2 $ (13.5) $ - $ 16.5
=========== ========== ========== =========== ===========
In connection with the 2000 restructuring program, in the beginning of
the fourth quarter of 2000, the Company decided to consolidate its manufacturing
facility in Phoenix, Arizona into its manufacturing facility in Oxford, North
Carolina. The plan was to relocate substantially all of the Phoenix equipment to
8
REV HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
the Oxford facility and commence production there over a period of approximately
nine months which would allow the Company to fully staff the Oxford facility and
to produce enough inventory through a combination of production in the Phoenix
and Oxford facilities to meet supply chain demand as the Phoenix facility
production lines were dismantled, moved across the country, and placed into
service at the Oxford facility. Substantially all production at the Phoenix
facility ceased by June 30, 2001, and the facility was sold. At the time the
decision was made the useful lives of the facility and production assets which
would not be relocated to the Oxford facility were shortened to the nine-month
period in which the Phoenix facility would continue production. The Company
began depreciating the net book value of the Phoenix facility and production
equipment in excess of their estimated salvage value over the estimated
nine-month useful life. This resulted in the recognition of increased
depreciation through June 30, 2001 of $6.1, which is included in cost of sales.
(6) GEOGRAPHIC INFORMATION
The Company manages its business on the basis of one reportable
operating segment. The Company is exposed to the risk of changes in social,
political and economic conditions inherent in foreign operations and the
Company's results of operations and the value of its foreign assets and
liabilities are affected by fluctuations in foreign currency exchange rates.
During the first quarter of 2002, to reflect the integration of
management reporting responsibilities, the Company reclassified Puerto Rico's
results from its international operations to its United States operations. The
geographic information reflects this change for both the 2002 and 2001 periods.
THREE MONTHS ENDED SIX MONTHS ENDED
GEOGRAPHIC AREAS: JUNE 30, JUNE 30,
------------------------------ ------------------------------
Net sales: 2002 2001 2002 2001
------------ ------------ ------------ ------------
United States.......................... $ 206.1 $ 205.5 $ 393.1 $ 408.0
Canada................................. 10.9 10.7 20.3 20.7
------------ ------------ ------------ ------------
United States and Canada............... 217.0 216.2 413.4 428.7
International.......................... 91.2 105.9 170.2 207.0
------------ ------------ ------------ ------------
$ 308.2 $ 322.1 $ 583.6 $ 635.7
============ ============ ============ ============
JUNE 30, DECEMBER 31,
Long-lived assets: 2002 2001
------------ ------------
United States.......................... $ 400.3 $ 411.1
Canada................................. 3.0 2.5
------------ ------------
United States and Canada............... 403.3 413.6
International.......................... 70.1 71.6
------------ ------------
$ 473.4 $ 485.2
============ ============
THREE MONTHS ENDED SIX MONTHS ENDED
CLASSES OF SIMILAR PRODUCTS: JUNE 30, JUNE 30,
------------------------------ ------------------------------
Net sales: 2002 2001 2002 2001
------------ ------------ ------------ ------------
Cosmetics, skin care and fragrances.... $ 193.7 $ 197.6 $ 368.9 $ 404.2
Personal care.......................... 114.5 124.5 214.7 231.5
------------ ------------ ------------ ------------
$ 308.2 $ 322.1 $ 583.6 $ 635.7
============ ============ ============ ============
9
REV HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(7) DISPOSITION
In February 2002, Products Corporation completed the disposition of its
subsidiaries that operated its marketing, sales and distribution business in
Belgium, the Netherlands and Luxembourg ("Benelux"). As part of this sale,
Products Corporation entered into a long-term distribution agreement with the
purchaser pursuant to which the purchaser distributes the Company's products in
Benelux. The purchase price consisted principally of the assumption of certain
liabilities and a deferred purchase price contingent upon future results of up
to approximately $4.7, which could be received over approximately a seven-year
period. In connection with the disposition, the Company recognized a pre-tax and
after-tax loss of $1.0 in the first quarter of 2002.
(8) DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, primarily foreign
currency forward exchange contracts, to reduce the exposure of adverse effects
of fluctuations in foreign currency exchange rates. These contracts, which have
been designated as cash flow hedges, were entered into primarily to hedge
anticipated inventory purchases and certain intercompany payments denominated in
foreign currencies, which have maturities of less than one year. Any
unrecognized income (loss) related to these contracts are recorded in the
Statement of Operations when the underlying transactions hedged are realized
(e.g., when inventory is sold or intercompany transactions are settled). During
2002, the Company entered into these contracts with a counterparty that is a
major financial institution, and accordingly the Company believes that the risk
of counterparty nonperformance is remote. The notional amount of the foreign
currency forward exchange contracts outstanding at June 30, 2002 was $27.2. The
Company recorded an accrued liability of $0.7 in the balance sheet, a foreign
exchange loss of $0.2 and a debit of $0.5 in Other Comprehensive Loss, which
represents the fair value of the foreign currency forward exchange contracts
outstanding at June 30, 2002.
(9) LONG-TERM DEBT
On February 12, 2001, REV Holdings issued $80.5 principal amount of its
12% Senior Secured Notes due 2004 (the "New REV Holdings Notes"), which were
issued in exchange for a like principal amount of the Senior Secured Discount
Notes due 2001 (the "Old REV Holdings Notes"). The New REV Holdings Notes bear
interest at 12% per year, payable semi-annually, and mature on February 1, 2004.
On March 15, 2001, an affiliate contributed $667.5 principal amount of Old REV
Holdings Notes to REV Holdings, which were delivered to the trustee for
cancellation and contributed $22.0 in cash to REV Holdings to retire the
remaining Old REV Holdings Notes at maturity. Upon cancellation, the indenture
governing the Old REV Holdings Notes was discharged.
REV Holdings has entered into a Keepwell Agreement with GSB Investments
Corp., one of its affiliates (the "Keepwell Agreement"), pursuant to which GSB
Investments Corp. has agreed to provide REV Holdings with funds in an amount
equal to any interest payments due on the New REV Holdings Notes, to the extent
that REV Holdings does not have sufficient funds on hand to make such payments
on the applicable due dates. However, the Keepwell Agreement is not a guarantee
of the payment of interest
10
REV HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
on the New REV Holdings Notes. The obligations of GSB Investments Corp. under
the Keepwell Agreement are only enforceable by REV Holdings, and may not be
enforced by the holders of the New REV Holdings Notes or the trustee under the
New Indenture (as hereinafter defined) for the New REV Holdings Notes. The
failure of GSB Investments Corp. to make a payment to REV Holdings under the
Keepwell Agreement will not be an event of default under the New Indenture.
Further, the New Indenture has no requirement that REV Holdings maintain the
Keepwell Agreement. In addition, although REV Holdings has the right to enforce
the Keepwell Agreement, there can be no assurance that GSB Investments Corp.
will have sufficient funds to make any payments to REV Holdings under the
Keepwell Agreement or that it will comply with its obligations under the
Keepwell Agreement.
As of March 31, 2002, GSB Investments Corp. owned 42,949,525 shares of
the common stock of Golden State Bancorp Inc. ("GSB"). On June 20, 2002, GSB
Investments Corp. dividended 22,868,801 shares of GSB common stock to its
parent. As of June 30, 2002, GSB Investments Corp. owned 20,080,724 shares of
GSB. At June 28, 2002, the last reported sale price of GSB common stock on the
New York Stock Exchange was $36.25 per share. All of the shares of GSB owned by
GSB Investments Corp. are pledged to secure forward contracts.
