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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 1-11178
REVLON, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3662955
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
625 MADISON AVENUE, NEW YORK, NEW YORK 10022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 527-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OR 12(g) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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CLASS A COMMON STOCK NEW YORK STOCK EXCHANGE
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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 [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12b-2 OF THE SECURITIES EXCHANGE ACT OF 1934). YES [ ] NO [X]
AS OF DECEMBER 31, 2002, 20,516,135 SHARES OF CLASS A COMMON STOCK AND
31,250,000 SHARES OF CLASS B COMMON STOCK WERE OUTSTANDING. 11,650,000 SHARES OF
CLASS A COMMON STOCK AND ALL OF THE SHARES OF CLASS B COMMON STOCK WERE HELD BY
REV HOLDINGS LLC, A DELAWARE LIMITED LIABILITY COMPANY AND AN INDIRECTLY WHOLLY-
OWNED SUBSIDIARY OF MAFCO HOLDINGS INC. THE AGGREGATE MARKET VALUE OF THE
REGISTRANT'S CLASS A COMMON STOCK HELD BY NON-AFFILIATES (USING THE NEW YORK
STOCK EXCHANGE CLOSING PRICE AS OF JUNE 28, 2002, THE LAST BUSINESS DAY OF THE
REGISTRANT'S MOST RECENTLY COMPLETED SECOND FISCAL QUARTER) WAS APPROXIMATELY
$43,887,368.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
Revlon, Inc. (and together with its subsidiaries, the "Company") conducts
its business exclusively through its direct subsidiary, Revlon Consumer Products
Corporation ("Products Corporation"), which manufactures, markets and sells an
extensive array of cosmetics and skin care, fragrances and personal care
products. REVLON is one of the world's best-known names in cosmetics and is a
leading mass-market cosmetics brand. The Company believes that its global brand
name recognition, product quality and marketing experience have enabled it to
create one of the strongest consumer brand franchises in the world. The
Company's products are sold worldwide and marketed under such well-known brand
names as REVLON, COLORSTAY, REVLON AGE DEFYING, SKINLIGHTS and ULTIMA II, as
well as ALMAY, in cosmetics; ALMAY Kinetin, VITAMIN C ABSOLUTES, ETERNA 27,
ULTIMA II and JEANNE GATINEAU in skin care; CHARLIE in fragrances; and HIGH
DIMENSION, FLEX, MITCHUM, COLORSILK, JEAN NATE and BOZZANO in personal care
products.
The Company was founded by Charles Revson, who revolutionized the cosmetics
industry by introducing nail enamels matched to lipsticks in fashion colors over
70 years ago. Today, the Company has leading market positions in a number of its
principal product categories in the U.S. mass-market distribution channel,
including the lip, face makeup and nail enamel categories. The Company also has
leading market positions in several product categories in certain markets
outside of the U.S., including in Australia, Canada, Mexico and South Africa.
The Company's products are sold in more than 100 countries across five
continents.
All United States market share and market position data herein for the
Company's brands are based upon retail dollar sales, which are derived from
ACNielsen data. ACNielsen measures retail sales volume of products sold in the
U.S. mass-market distribution channel. Such data represent ACNielsen's estimates
based upon data gathered by ACNielsen from market samples and are therefore
subject to some degree of variance. Additionally, as of August 4, 2001,
ACNielsen's data does not reflect sales volume from Wal-Mart, Inc.
THE COMPANY'S PLAN
The Company's plan consists of three main components: (1) the cost
rationalization phase; (2) the stabilization and growth phase; and (3) the
accelerated growth phase.
Phase 1 -- Cost Rationalization
In 1999 and 2000, the Company faced a number of strategic challenges.
Accordingly, through 2001 the Company focused its plan on lowering costs and
improving operating efficiency.