On May 21, 2002, GSB, Citigroup Inc. ("Citigroup") and a subsidiary of
Citigroup entered into an Agreement and Plan of Merger (the "GSB Merger
Agreement"). Pursuant to the GSB Merger Agreement and subject to the terms and
conditions set forth therein, GSB will merge with a subsidiary of Citigroup (the
"GSB Merger"), and, as a result of the GSB Merger, GSB will become a wholly
owned subsidiary of Citigroup. Upon consummation of the GSB Merger, Citigroup
will pay an amount equal to approximately $16.4 in cash and 0.5324 shares of
common stock, par value $0.01 per share, of Citigroup (the "Citigroup Common
Stock") for each share of GSB common stock. GSB's stockholders will be entitled
to elect to receive such merger consideration in Citigroup Common Stock or cash,
subject to certain limitations. The transaction is expected to close in the
fourth quarter of 2002. Since the mix of Citigroup Common Stock and cash to be
received by GSB Investments Corp. in the GSB Merger depends upon, among other
things, the market value of the Citigroup Common Stock prior to the closing of
the GSB Merger, the election to be made by GSB Investments Corp., the elections
made by all other GSB stockholders and limitations in the forward contracts to
which GSB Investments Corp. is a party, it is not possible at this time to
determine the mix of Citigroup Common Stock and cash to be received by GSB
Investments Corp. in the GSB Merger. In addition, at or about the time of the
GSB Merger, GSB Investments Corp. expects to receive shares of Citigroup Common
Stock as consideration for certain tax benefits realized by GSB. The number of
shares of Citigroup Common Stock to be received by GSB Investments Corp. for tax
benefits depends upon, among other things, the market value of Citigroup Common
Stock and the timing of the resolution of certain tax matters. All shares of
Citigroup Common Stock received by GSB Investments Corp. in connection with the
GSB Merger will be pledged to secure the forward contracts of GSB Investments
Corp. (excluding, however, the shares received for tax benefits). All cash
received by GSB Investments Corp. in connection with the GSB Merger is expected
to be advanced to an affiliate of GSB Investments Corp.
GSB has paid quarterly dividends of $0.10 per share since July 2000. If
GSB were to continue to pay quarterly dividends at this rate and GSB Investments
Corp. were to continue to own 20,080,724 shares of GSB, GSB Investments Corp.
would not have sufficient income from dividends paid on its GSB stock to make
the payments to REV Holdings that it might be required to make under the
Keepwell Agreement. Furthermore, GSB has only paid dividends at this rate since
July 2000 and there can be no assurance that GSB will continue to pay dividends
at this rate, if at all, or that GSB Investments Corp. will continue to own its
shares of the common stock of GSB or, after consummation of the GSB Merger, its
shares of Citigroup Common Stock. Citigroup has paid quarterly dividends, which
have increased from $0.12 per share in the first quarter of 2000 to $0.18 per
share in the second quarter of 2002. Due to the uncertainty regarding the number
of shares of Citigroup Common Stock that GSB Investments Corp. will receive in
the GSB Merger and in connection with certain tax benefits realized by GSB, it
is not possible to determine at this time whether GSB Investments Corp. would
have sufficient income from dividends paid on its Citigroup Common Stock to make
the payments to REV Holdings that it might be required to make
11
REV HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
under the Keepwell Agreement. Furthermore, there can be no assurance
that Citigroup will continue to pay dividends at this rate, if at all, or that
GSB Investments Corp. will continue to own the shares of Citigroup Common Stock
it receives in connection with the GSB Merger and the realization of tax
benefits by GSB.
If GSB Investments Corp. fails to comply with its obligations under the
forward contracts that are secured by the pledge of the GSB common stock, the
beneficiary of such pledge could enforce its rights with respect to such
collateral and could deprive GSB Investments Corp. of its rights to receive
dividends on such pledged shares. GSB Investments Corp. has advised REV Holdings
that, if GSB Investments Corp. does not receive sufficient dividend income from
its GSB common stock or, after consummation of the GSB Merger, its shares of
Citigroup Common Stock, to satisfy its obligations under the Keepwell Agreement
it expects to obtain capital contributions or loans from affiliates to satisfy
such obligation. There can be no assurance that GSB Investments Corp. could
obtain any such funds.
On February 1, 2002 and August 1, 2002, GSB Investments Corp. made
non-interest bearing advances totaling $9.8 to REV Holdings under the Keepwell
Agreement, which were used to make the February 1, 2002 and August 1, 2002
interest payments on the New REV Holdings Notes. The Keepwell Agreement will
terminate at such time as there are no New REV Holdings Notes outstanding, at
which time GSB Investments Corp. may require repayment of advances under the
Keepwell Agreement.
The Company currently anticipates that cash flow generated from
operations will be insufficient to pay interest when due and the principal
amount at maturity of the New REV Holdings Notes. The Company currently
anticipates that it will be required to adopt one or more alternatives to pay
the principal amount at maturity of the New REV Holdings Notes, such as
refinancing its indebtedness, selling its equity securities or the equity
securities or assets of Revlon, Inc. or seeking capital contributions or loans
from its affiliates. There can be no assurance that any of the foregoing actions
could be effected on satisfactory terms, that any of the foregoing actions would
enable the Company to pay the principal amount at maturity of the New REV
Holdings Notes or that any of such actions would be permitted by the terms of
the indenture governing the New REV Holdings Notes (the "New Indenture") or any
other debt instruments of the Company and the Company's subsidiaries then in
effect.
As of March 31, 2002, 4.2 million shares of Revlon, Inc. common stock
owned by REV Holdings were pledged to secure the New REV Holdings Notes and 38.7
million shares of Revlon, Inc. common stock owned by REV Holdings were pledged
to secure obligations of an affiliate of REV Holdings. During the second quarter
of 2002, 22.9 million of the foregoing shares of Revlon, Inc. common stock owned
by REV Holdings were released from pledge. As of June 30, 2002, 4.2 million
shares of Revlon, Inc. common stock owned by REV Holdings were pledged to secure
the New REV Holdings Notes and 15.8 million shares of Revlon, Inc. common stock
owned by REV Holdings were pledged to secure obligations of an affiliate of REV
Holdings.
12
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
OVERVIEW
The Company operates in a single segment and manufactures, markets and
sells an extensive array of cosmetics and skin care, fragrances and personal
care products. In addition, the Company has a licensing group.
On July 16, 2001 Products Corporation completed the disposition of the
Colorama brand in Brazil. Accordingly, the Unaudited Consolidated Condensed
Financial Statements include the results of operations of the Colorama brand
through the date of its disposition.
During the first quarter of 2002, to reflect the integration of
management reporting responsibilities, the Company reclassified Puerto Rico's
results from its international operations to its United States operations.
Management's discussion and analysis data reflects this change for both the 2002
and 2001 periods.
Discussion of Critical Accounting Policies:
In the ordinary course of business, the Company has made a number of
estimates and assumptions relating to the reporting of results of operations and
financial condition in the preparation of its financial statements in conformity
with accounting principles generally accepted in the United States. Actual
results could differ significantly from those estimates and assumptions. The
Company believes that the following discussion addresses the Company's most
critical accounting policies, which are those that are most important to the
portrayal of the Company's financial condition and results and require
management's most difficult, subjective and complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain.
Sales Returns:
The Company allows customers to return their unsold products when they
meet certain Company-established criteria as outlined in the Company's trade
terms. The Company regularly reviews and revises, when deemed necessary, its
estimates of sales returns based primarily upon actual returns, planned product
discontinuances, and promotional sales, which would permit customers to return
items based upon the Company's trade terms. The Company records estimated sales
returns as a reduction to sales, cost of sales and accounts receivable and an
increase to inventory. Cost of sales includes the cost of refurbishment of
returned products. Returned products which are recorded as inventories are
valued based upon the amount that the Company expects to realize upon their
subsequent disposition. The physical condition and marketability of the returned
products are the major factors considered by the Company in estimating
realizable value. Actual returns, as well as realized values on returned
products, may differ significantly, either favorably or unfavorably, from our
estimates if factors such as product discontinuances, customer inventory levels
or competitive conditions differ from our estimates and expectations and, in the
case of actual returns, if economic conditions differ significantly from our
estimates and expectations.
Trade Support Costs:
In order to support the retail trade, the Company has various
performance-based arrangements with retailers to reimburse them for all or a
portion of their promotional activities related to the Company's products. The
Company regularly reviews and revises, when deemed necessary, estimates of costs
to the Company for these promotions based on estimates of what has been incurred
by the retailers. Actual costs incurred by the Company may differ significantly
if factors such as the level and success of the retailers' programs or other
conditions differ from our estimates and expectations.
13
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
Inventories:
Inventories are stated at the lower of cost or market value. Cost is
principally determined by the first-in, first-out method. The Company records
adjustments to the value of inventory based upon its forecasted plans to sell
its inventories. The physical condition (e.g., age and quality) of the
inventories is also considered in establishing its valuation. These adjustments
are estimates, which could vary significantly, either favorably or unfavorably,
from the amounts that the Company may ultimately realize upon the disposition of
inventories if future economic conditions, customer inventory levels, product
discontinuances or competitive conditions differ from our estimates and
expectations.
Property, Plant and Equipment and Other Assets:
Property, plant and equipment is recorded at cost and is depreciated on
a straight-line basis over the estimated useful lives of such assets. Changes in
circumstances such as technological advances, changes to the Company's business
model, changes in the planned use of fixtures or software or closing of
facilities or changes in the Company's capital strategy can result in the actual
useful lives differing from the Company's estimates.
Long-lived assets, including fixed assets, permanent display units and
intangibles other than goodwill, are reviewed by the Company for impairment
whenever events or changes in circumstances indicate that the carrying amount of
any such asset may not be recoverable. If the sum of the undiscounted cash flows
(excluding interest) is less than the carrying value, the Company recognizes an
impairment loss, measured as the amount by which the carrying value exceeds the
fair value of the asset. The estimate of undiscounted cash flow is based upon,
among other things, certain assumptions about expected future operating
performance. The Company's estimates of undiscounted cash flow may differ from
actual cash flow due to, among other things, technological changes, economic
conditions, changes to its business model or changes in its operating
performance. In those cases where the Company determines that the useful life of
other long-lived assets should be shortened, the Company would depreciate the
net book value in excess of the salvage value (after testing for impairment as
described above), over the revised remaining useful life of such asset thereby
increasing amortization expense.
Pension Benefits:
The Company sponsors pension and other retirement plans in various
forms covering substantially all employees who meet eligibility requirements.
Several statistical and other factors which attempt to anticipate future events
are used in calculating the expense and liability related to the plans. These
factors include assumptions about the discount rate, expected return on plan
assets and rate of future compensation increases as determined by the Company,
within certain guidelines. In addition, the Company's actuarial consultants also
use subjective factors such as withdrawal and mortality rates to estimate these
factors. The actuarial assumptions used by the Company may differ materially
from actual results due to changing market and economic conditions, higher or
lower withdrawal rates or longer or shorter life spans of participants, among
other things. These differences may result in a significant impact to the amount
of pension expense recorded by the Company. Due to decreases in interest rates
and declines in the income of assets in the plans, it is expected that the
pension expense for 2002 will be significantly higher than in recent years.
14
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
RESULTS OF OPERATIONS
In order to provide a comparison of results from its ongoing
operations, the Company's discussion includes presentation on an "ongoing
operations" basis. The following table sets forth certain summary unaudited data
for the Company for the three months and six months ended June 30, 2002 and June
30, 2001, respectively, reconciling the Company's actual "as reported results"
to the ongoing operations, after giving effect to the following: (i) the
disposition of the Colorama brand, assuming such transaction occurred on January
1, 2001; (ii) the elimination of restructuring costs in the period incurred; and
(iii) the elimination of additional costs associated with the closing of the
Phoenix and Canada facilities that were included in cost of sales and selling,
general and administrative expenses ("SG&A") and executive severance costs that
were included in SG&A expenses in the period incurred (after giving effect
thereto, the "Ongoing Operations"). The adjustments are based upon available
information and certain assumptions that the Company's management believes are
reasonable and do not represent pro forma adjustments prepared in accordance
with Regulation S-X. The summary unaudited data for the Ongoing Operations does
not purport to represent the results of operations or the Company's financial
position that actually would have occurred had the foregoing transactions
referred to in (i) above been consummated on January 1, 2001.
THREE MONTHS ENDED JUNE 30, 2002:
- ---------------------------------------------
BRANDS AND RESTRUCTURING
AS FACILITIES COSTS AND ONGOING
REPORTED SOLD OTHER, NET OPERATIONS
---------------- ----------------- ---------------- -----------------
Net sales .................................. $ 308.2 $ - $ - $ 308.2
Gross profit ............................... 188.4 - 0.3 188.7
SG&A expenses .............................. 180.8 - - 180.8
Restructuring costs and other, net.......... 3.2 - (3.2) -
SIX MONTHS ENDED JUNE 30, 2002:
- ---------------------------------------------
BRANDS AND RESTRUCTURING
AS FACILITIES COSTS AND ONGOING
REPORTED SOLD OTHER, NET OPERATIONS
---------------- ----------------- ---------------- -----------------
Net sales .................................. $ 583.6 $ - $ - $ 583.6
Gross profit ............................... 354.8 - 1.0 355.8
SG&A expenses .............................. 347.5 - (6.6) 340.9
Restructuring costs and other, net.......... 7.2 - (7.2) -
THREE MONTHS ENDED JUNE 30, 2001:
- ---------------------------------------------
BRANDS AND RESTRUCTURING
AS FACILITIES COSTS AND ONGOING
REPORTED SOLD OTHER, NET OPERATIONS
---------------- ----------------- ---------------- -----------------
Net sales .................................. $ 322.1 $ (6.3)$ - $ 315.8
Gross profit ............................... 179.1 (2.8) 18.4 194.7
SG&A expenses .............................. 182.5 (3.3) (4.0) 175.2
Restructuring costs and other, net.......... 7.9 - (7.9) -
15
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
SIX MONTHS ENDED JUNE 30, 2001:
- ---------------------------------------------
BRANDS AND RESTRUCTURING
AS FACILITIES COSTS AND ONGOING
REPORTED SOLD OTHER, NET OPERATIONS
---------------- ----------------- ---------------- -----------------
Net sales ................................... $ 635.7 $ (16.1)$ - $ 619.6
Gross profit ................................ 361.1 (7.0) 24.8 378.9
SG&A expenses ............................... 359.4 (6.8) (5.7) 346.9
Restructuring costs and other, net........... 22.5 - (22.5) -
Net sales
Net sales were $308.2 and $322.1 for the second quarters of 2002 and
2001, respectively, a decrease of $13.9, or 4.3% on a reported basis (a decrease
of 2.1% on a constant U.S. dollar basis), and were $583.6 and $635.7 for the
first half of 2002 and 2001, respectively, a decrease of $52.1, or 8.2% on a
reported basis (a decrease of 5.5% on a constant U.S. dollar basis).
Net sales from Ongoing Operations were $308.2 and $315.8 for the second
quarters of 2002 and 2001, respectively, a decrease of $7.6, or 2.4% on a
reported basis (a decrease of 0.2% on a constant U.S. dollar basis), and were
$583.6 and $619.6 for the first half of 2002 and 2001, respectively, a decrease
of $36.0, or 5.8% on a reported basis (a decrease of 3.2% on a constant U.S.
dollar basis).
United States and Canada. Net sales in the United States and Canada on
both an as reported and Ongoing Operations basis were $217.0 for the second
quarter of 2002 compared with $216.2 for the second quarter of 2001, an increase
of $0.8, or 0.4%, and were $413.4 and $428.7 for the first half of 2002 and
2001, respectively, a decrease of $15.3, or 3.6%. The decrease for the first
half of 2002 of 3.6% was driven primarily by lower shipments to our retail
customers as a result of the decision by two major U.S. retailers to shift the
timing of plan-o-gram resets for certain 2002 new products (this resulted in
shipments of approximately $14.0 of 2002 new products in the fourth quarter of
2001) and to a lesser extent increased sales returns and allowances, higher
promotional activity and increased competitive activity.
International. Net sales in the Company's international operations were
$91.2 for the second quarter of 2002, compared with $105.9 for the second
quarter of 2001, a decrease of $14.7, or 13.9% on a reported basis (a decrease
of 7.6% on a constant U.S. dollar basis) and were $170.2 and $207.0 for the
first half of 2002 and 2001, respectively, a decrease of $36.8, or 17.8% on a
reported basis (a decrease of 10.1% on a constant U.S. dollar basis).