During 2001, the Company implemented several key elements of this phase of
its plan. For example, the Company:
o reduced departmental general and administrative expenses in the
Company's operations;
o reduced manufacturing and warehousing square footage by approximately
55% during the period from November 2000 to December 31, 2001;
o closed the Company's in-house advertising division and consolidated
all advertising for the Company's Revlon and Almay brands with two
prominent advertising agencies (and further consolidated into a single
agency in 2002); and
o implemented revised trade terms with the Company's U.S. customers
intended to increase sell-through of the Company's products, reduce
merchandise returns and claims for damages and drive market growth.
The Company believes that the actions taken during 2000 and 2001
lowered the Company's cost structure overall and improved the Company's
manufacturing and operating efficiency, creating a platform for the
stabilization and growth stage of the Company's plan.
Phase 2 -- Stabilization and Growth
In February 2002, the Company announced the appointment of Jack L.
Stahl, former president and chief operating officer of The Coca-Cola Company, as
the Company's new President and Chief Executive Officer.
Following the appointment of Mr. Stahl, the Company undertook an
extensive review and evaluation of the Company's business to establish specific
integrated objectives and actions to advance the next stage in the Company's
plan. As a result of this review, the Company established three principal
objectives:
o creating and developing the most consumer-preferred brands;
o becoming the most valuable partner to the Company's retailers; and
o becoming a top company where people choose to work.
The Company also conducted detailed evaluations and research of the
strengths of the Revlon brand (and the Company is continuing to conduct similar
evaluations and research for the Company's other major brands); the Company's
advertising and promotional efforts; the Company's relationships with the
Company's retailers and consumers; its retail in-store presence; and the
strength and skills of the Company's organization. As a result, the Company
developed the following key actions and investments to support the stabilization
and growth phase of its plan:
o Increase advertising and media spending and effectiveness. The Company
expects to increase its media spending and advertising support. The
Company will also seek to improve the effectiveness of its marketing,
including its advertising, by, among other things, ensuring consistent
messaging and imagery in its advertising, in the graphics included in
the Company's wall displays and in other marketing materials.
o Increase the marketing effectiveness of the Company's wall displays.
Beginning in the first quarter of 2003, the Company intends to make
significant improvements to its retail wall displays by streamlining
its product assortment and reconfiguring product placement, which the
Company believes will optimize cross-selling among the Company's
various product categories on the wall displays and make the wall
displays easier to merchandise and stock. The Company also intends to
continue to roll out its new wall displays, which the Company began in
2002. In addition, the Company intends to enhance merchandiser
coverage to improve customer's stock levels and continue to develop
the Company's tamper evident program to reduce damages. The Company
also intends to work with its retail customers to improve
replenishment of the Company's products on the wall displays and to
minimize out-of-stocks at its customers.
o Adopt revised pricing strategies. The Company believes that it can
increase sales by selectively adjusting prices on certain SKUs to
better align the Company's pricing with product benefits and
competitive benchmarks.
o Further strengthen the Company's new product development process. The
Company is developing a new cross-functional new product development
process intended to optimize the Company's ability to bring to market
its new product offerings to ensure that the Company has products in
key trend categories.
o Implement a comprehensive program to develop and train the Company's
employees. The Company is implementing a comprehensive program to
further develop the management, leadership and communication skills of
its employees, which the Company will regularly assess as part of its
goal to become a top company where people choose to work.
2
In December 2002, the Company announced that it would accelerate the
implementation of the stabilization and growth phase of its plan. The Company
recorded charges of approximately $100 million in the fourth quarter of 2002 and
currently expects to record additional charges not to exceed $60 million during
2003 and 2004. These charges relate to various aspects of the stabilization and
growth phase of the Company's plan, primarily stemming from higher sales returns
and inventory writedowns from a selective reduction of SKUs, reduced
distribution of the Ultima II brand, higher allowances stemming from selective
price adjustments on certain products, higher professional expenses associated
with the development of, research in relation to, and execution of the
stabilization and growth phase of the Company's plan, and writedowns associated
with reconfiguring existing wall displays at the Company's retail customers.
Phase 3 -- Accelerated Growth
The Company intends to capitalize on the actions taken during the
stabilization and growth phase of the Company's plan, with the objective of
increasing revenues and profitability over the long term.