Net sales in the Company's international Ongoing Operations ("Ongoing
International Operations") were $91.2 and $99.6 for the second quarters of 2002
and 2001, respectively, a decrease of $8.4, or 8.4%, on a reported basis (a
decrease of 1.5% on a constant U.S. dollar basis) and were $170.2 and $190.9 for
the first half of 2002 and 2001, respectively, a decrease of $20.7, or 10.8% on
a reported basis (a decrease of 2.5% on a constant U.S. dollar basis).
Ongoing International Operations sales are divided by the Company into
three geographic regions. In Europe and Africa, which is comprised of Europe,
the Middle East and Africa, net sales decreased by $3.5, or 8.8% on a reported
basis to $36.2 for the second quarter of 2002, as compared with the second
quarter of 2001 (a decrease of 5.7% on a constant U.S. dollar basis), and
decreased by $9.5, or 12.2% on a reported basis to $68.2 for the first half of
2002, as compared with the first half of 2001 (a decrease of 5.8% on a constant
U.S. dollar basis). In Latin America, which is comprised of Mexico, Central
America and South America, net sales decreased by $7.4, or 22.3% on a reported
basis to $25.8 for the second quarter of
16
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
2002, as compared with the second quarter of 2001 (a decrease of 3.1% on a
constant U.S. dollar basis) and decreased by $13.5, or 21.7% on a reported basis
to $48.6 for the first half of 2002, as compared with the first half of 2001 (a
decrease of 4.3% on a constant U.S. dollar basis). In the Far East, net sales
increased by $2.5, or 9.4% on a reported basis to $29.2 for the second quarter
of 2002, as compared with the second quarter of 2001 (an increase of 6.1% on a
constant U.S. dollar basis) and increased by $2.3, or 4.5% on a reported basis
to $53.4 for the first half of 2002, as compared with the first half of 2001 (an
increase of 4.0% on a constant U.S. dollar basis). Net sales in the Company's
international operations may be adversely affected by weak economic conditions,
political uncertainties, adverse currency fluctuations, and competitive
activities. The Company is experiencing production difficulties with its
principal third party manufacturer for Europe and certain other international
markets which operates the Maesteg facility. As a result, the Company is engaged
in discussions with the manufacturer to, among other things, revise the Supply
Agreement between them. In the interim, the Company intends to source products
for Europe and certain other international markets from its Oxford facility and
other available sources. The Company anticipates that these production
difficulties will be resolved during the first half of 2003.
The decrease in net sales for the second quarter, as compared to the
comparable 2001 period, for Ongoing International Operations on a comparable
currency basis, was primarily due to political and economic difficulties in
Argentina and Venezuela (which factor the Company estimates contributed to an
approximately 3.7% reduction in net sales on a constant dollar basis), increased
competitive activity in Mexico and Italy (which factor the Company estimates
contributed to an approximately 2.8% reduction in net sales on a constant dollar
basis), conversion of the Company's Benelux business to a distributor (which
factor the Company estimates contributed to an approximately 2.6% reduction in
net sales on a constant dollar basis), and disruption in production at the
Company's third party manufacturer in Maesteg, Wales, which the Company
estimates contributed to an approximately 1.4% reduction in net sales, partially
offset by increased new product sales and distribution in the U.K., South
Africa, China, Hong Kong and Taiwan (which factor the Company estimates
contributed to an approximately 5.7% increase in net sales on a constant dollar
basis), and sales tax increases in Brazil (which factor the Company estimates
contributed to an approximately 3.6% increase in net sales on a constant dollar
basis).
The decrease in net sales for the first half of 2002, as compared to
the comparable 2001 period, for Ongoing International Operations on a comparable
currency basis, was primarily due to political and economic difficulties in
Argentina and Venezuela (which factor the Company estimates contributed to an
approximately 3.3% reduction in net sales on a constant dollar basis), increased
competitive activity in Mexico, Italy, Australia, New Zealand and Japan (which
factor the Company estimates contributed to an approximately 2.6% reduction in
net sales on a constant dollar basis), conversion of the Company's Benelux and
Israel businesses to a distributor (which factor the Company estimates
contributed to an approximately 3.3% reduction in net sales on a constant dollar
basis), and disruption in production at the Company's third party manufacturer
in Maesteg, Wales, which the Company estimates contributed to an approximately
0.7% reduction in net sales, partially offset by increased new product sales and
distribution in the U.K., South Africa, China, Hong Kong and Taiwan (which
factor the Company estimates contributed to an approximately 5.5% increase in
net sales on a constant dollar basis), and sales tax increases in Brazil (which
factor the Company estimates contributed to an approximately 2.6% increase in
net sales on a constant dollar basis).
Gross profit
Gross profit was $188.4 for the second quarter of 2002, compared with
$179.1 for the second quarter of 2001 and was $354.8 for the first half of 2002,
compared to $361.1 for the first half of 2001. As a percentage of net sales,
gross profit margins were 61.1% for the second quarter of 2002, compared with
55.6% for the second quarter of 2001 and was 60.8% for the first half of 2002,
compared with 56.8% for the first half of 2001. Gross profit and gross profit
margin for Ongoing Operations were $188.7 and 61.2%,
17
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
respectively, in the second quarter of 2002, compared with gross profit and
gross profit margin of $194.7 and 61.7% in the second quarter of 2001 and were
$355.8 and 61.0%, respectively, in the first half of 2002, compared with gross
profit and gross profit margin of $378.9 and 61.2% in the first half of 2001.
The decline in gross profit margin on an ongoing basis in the second quarter and
first half of 2002 compared to the comparable 2001 periods is due to higher
promotional activity, returns and allowances, as well as higher costs for
certain products produced in Europe and unfavorable product mix, partially
offset by reduced overhead costs primarily as a result of the shutdown of the
Phoenix and Canada facilities in 2001. Gross profit from Ongoing Operations for
the first half of 2001 excludes $24.8 ($6.1 of which represents increased
depreciation recorded for the Phoenix facility - See Note 5) of additional
consolidation costs associated with the shutdown of the Phoenix and Canada
facilities in 2001 and $7.0 of gross profit from the Colorama brand in Brazil.
SG&A expenses
SG&A expenses were $180.8 for the second quarter of 2002, compared with
$182.5 for the second quarter of 2001 and $347.5 for the first half of 2002
compared with $359.4 for the first half of 2001. SG&A expenses for Ongoing
Operations were $180.8 for the second quarter of 2002, compared with $175.2 for
the second quarter of 2001, which excludes $4.0 of additional consolidation
costs associated with the shutdown of the Phoenix and Canada facilities in 2001
and $3.3 of SG&A expenses of the Colorama brand in Brazil in 2001. SG&A expenses
for Ongoing Operations were $340.9 for the first half of 2002, which excludes
$6.5 of executive separation costs, compared with $346.9 for the first half of
2001, which excludes $5.7 of additional consolidation costs associated with the
shutdown of the Phoenix and Canada facilities in 2001 and $6.8 of SG&A expenses
of the Colorama brand in Brazil in 2001. The increase in SG&A expenses for
Ongoing Operations for the second quarter of 2002, as compared to the second
quarter of 2001, is due primarily to higher permanent display amortization of
$6.9 associated with the roll-out of the Company's new permanent display units
(See Financial Condition, Liquidity and Capital Resources) and accelerated
amortization charges of $1.4 and a write-off of $2.2 for certain information
systems related to the Company's decision to upgrade its information systems
(See Financial Condition, Liquidity and Capital Resources) and higher
departmental and other general and administrative expenses of $10.8 primarily
related to compensation and professional fees. These increases were partially
offset by a reduction of $11.2 for certain brand support expenses, the
elimination of goodwill amortization of $1.9, as well as lower distribution
costs of $1.5. The decrease in SG&A expenses for Ongoing Operations for the
first half of 2002, as compared to the first half of 2001 is primarily due to a
reduction of $10.7 for certain brand support expenses, the elimination of
goodwill amortization of $3.8, as well as lower distribution costs of $3.9,
partially offset by higher permanent display amortization of $9.7 associated
with the roll-out of the Company's new permanent display units, accelerated
amortization charges of $1.4 and a write-off of $2.2 in connection with the
Company's decision to upgrade certain of its information systems and higher
departmental and other general and administrative expenses of $1.4 primarily
related to compensation and professional fees.
Restructuring costs
During the third quarter of 2000, the Company initiated a new
restructuring program in line with the original restructuring plan developed in
late 1998, designed to improve profitability by reducing personnel and
consolidating manufacturing facilities. The 2000 restructuring program focused
on the Company's plans to close its manufacturing operations in Phoenix, Arizona
and Mississauga, Canada and to consolidate its cosmetics production into its
plant in Oxford, North Carolina. The 2000 restructuring program also includes
the remaining obligation for excess leased real estate in the Company's
headquarters, consolidation costs associated with the Company closing its
facility in New Zealand, and the elimination of several domestic and
international executive and operational positions, each of which were effected
to reduce and streamline corporate overhead costs. In the first quarter of 2001,
the Company recorded a
18
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
charge of $14.6 related to previous restructuring programs, as well as the 2000
restructuring program, principally for additional employee severance and other
personnel benefits, relocation and to consolidate worldwide operations. In the
second quarter of 2001, the Company continued to implement the 2000
restructuring program and recorded a charge of $7.9, principally for additional
employee severance and other personnel benefits and other costs related to the
consolidation of worldwide operations.
During the second quarter of 2002 and the six months ended June 30,
2002, the Company continued to implement the 2000 restructuring program, as well
as other restructuring actions, and recorded a charge of $3.2 and $7.2,
respectively, principally for additional employee severance and other personnel
benefits, primarily resulting from reductions in the Company's worldwide sales
force, relocation and other costs related to the consolidation of worldwide
operations.
The Company anticipates annualized savings of approximately $8 to $10
relating to the restructuring charges recorded during the first half of 2002.
Other expenses (income)
Interest expense was $41.6 for the second quarter of 2002 compared with
$39.1 for the second quarter of 2001, and $83.3 for the first half of 2002,
compared to $90.0 for the first half of 2001. The increase in interest expense
for the second quarter, as compared to the second quarter of 2001, is primarily
due to the interest on the Original 12% Notes (as hereinafter defined) (which
were issued by Products Corporation in late November 2001) and interest on the
New REV Holdings Notes that were issued in February 2001, partially offset by
lower average outstanding borrowings and lower interest rates under the Credit
Agreement. The decrease in interest expense for the first half of 2002, as
compared to the first half of 2001, is primarily due to the cancellation of the
Old REV Holdings Notes, lower average outstanding borrowings and lower interest
rates under the Credit Agreement (as hereinafter defined), partially offset by
the interest on the 12% Notes and interest on the New REV Holdings Notes.
Sale of assets and brand, net
In February 2002, Products Corporation completed the disposition of its
Benelux business. As part of this sale, Products Corporation entered into a
long-term distribution agreement with the purchaser pursuant to which the
purchaser distributes the Company's products in Benelux. The purchase price
consisted principally of the assumption of certain liabilities and a deferred
purchase price contingent upon future results of up to approximately $4.7, which
could be received over approximately a seven-year period. In connection with the
disposition, the Company recognized a pre-tax and after-tax loss of $1.0 in the
first quarter of 2002.
In July 2001, Products Corporation completed the disposition of the
Colorama brand in Brazil. In connection with the disposition the Company
recognized a pre-tax and after-tax loss of $6.5, $6.3 of which was recorded in
the second quarter of 2001. Additionally, the Company recognized a pre-tax and
after-tax loss on the disposition of land in Minami Aoyama near Tokyo, Japan
(the "Aoyama Property") and related rights for the construction of a building on
such land of $0.8 during the second quarter of 2001.
Provision (benefit) for income taxes
The provision (benefit) for income taxes was $1.0 for the second
quarter of 2002, compared with $1.3 for the second quarter of 2001, and $(3.2)
for the first half of 2002, compared to $1.8 for the first half of 2001. The
benefit for income taxes in the first half of 2002 resulted from the Company's
full utilization of its alternative minimum tax net operating losses to offset
the alternative minimum taxable income
19
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
recorded in 2001 in connection with the retirement of the Old REV Holdings
Notes, in accordance with the new tax legislation enacted in the first quarter
of 2002.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities was $107.3 and $60.4 for the
first half of 2002 and 2001, respectively. The increase in net cash used for
operating activities is due to a net use of working capital and increased
purchases of permanent displays, which was partially offset by a lower net loss.
Net cash (used for) provided by investing activities was $(3.0) and
$25.8 for the first half of 2002 and 2001, respectively. Net cash used for
investing activities for the first half of 2002 consisted of capital
expenditures, partially offset by the sale of marketable securities. Net cash
provided by investing activities for the first half of 2001 consisted of
proceeds from the sale of the Company's Aoyama Property and Phoenix facility,
partially offset by capital expenditures. The reduction in capital expenditures
for the first half of 2002, as compared to the first half of 2001, is due to the
timing of such expenditures.
Net cash provided by financing activities was $42.8 and $15.4 for the
first half of 2002 and 2001, respectively. Net cash provided by financing
activities for the first half of 2002 included cash drawn under the 2001 Credit
Agreement and an advance under the Keepwell Agreement, partially offset by the
repayment of borrowings under the 2001 Credit Agreement. Net cash provided by
financing activities for the first half of 2001 included borrowings under the
1997 Credit Agreement and a capital contribution from an indirect parent to
retire the Old REV Holdings Notes, partially offset by repayments of borrowings
under the 1997 Credit Agreement, payment of debt issuance costs and repayment
of the remaining portion of the Old REV Holdings Notes with such capital
contribution.
On November 26, 2001, Products Corporation issued and sold $363 in
aggregate principal amount of Original 12% Notes in a private placement,
receiving gross proceeds of $350.5. Products Corporation used the proceeds from
the 12% Senior Secured Notes due 2005 (the "Original 12% Notes") and borrowings
under the 2001 Credit Agreement to repay outstanding indebtedness under Products
Corporation's 1997 Credit Agreement and to pay fees and expenses incurred in
connection with entering into the 2001 Credit Agreement and the issuance of the
Original 12% Notes, and the balance was available for general corporate
purposes. On June 21, 2002, the Original 12% Notes were exchanged for the new
12% Senior Secured Notes due 2005 (the "12% Notes") which have substantially
identical terms as the Original 12% Notes, except that the 12% Notes are
registered with the Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933, as amended, and the transfer restrictions and
registration rights applicable to the Original 12% Notes do not apply to the 12%
Notes.
On November 30, 2001, Products Corporation entered into the 2001 Credit
Agreement with a syndicate of lenders, whose individual members change from time
to time, which agreement amended and restated the credit agreement entered into
by Products Corporation in May 1997 (as amended, the "1997 Credit Agreement";
the 2001 Credit Agreement and the 1997 Credit Agreement are sometimes referred
to as the "Credit Agreement"), and which matures on May 30, 2005. As of June 30,
2002, the 2001 Credit Agreement provided up to $250.0, which is comprised of a
$117.9 term loan facility (the "Term Loan Facility") and a $132.1 multi-currency
revolving credit facility (the "Multi-Currency Facility"). At June 30, 2002, the
Term Loan Facility was fully drawn and $70.4 was available under the
Multi-Currency Facility, including the letters of credit.
The Company's principal sources of funds are expected to be cash flow
generated from operations, cash on hand and available borrowings under the
Multi-Currency Facility of the Credit Agreement and advances under the Keepwell
Agreement. The Credit Agreement, Products Corporation's 12% Notes, Products
Corporation's 8 5/8% Notes due 2008 (the "8 5/8% Notes"), Products Corporation's
8 1/8% Notes
20
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
due 2006 (the "8 1/8% Notes") and Products Corporation's 9% Notes due 2006 (the
"9% Notes") contain certain provisions that by their terms limit Products
Corporation's and/or its subsidiaries' ability to, among other things, incur
additional debt. The New REV Holdings Notes contain certain provisions that by
their terms limit REV Holdings' ability to, among other things, incur additional
debt. The Company's principal uses of funds are expected to be the payment of
operating expenses, working capital, purchases of permanent displays and capital
expenditure requirements, including the ERP System (as hereinafter defined),
expenses in connection with the Company's restructuring programs referred to
above, debt service payments and interest under the New REV Holdings Notes.