RECENT DEVELOPMENTS
In December 2002, the Company's principal stockholder, MacAndrews & Forbes
Holdings Inc. ("MacAndrews Holdings"), a corporation wholly owned indirectly
through Mafco Holdings Inc. ("Mafco Holdings" and, collectively with MacAndrews
Holdings, "MacAndrews & Forbes"), by Ronald O. Perelman, proposed providing the
Company with up to $150 million in cash in order to help fund a portion of the
costs and expenses associated with implementing the stabilization and growth
phase of the Company's plan and for general corporate purposes. The Company's
Board of Directors appointed a special committee of independent directors to
evaluate the proposal made by MacAndrews & Forbes. The special committee
reviewed and considered the proposal and negotiated enhancements to the terms of
the proposal. In February 2003, the enhanced proposal was recommended to the
Company's Board of Directors by the special committee of the Company's Board of
Directors and approved by the Company's full board.
In connection with MacAndrews & Forbes' enhanced proposal, in February
2003 the Company entered into an investment agreement with MacAndrews & Forbes
(the "Investment Agreement") pursuant to which the Company will undertake a $50
million equity rights offering (the "Rights Offering") that will allow its
stockholders to purchase additional shares of the Company's Class A common
stock, with a par value of $0.01 per share ("Class A Common Stock"). Pursuant to
the Rights Offering, the Company will distribute to each stockholder of record
of its Class A Common Stock and its Class B common stock, with a par value of
$0.01 per share ("Class B Common Stock," together with the Class A Common Stock,
the "Common Stock"), as of the close of business on a record date to be set by
the Board of Directors, at no charge, a pro rata number of transferable
subscription rights for each share of Common Stock owned. The subscription
rights will enable the holders to purchase their pro rata portion of such number
of shares of Class A Common Stock equal to (a) $50 million divided by (b) the
subscription price, which will be equal to the greater of (1) $2.30,
representing 80% of the closing price per share of the Company's Class A Common
Stock on the New York Stock Exchange ("NYSE") on January 30, 2003, and (2) 80%
of the closing price per share of its Class A Common Stock on the NYSE on the
record date of the Rights Offering. Such number may be adjusted in an equitable
manner to avoid fractional rights and/or shares of Class A Common Stock and to
ensure that the gross proceeds from the Rights Offering equals $50 million.
Pursuant to the over-subscription privilege, each rights holder that
exercises its basic subscription privilege in full may also subscribe for
additional shares of Class A Common Stock at the same subscription price per
share, to the extent that other stockholders do not exercise their subscription
rights in full. If an insufficient number of shares is available to fully
satisfy the over-subscription privilege requests, the available shares will be
sold pro rata among subscription rights holders who exercised their
over-subscription privilege based on the number of shares each subscription
rights holder subscribed for under the basic subscription privilege.
As a Revlon stockholder, MacAndrews & Forbes will receive its pro rata
subscription rights and would also be entitled to exercise an over-subscription
privilege. However, MacAndrews & Forbes has agreed not to exercise either its
basic or its over-subscription privileges. Instead, MacAndrews & Forbes has
agreed to purchase the shares of the Company's Class A Common Stock that it
would otherwise have been entitled to receive pursuant to its basic subscription
privilege (equal to approximately 83% of the rights distributed in the Rights
Offering, or $41.5 million)
3
in a private placement direct from the Company. In addition, if any shares
remain following the exercise of the basic subscription privileges and the
over-subscription privileges by other right holders, MacAndrews & Forbes will
back- stop the Rights Offering by purchasing the remaining shares of Class A
Common Stock offered but not purchased by other stockholders (approximately 17%,
or an additional $8.5 million), also in a private placement.