The Company estimates that cash payments related to the restructuring
programs referred to in Note 5 to the Unaudited Consolidated Condensed Financial
Statements and executive separation costs will be $28 to $32 in 2002. Pursuant
to tax sharing agreements, REV Holdings and Revlon, Inc. may be required to make
tax sharing payments to Mafco Holdings as if REV Holdings or Revlon, Inc., as
the case may be, were filing separate income tax returns, except that no
payments are required by Revlon, Inc. if and to the extent that Products
Corporation is prohibited under the Credit Agreement from making tax sharing
payments to Revlon, Inc. The Credit Agreement prohibits Products Corporation
from making any tax sharing payments other than in respect of state and local
income taxes. REV Holdings currently anticipates that, with respect to Revlon,
Inc. as a result of net operating tax losses and prohibitions under the Credit
Agreement, and with respect to REV Holdings as a result of the absence of
business operations or a source of income of its own, no cash federal tax
payments or cash payments in lieu of federal taxes pursuant to the tax sharing
agreements will be required for 2002.
Products Corporation enters into foreign currency forward exchange
contracts and option contracts from time to time to hedge certain cash flows
denominated in foreign currencies. There were foreign currency forward exchange
contracts with a notional amount of $27.2 and a fair value of $(0.7) outstanding
at June 30, 2002. There were no option contracts outstanding at June 30, 2002.
The Company expects that cash flows from operations, cash on hand,
available borrowings under the Multi-Currency Facility of the Credit Agreement
and advances under the Keepwell Agreement will be sufficient to enable the
Company to meet its anticipated cash requirements during 2002, including the
payment of operating expenses, working capital, purchases of permanent displays
and capital expenditure requirements, including for the ERP System, expenses in
connection with the Company's restructuring programs referred to above and debt
service payments of its subsidiaries. However, there can be no assurance that
the combination of cash flow from operations, cash on hand, available borrowings
under the Multi-Currency Facility of the Credit Agreement and advances under the
Keepwell Agreement will be sufficient to meet the Company's cash requirements.
Additionally, in the event of a decrease in demand for Products Corporation's
products or reduced sales, such development, if significant, could reduce
Products Corporation's cash flow from operations and could adversely affect
Products Corporation's ability to achieve certain financial covenants under the
Credit Agreement, including the minimum EBITDA covenant, and in such event the
Company could be required to take measures, including reducing discretionary
spending. If the Company is unable to satisfy such cash requirements from these
sources, the Company could be required to adopt one or more alternatives, such
as reducing or delaying purchases of permanent displays, reducing or delaying
capital expenditures, including with respect to the ERP System, delaying or
revising restructuring programs, restructuring subsidiary indebtedness, selling
assets or operations, selling its equity securities, seeking capital
contributions or loans from affiliates of the Company or selling additional
shares of capital stock of Revlon, Inc. Products Corporation has received a
commitment from an affiliate that is prepared to provide, if necessary,
additional financial support to Products Corporation of up to $40 on appropriate
terms through December 31, 2003. There can be no assurance that any of such
actions could be effected, that they would enable the Company's subsidiaries to
continue to satisfy their capital requirements or that they would be permitted
under the terms of the Company's various debt instruments then in effect. The
Company, as a holding company, will be dependent on distributions with respect
to its approximately 83% ownership interest in Revlon, Inc. from the
21
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
earnings generated by Products Corporation and advances under the Keepwell
Agreement to pay its expenses and to pay interest and the principal amount at
maturity of the New REV Holdings Notes. The terms of the Credit Agreement, the
12% Notes, the 8 5/8% Notes, the 8 1/8% Notes and the 9% Notes generally
restrict Products Corporation from paying dividends or making distributions,
except that Products Corporation is permitted to pay dividends and make
distributions to Revlon, Inc., among other things, to enable Revlon, Inc. to pay
expenses incidental to being a public holding company, including, among other
things, professional fees such as legal and accounting, regulatory fees such as
Commission filing fees and other miscellaneous expenses related to being a
public holding company and, subject to certain limitations, to pay dividends or
make distributions in certain circumstances to finance the purchase by Revlon,
Inc. of its Class A Common Stock in connection with the delivery of such Class A
Common Stock to grantees under the Revlon, Inc. Amended and Restated 1996 Stock
Plan.
The Company currently anticipates that cash flow generated from
operations will be insufficient to pay interest when due and the principal
amount at maturity of the New REV Holdings Notes. The Company currently
anticipates that it will be required to adopt one or more alternatives to pay
the principal amount at maturity of the New REV Holdings Notes, such as
refinancing its indebtedness, selling its equity securities or the equity
securities or assets of Revlon, Inc. or seeking capital contributions or loans
from its affiliates. There can be no assurance that any of the foregoing actions
could be effected on satisfactory terms, that any of the foregoing actions would
enable the Company to pay the principal amount at maturity of the New REV
Holdings Notes or that any of such actions would be permitted by the terms of
the New Indenture or any other debt instruments of the Company and the Company's
subsidiaries then in effect. REV Holdings has entered into a Keepwell Agreement
with GSB Investments Corp., one of its affiliates pursuant to which GSB
Investments Corp. has agreed to provide REV Holdings with funds in an amount
equal to any interest payments due on the New REV Holdings Notes, to the extent
that REV Holdings does not have sufficient funds on hand to make such payments
on the applicable due dates. However, the Keepwell Agreement is not a guarantee
of the payment of interest on the New REV Holdings Notes. The obligations of GSB
Investments Corp. under the Keepwell Agreement are only enforceable by REV
Holdings, and may not be enforced by the holders of the New REV Holdings Notes
or the trustee under the New Indenture for the New REV Holdings Notes. The
failure of GSB Investments Corp. to make a payment to REV Holdings under the
Keepwell Agreement will not be an event of default under the New Indenture.
Further, the New Indenture has no requirement that REV Holdings maintain the
Keepwell Agreement. In addition, although REV Holdings has the right to enforce
the Keepwell Agreement, there can be no assurance that GSB Investments Corp.
will have sufficient funds to make any payments to REV Holdings under the
Keepwell Agreement or that it will comply with its obligations under the
Keepwell Agreement.
As of March 31, 2002, 4.2 million shares of Revlon, Inc. common stock
owned by REV Holdings were pledged to secure the New REV Holdings Notes and 38.7
million shares of Revlon, Inc. common stock owned by REV Holdings were pledged
to secure obligations of an affiliate of REV Holdings. During the second quarter
of 2002, 22.9 million of the foregoing shares of Revlon, Inc. common stock owned
by REV Holdings were released from pledge. As of June 30, 2002, 4.2 million
shares of Revlon, Inc. common stock owned by REV Holdings were pledged to secure
the New REV Holdings Notes and 15.8 million shares of Revlon, Inc. common stock
owned by REV Holdings were pledged to secure obligations of an affiliate of REV
Holdings.
As of March 31, 2002, GSB Investments Corp. owned 42,949,525 shares of
the common stock of GSB. On June 20, 2002, GSB Investments Corp. dividended
22,868,801 shares of GSB common stock to its parent. As of June 30, 2002, GSB
Investments Corp. owned 20,080,724 shares of GSB. At June 28, 2002, the last
reported sale price of GSB common stock on the New York Stock Exchange was
$36.25 per share. All of the shares of GSB owned by GSB Investments Corp. are
pledged to secure forward contracts.
On May 21, 2002, GSB, Citigroup and a subsidiary of Citigroup entered
into the GSB Merger Agreement. Pursuant to the GSB Merger Agreement and subject
to the terms and conditions set forth therein, and as a result of the GSB
Merger, GSB will become a wholly owned subsidiary of Citigroup. Upon
consummation of the GSB Merger, Citigroup will pay an amount equal to
approximately $16.4 in cash and 0.5324 shares of Citigroup Common Stock for each
share of GSB common stock. GSB's stockholders will be entitled to elect to
receive such merger consideration in Citigroup Common Stock or cash, subject to
certain limitations. The transaction is expected to close in the fourth quarter
of 2002. Since
22
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
the mix of Citigroup Common Stock and cash to be received by GSB Investments
Corp. in the GSB Merger depends upon, among other things, the market value of
the Citigroup Common Stock prior to the closing of the GSB Merger, the election
to be made by GSB Investments Corp., the elections made by all other GSB
stockholders and limitations in the forward contracts to which GSB Investments
Corp. is a party, it is not possible at this time to determine the mix of
Citigroup Common Stock and cash to be received by GSB Investments Corp. in the
GSB Merger. In addition, at or about the time of the GSB Merger, GSB Investments
Corp. expects to receive shares of Citigroup Common Stock as consideration for
certain tax benefits realized by GSB. The number of shares of Citigroup Common
Stock to be received by GSB Investments Corp. for tax benefits depends upon,
among other things, the market value of Citigroup Common Stock and the timing of
the resolution of certain tax matters. All shares of Citigroup Common Stock
received by GSB Investments Corp. in connection with the GSB Merger will be
pledged to secure the forward contracts of GSB Investments Corp. (excluding,
however, the shares received for tax benefits). All cash received by GSB
Investments Corp. in connection with the GSB Merger is expected to be advanced
to an affiliate of GSB Investments Corp.