In addition, in accordance with the enhanced proposal, MacAndrews & Forbes
has also provided a $100 million term loan to Products Corporation (the
"MacAndrews & Forbes $100 million term loan"). If, prior to the consummation of
the Rights Offering, Products Corporation has fully drawn the MacAndrews &
Forbes $100 million term loan and the implementation of the stabilization and
growth phase of the Company's plan causes the Company to require some or all of
the $50 million of funds that the Company would raise from the Rights Offering,
MacAndrews & Forbes has agreed to advance the Company these funds prior to
closing the Rights Offering by purchasing up to $50 million of newly-issued
shares of the Company's Series C preferred stock which would be redeemed with
the proceeds the Company receives from the Rights Offering (this investment in
the Company's Series C preferred stock (which is non-voting, non-dividend paying
and non-convertible) is referred to as the "$50 million Series C preferred stock
investment"). The MacAndrews & Forbes $100 million term loan has a final
maturity date of December 1, 2005 and interest on such loan of 12.0% is not
payable in cash, but will accrue and be added to the principal amount each
quarter and be paid in full at final maturity. The Company expects that it will
issue the subscription rights and consummate the Rights Offering in the second
quarter of 2003, subject to the effectiveness of the registration statement
(which the Company filed with the Securities and Exchange Commission (the
"Commission") on February 5, 2003). Based on this expectation, the Company
anticipates that Products Corporation will be required to draw on the MacAndrews
& Forbes $100 million term loan before the Rights Offering is consummated in
order to continue the implementation of the stabilization and growth phase of
the Company's plan and for general corporate purposes. However, the Company does
not currently anticipate that it will require that MacAndrews & Forbes make the
$50 million Series C preferred stock investment.
Additionally, MacAndrews & Forbes has also agreed to provide Products
Corporation with an additional $40 million line of credit during 2003, which
amount will increase to $65 million on January 1, 2004 (the "MacAndrews & Forbes
$40-65 million line of credit") (the MacAndrews & Forbes $100 million term loan
and the MacAndrews & Forbes $40-65 million line of credit are referred to as the
"Mafco Loans" and the Rights Offering and the Mafco Loans are referred to as the
"M&F Investments") and which will be available to Products Corporation through
December 31, 2004, provided that the MacAndrews & Forbes $100 million term loan
is fully drawn and MacAndrews & Forbes has purchased an aggregate of $50 million
of the Company's Series C preferred stock (or if the Company has consummated the
Rights Offering and redeemed any outstanding shares of Series C preferred
stock). The MacAndrews & Forbes $40-65 million line of credit will bear interest
payable in cash at a rate of the lesser of (i) 12.0% and (ii) 0.25% less than
the rate payable from time to time on Eurodollar loans under Products
Corporation's Credit Agreement discussed below (and as hereinafter defined)
(which rate, after giving effect to the amendment in February 2003 to Products
Corporation's Credit Agreement, is 8.25% as of March 1, 2003). The Company does
not expect that Products Corporation will draw on the MacAndrews & Forbes $40-65
million line of credit during 2003.
In connection with the transactions with MacAndrews & Forbes described
above, and as a result of the Company's operating results for the fourth quarter
of 2002 and the effect of the acceleration of the Company's implementation of
the stabilization and growth phase of its plan, as discussed above, Products
Corporation entered into an amendment in February 2003 of its Credit Agreement
with its bank lenders and secured waivers of compliance with certain covenants
under the Credit Agreement. In particular, EBITDA (as defined in the Credit
Agreement) was $35.2 million for the four consecutive fiscal quarters ended
December 31, 2002, which was less than the minimum of $210 million required
under the EBITDA covenant of the Credit Agreement for that period and the
Company's leverage ratio was 5.09:1.00, which was in excess of the maximum ratio
of 1.4:1.00 permitted under the leverage ratio covenant of the Credit Agreement
for that period. Accordingly, the Company sought and secured waivers of
compliance with these covenants for the fourth quarter of 2002 and, in light of
the Company's expectation that the continued implementation of the stabilization
and growth phase of the Company's plan would affect the ability of Products
Corporation to comply with these covenants during 2003, the Company also secured
an amendment to eliminate the EBITDA and leverage ratio covenants for the first
three quarters of 2003 and a waiver of compliance with such covenants for the
fourth quarter of 2003 expiring on January 31, 2004.
4
The amendment to the Credit Agreement also included the substitution of a
minimum liquidity covenant requiring the Company to maintain a minimum of $20
million of liquidity from all available sources at all times through January 31,
2004 and certain other amendments to allow for the M&F Investments and the
implementation of the stabilization and growth phase of the Company's plan,
including specific exceptions from the limitations under the indebtedness
covenant to permit the MacAndrews & Forbes $100 million term loan and the
MacAndrews & Forbes $40-65 million line of credit and to exclude the proceeds
from the M&F Investments from the mandatory prepayment provisions of the Credit
Agreement, and to increase the maximum limit on capital expenditures (as defined
in the Credit Agreement) from $100 million to $115 million for 2003. The
amendment also increased the applicable margin on loans under the existing
credit agreement by 0.5%, the incremental cost of which to the Company, assuming
the Credit Agreement is fully drawn, would be $1.1 million from February 5, 2003
through the end of 2003.
PRODUCTS
The Company manufactures and markets a variety of products worldwide. The
following table sets forth the Company's principal brands and certain selected
products.
PERSONAL
BRAND COSMETICS SKIN CARE FRAGRANCES CARE
PRODUCTS
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REVLON Revlon Eterna 27 Charlie High Dimension
ColorStay Vitamin C Absolutes Ciara Colorsilk
ColorStay Overtime Revlon Absolutes Frost & Glow
Stay Natural Flex
Always On Outrageous
Revlon Age Defying Aquamarine
Super Lustrous Mitchum
New Complexion Hi & Dri
Skinlights Jean Nate
High Dimension Revlon Beauty Tools
Illuminance
Lipglide
Moisturous
ALMAY Almay Almay Kinetin Almay
Time-Off Almay Milk Plus
Amazing Lasting
One Coat
Skin Stays Clean
Organic Fluoride Plus
Lip Vitality
Clear Complexion
Skin Smoothing
Foundation
Pure Tints
OTHER Ultima II Ultima II Bozzano
BRANDS Jeanne Gatineau Jeanne Gatineau Juvena
Cutex
Cosmetics and Skin Care. The Company sells a broad range of cosmetics and
skin care products designed to fulfill specifically identified consumer needs,
principally priced in the upper range of the mass-market distribution channel,
including lip makeup, nail color and nail care products, eye and face makeup and
skin care products such as lotions, cleansers, creams, toners and moisturizers.
Many of the Company's products incorporate patented, patent-pending or
proprietary technology.
5
The Company markets several different lines of REVLON lip makeup (which
address different segments of the lip makeup category). The Company's COLORSTAY
lipcolor uses patented transfer-resistant technology that provides long wear.
COLORSTAY OVERTIME LIPCOLOR is a patented lip technology introduced in 2002 that
builds on the strengths of the COLORSTAY franchise by offering long-wearing
benefits in a new product form, which enhances comfort and shine. SUPER LUSTROUS
lipstick is the Company's flagship wax-based lipcolor. MOON DROPS, a
moisturizing lipstick, is produced in approximately 30 shades.
The Company's nail color and nail care lines include enamels, cuticle
preparations and enamel removers. The Company's flagship REVLON nail enamel uses
a patented formula that provides consumers with improved wear, application,
shine and gloss in a toluene-free and formaldehyde-free formula. The Company's
SUPER TOP SPEED nail enamel contains a patented speed drying polymer formula,
which sets in 60 seconds. The Company also sells CUTEX nail polish remover and
nail care products in certain countries outside the U.S.
The Company sells face makeup, including foundation, powder, blush and
concealers, under such Revlon brand names as REVLON AGE DEFYING, which is
targeted for women in the over 35 age bracket; COLORSTAY, which uses patented
transfer-resistant technology that provides long wear and won't rub off
benefits; NEW COMPLEXION, for consumers in the 18-to-34 age bracket; and
SKINLIGHTS skin brighteners that brighten skin with sheer washes of color.