GSB has paid quarterly dividends of $0.10 per share since July 2000. If
GSB were to continue to pay quarterly dividends at this rate and GSB Investments
Corp. were to continue to own 20,080,724 shares of GSB, GSB Investments Corp.
would not have sufficient income from dividends paid on its GSB stock to make
the payments to REV Holdings that it might be required to make under the
Keepwell Agreement. Furthermore, GSB has only paid dividends at this rate since
July 2000 and there can be no assurance that GSB will continue to pay dividends
at this rate, if at all, or that GSB Investments Corp. will continue to own its
shares of the common stock of GSB or, after consummation of the GSB Merger, its
shares of Citigroup Common Stock. Citigroup has paid quarterly dividends, which
have increased from $0.12 per share in the first quarter of 2000 to $0.18 per
share in the second quarter of 2002. Due to the uncertainty regarding the number
of shares of Citigroup Common Stock that GSB Investments Corp. will receive in
the GSB Merger and in connection with certain tax benefits realized by GSB, it
is not possible to determine at this time whether GSB Investments Corp. would
have sufficient income from dividends paid on its Citigroup Common Stock to make
the payments to REV Holdings that it might be required to make under the
Keepwell Agreement. Furthermore, there can be no assurance that Citigroup will
continue to pay dividends at this rate, if at all, or that GSB Investments Corp.
will continue to own the shares of Citigroup Common Stock it receives in
connection with the GSB Merger and the realization of tax benefits by GSB.
If GSB Investments Corp. fails to comply with its obligations under the
forward contracts that are secured by the pledge of the GSB common stock, the
beneficiary of such pledge could enforce its rights with respect to such
collateral and could deprive GSB Investments Corp. of its rights to receive
dividends on such pledged shares. GSB Investments Corp. has advised REV Holdings
that, if GSB Investments Corp. does not receive sufficient dividend income from
its GSB common stock or, after consummation of the GSB Merger, its shares of
Citigroup Common Stock, to satisfy its obligations under the Keepwell Agreement
it expects to obtain capital contributions or loans from affiliates to satisfy
such obligation. There can be no assurance that GSB Investments Corp. could
obtain any such funds.
On February 1, 2002 and August 1, 2002, GSB Investments Corp. made
non-interest bearing advances totaling $9.8 to REV Holdings under the Keepwell
Agreement, which were used to make the February 1, 2002 and August 1, 2002
interest payments on the New REV Holdings Notes. The Keepwell Agreement will
terminate at such time as there are no New REV Holdings Notes outstanding, at
which time GSB Investments Corp. may require repayment of advances under the
Keepwell Agreement.
The Company has developed a new design for its permanent display units
and has begun installing them at certain customers' retail stores during 2002.
Accordingly, the Company has accelerated the amortization of its existing
display units. The Company estimates the installation of these new displays will
result in accelerated amortization in 2002 through 2003. The accelerated
amortization will range from $12
23
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
to $15 during 2002, of which $9.7 has been recorded during the first half of
2002. The Company estimates that purchases of permanent displays for 2002 will
be approximately $60 to $65.
Additionally, the Company has evaluated its management information
systems and determined to upgrade to an Enterprise Resource Planning ("ERP")
System, which is intended to provide benefits to the Company in excess of the
related purchase and implementation costs. As a result of this decision, certain
existing information systems are being amortized on an accelerated basis. The
Company will begin to develop the ERP System in the latter portion of 2002, and
expects to complete installation by 2005. Based upon the estimated time required
to implement an ERP System, the Company currently estimates that it would record
additional amortization charges of its current information system in 2002
through 2005. The additional amortization will range from $4 to $5 during 2002,
of which $1.4 has been recorded during the first half of 2002.
The Company estimates that capital expenditures for 2002 will be
approximately $15 to $20.
Disclosures about Contractual Obligations and Commercial Commitments
The SEC has encouraged all public companies to aggregate all
contractual commitments and commercial obligations that affect financial
condition and liquidity. To respond to this, the Company has included a table in
the Company's Annual Report of Form 10-K for the year ended December 31, 2001.
There have been no material changes to the total contractual cash obligations in
the table setting forth the Company's contractual commitments and commercial
obligations that affect financial condition and liquidity which was set forth in
the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
However, the Company is experiencing production difficulties with its principal
third party manufacturer for Europe and certain other international markets
which operates the Maesteg facility. As a result, the Company is engaged in
discussions with the manufacturer to, among other things, revise the Supply
Agreement between them.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has exposure to market risk both as a result of changing
interest rates and movements in foreign currency exchange rates. The Company's
policy is to manage market risk through a combination of fixed and floating rate
debt, the use of derivative financial instruments and foreign exchange forward
and option contracts. The Company does not hold or issue financial instruments
for trading purposes. The qualitative and quantitative information presented in
Item 7A of the Company's Annual Report on Form 10-K for the year ended December
31, 2001 describes significant aspects of the Company's financial instrument
programs that have material market risk as of December 31, 2001. The following
table presents the information required by Item 7A as of June 30, 2002.
24
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
EXPECTED MATURITY DATE FOR THE YEAR ENDED JUNE 30,
------------------------------------------------------------------
2002 2003 2004 2005 2006 THEREAFTER
--------- -------- --------- ---------- ---------- -----------
DEBT
- ---------------
Short-term variable rate (various currencies)....... $22.6
Average interest rate (a)..................... 6.1%
Long-term fixed rate ($US).......................... $352.1 $499.5 $649.9
Average interest rate......................... 12.0% 8.6% 8.6%
Long-term variable rate ($US)....................... 145.7 *
Average interest rate (a)..................... 9.0%
Long-term variable rate (various currencies)........ 7.5 *
Average interest rate (a)..................... 9.9%
--------- -------- --------- ---------- ---------- -----------
Total debt**........................................ $ 22.6 $ - $ - $ 505.3 $499.5 $ 649.9
========= ======== ========= ========== ========== ===========
FAIR VALUE
JUNE 30,
TOTAL 2002
------------ ------------
DEBT
- ---------------
Short-term variable rate (various currencies)....... $22.6 $ 22.6
Average interest rate (a).....................
Long-term fixed rate ($US).......................... 1,501.5 1,029.9
Average interest rate.........................
Long-term variable rate ($US)....................... 145.7 145.7
Average interest rate (a).....................
Long-term variable rate (various currencies)........ 7.5 7.5
Average interest rate (a).....................
------------ ------------
Total debt**........................................ $ 1,677.3 $1,205.7
============ ============
AVERAGE ORIGINAL CONTRACT
CONTRACTUAL US DOLLAR VALUE FAIR VALUE
RATE NOTIONAL JUNE 30, JUNE 30,
FORWARD CONTRACTS $/FC AMOUNT 2002 2002
- ----------------- ----------- ----------- ------------ -------------
Buy Euros/Sell USD.................................. 0.8718 $ 3.7 $ 4.2 $ 0.5
Sell British Pounds/Buy USD......................... 1.4108 1.5 1.4 (0.1)
Sell Australian Dollars/Buy USD..................... 0.5185 3.7 3.4 (0.3)
Sell Canadian Dollars/Buy USD....................... 0.6258 9.2 8.7 (0.5)
Sell South African Rand/Buy USD..................... 0.0835 1.7 1.5 (0.2)
Buy South African Rand/Sell USD..................... 0.0969 1.6 1.6 -
Buy Australian Dollars/Sell New Zealand Dollars..... 1.2212 1.3 1.2 (0.1)
Buy British Pounds/Sell Euros....................... 0.6147 2.2 2.2 -
Sell British Pounds/Buy Euros....................... 0.6181 2.3 2.3 -
----------- ------------ ------------
Total forward contracts ............................ $ 27.2 $ 26.5 $ (0.7)
=========== ============ ============
- --------------------
(a) Weighted average variable rates are based upon implied forward rates from
the yield curves at June 30, 2002.
* Represents Products Corporation's Credit Agreement which matures in
May 2005.
** The New REV Holdings Notes are excluded from the table above since there is
no active trading market for the New REV Holdings Notes and therefore the
Company is unable to assess the fair market value at this time. The New REV
Holdings Notes mature on February 1, 2004 and have a face value of $80.5.
EFFECT OF NEW ACCOUNTING STANDARD
In August 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations. Statement 143 requires recording the fair market value
of an asset retirement obligation as a liability in the period in which a legal
obligation associated with the retirement of tangible long-lived assets is
incurred. The Statement also requires recording the contra asset to the initial
obligation as an increase to the carrying amount of the related long-lived asset
and depreciation of that cost over the life of the asset. The liability is then
increased at the end of each period to reflect the passage of time and changes
in the initial fair value measurement. The Company is required to adopt the
provisions of Statement 143 effective January 1, 2003 and has not yet determined
the extent of its impact, if any.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q for the quarter ended June 30, 2002,
as well as other public documents and statements of the Company, contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ materially from those discussed in such
forward-looking statements. Such statements include, without limitation, the
Company's expectations and estimates (whether qualitative or quantitative) as
to: the introduction of new products; the Company's plans to update its retail
presence and install new display walls (and the Company's estimates of the costs
of such new displays, the effects of such plans on the accelerated amortization
of existing displays and the estimated amount of such amortization); its future
financial performance; the effect on sales of political and/or economic
conditions, adverse currency fluctuations and competitive activities; the
possible implementation
25
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
of a new ERP System, the timing, costs and benefits of such system and the
effects of the adoption of such system on the accelerated amortization of
existing information systems if the Company proceeds with such system;
restructuring activities, restructuring costs, the timing of such payments and
annual savings and other benefits from such activities; the effects of the
Company's trade terms for its U.S. customers; cash flow from operations, cash on
hand and availability of borrowings under the 2001 Credit Agreement, the
sufficiency of such funds to satisfy the Company's cash requirements in 2002,
and the availability of funds from capital contributions or loans from
affiliates, advances under the Keepwell Agreement and the sale of additional
shares of Revlon, Inc. or the sale of equity securities of REV Holdings; uses of
funds, including for the purchases of permanent displays, capital expenditures
(and the Company's estimates of the amounts of such expenses), including for the
ERP System, and restructuring costs (and the Company's estimates of the amounts
of such costs); the availability of raw materials and components and, with
respect to Europe, products; the Company's plan to revise the Supply Agreement
with its principal European supplier and its expectation that production
difficulties will be resolved during the first half of 2003; matters concerning
market-risk sensitive instruments; the effects of the assumptions and estimates
underlying the Company's critical accounting policies; the effects of the
adoption of certain accounting principles; the receipt, amount and timing of the
payment of contingent deferred purchase price in connection with the sale of
certain assets and the Company's expectations and estimates regarding the
possible consummation of the GSB Merger and the possible consequences, effects
and timing of such merger. Statements that are not historical facts, including
statements about the Company's beliefs and expectations, are forward-looking
statements. Forward-looking statements can be identified by, among other things,
the use of forward-looking language, such as "believes," "expects," "estimates,"
"projects," "forecast," "may," "will," "should," "seeks," "plans," "scheduled
to," "anticipates" or "intends" or the negative of those terms, or other
variations of those terms or comparable language, or by discussions of strategy
or intentions. Forward-looking statements speak only as of the date they are
made, and except for the Company's ongoing obligations under the U.S. federal
securities laws, the Company undertakes no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events or otherwise. Investors are advised, however, to consult any additional
disclosures the Company makes in its Quarterly Reports on Form 10-Q, Annual
Report on Form 10-K and Current Reports on Form 8-K to the Commission (which,
among other places, can be found on the Commission's website at
http://www.sec.gov), as well as on the Company's website at www.revloninc.com.
The information available from time to time on such website shall not be deemed
incorporated by reference into this Quarterly Report on Form 10-Q. A number of
important factors could cause actual results to differ materially from those
contained in any forward-looking statement. In addition to factors that may be
described in the Company's filings with the Commission, including this filing,
the following factors, among others, could cause the Company's actual results to
differ materially from those expressed in any forward-looking statements made by
the Company: (i) difficulties or delays in developing and introducing new
products or failure of customers to accept new product offerings; (ii)
difficulties or delays or unanticipated costs associated with the Company's
implementation of new display walls; (iii) changes in consumer preferences,
including reduced consumer demand for the Company's color cosmetics and other
current products; (iv) effects of and changes in political and/or economic
conditions, including inflation and monetary conditions, and in trade, monetary,
fiscal and tax policies in international markets; (v) actions by competitors,
including business combinations, technological breakthroughs, new product
offerings, promotional spending and marketing and promotional successes,
including increases in market share; (vi) unanticipated costs or difficulties or
delays in completing projects associated with the Company's strategic plan,
including in connection with the implementation of a new ERP System; (vii)
difficulties, delays or unanticipated costs or less than expected savings and
other benefits resulting from the Company's restructuring activities; (viii)
difficulties or delays in achieving the intended results of the Company's trade
terms, including, without limitation, the possible effect of the trade terms on
sales; (ix) lower than expected cash flow from operations, the inability to
secure capital contributions or loans from affiliates or advances under the
Keepwell Agreement or sell additional shares of Revlon, Inc. or equity
securities of REV Holdings or the unavailability of funds under the 2001 Credit
Agreement; (x) higher than expected operating expenses, working capital
expenses, permanent display costs, capital expenditures, including for the ERP
System, restructuring costs or debt service payments; (xi) difficulties, delays
or unexpected costs in
26
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
sourcing raw materials or components, and with respect to Europe, products;
(xii) difficulties, delays or unanticipated costs or effects arising from the
Company's plan to revise the Supply Agreement with its principal European
supplier and resolving the production difficulties; (xiii) interest rate or
foreign exchange rate changes affecting the Company and its market sensitive
financial instruments; (xiv) unanticipated effects of the assumptions and
estimates underlying the Company's critical accounting policies; (xv)
unanticipated effects of the Company's adoption of certain new accounting
standards; (xvi) combinations among significant customers or the loss,
insolvency or failure to pay debts by a significant customer or customers;
(xvii) difficulties or delays in receiving payment of certain contingent
deferred purchase price in connection with the sale of certain assets; and
(xviii) difficulties, delays or unanticipated consequences or effects arising
with respect to the GSB Merger. Factors other than those listed above could
cause the Company's results to differ materially from expected results. This
discussion is provided as permitted by the Private Securities Litigation Reform
Act of 1995.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
------------------------------------------------------
27
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) EXHIBITS -
10.18 First Amendment dated as of May 31, 2002 to the Second Amended and
Restated Credit Agreement dated as of November 30, 2001, among Products
Corporation, the subsidiaries of Products Corporation parties thereto, the
lenders parties thereto, the Co-Agents parties thereto, Citibank, N.A., as
documentation agent, Lehman Commercial Paper Inc., as syndication agent, J.P.
Morgan Securities Inc., as sole arranger and bookrunner, and JPMorgan Chase
Bank, as administrative agent. (Incorporated by reference to Exhibit 10.18 to
the Revlon, Inc. June 30, 2002 Form 10-Q).
(b) REPORTS ON FORM 8-K - None
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
REV HOLDINGS INC.
-----------------
Registrant
By:/s/ Todd J. Slotkin
---------------------------------------------
Todd J. Slotkin
Executive Vice President,
Chief Financial Officer
and Chief Accounting Officer
Dated: August 14, 2002
28