The Company's eye makeup products include mascaras, eyeliners, eye shadows
and brow color. COLORSTAY eyecolor, mascara and brow color, SOFTSTROKE eyeliners
and REVLON WET/DRY eye shadows are targeted for women in the 18-to-49 age
bracket. The Company's eye products also include ILLUMINANCE, an eye shadow that
gives a luminous finish, and HIGH DIMENSION mascara and eyeliners. In 2002, the
Company launched COLORSTAY OVERTIME lash tint, a patented product that wears for
up to three days.
The Company's ALMAY brand consists of a line of hypo-allergenic,
dermatologist-tested, fragrance-free cosmetics and skin care products. ALMAY
products include lip makeup, nail care, eye and face makeup and skin care
products. The ALMAY brand flagship ONE COAT franchise consists of lip makeup and
eye makeup products including mascara. The Company also sells Skin Stays Clean
liquid foundation makeup with its patented "clean pore complex." The ALMAY
AMAZING LASTING Collection features long-wearing mascaras and foundations. The
ALMAY Kinetin Skincare Advanced Anti-Aging Series features a patented
technology. In 2002, the Company launched ALMAY Kinetin SKIN SMOOTHING
foundation and ALMAY LIP VITALITY lipstick with a patented technology.
The Company sells Revlon Beauty Tools, which include nail and eye grooming
tools, such as clippers, scissors, files, tweezers and eye lash curlers. Revlon
Beauty Tools are sold individually and in sets under the REVLON brand name and
are the number one brand in the U.S. mass-market distribution channel.
The Company's skin care products, including moisturizers, are sold under
brand names including ETERNA 27, REVLON VITAMIN C ABSOLUTES, REVLON ABSOLUTES,
ALMAY Kinetin, ALMAY MILK PLUS and ULTIMA II. In addition, the Company sells
skin care products in international markets under internationally recognized
brand names and under various regional brands, including the Company's
premium-priced JEANNE GATINEAU brand.
Personal Care Products. The Company sells a broad line of personal care
consumer products, which complements its core cosmetics lines and enables the
Company to meet the consumer's broader beauty care needs. In the mass-market
distribution channel, the Company sells haircare, antiperspirant and other
personal care products, including the FLEX and AQUAMARINE haircare lines
throughout a portion of the world and the BOZZANO and JUVENA brands in Brazil;
as well as COLORSILK and FROST & GLOW hair coloring lines throughout most of the
world; and the MITCHUM and HI & DRI antiperspirant brands. The Company also
markets hypo-allergenic personal care products, including moisturizers and
antiperspirants, under the ALMAY brand. The Company's HIGH DIMENSION hair color
is a revolutionary 10-minute home permanent hair color.
Fragrances. The Company sells a selection of moderately priced and
premium-priced fragrances, including perfumes, eau de toilettes, colognes and
body sprays. The Company's portfolio includes fragrances such as CHARLIE and
CIARA.
6
MARKETING
The Company markets extensive consumer product lines at a range of retail
prices primarily through the mass-market distribution channel and outside the
U.S. also markets select premium lines through demonstrator-assisted channels.
The Company undertook a comprehensive review of its advertising strategy in
late 2000 and early 2001. This resulted in a shift from the historical use of an
in-house advertising division to create and execute advertising to the use of
outside agencies to develop advertising campaigns for a number of the Company's
key new product launches and to bring new energy to the REVLON and ALMAY brands,
respectively. Additionally, in 2002 the Company consolidated all of its
advertising for the REVLON and ALMAY brands into a single advertising agency
intended to increase the effectiveness of its worldwide advertising, as well as
result in more efficient media placement.
The Company uses print and television advertising and point-of-sale
merchandising, including displays and samples. The Company's marketing
emphasizes a uniform global image and product for its portfolio of core brands,
including REVLON, COLORSTAY, REVLON AGE DEFYING, ALMAY, FLEX, CHARLIE, and
MITCHUM. The Company coordinates advertising campaigns with in-store promotional
and other marketing activities. The Company develops jointly with retailers
carefully tailored advertising, point-of-purchase and other focused marketing
programs. The Company uses network and spot television advertising, national
cable advertising and print advertising in major general interest, women's
fashion and women's service magazines, as well as coupons, magazine inserts and
point-of-sale testers. The Company also uses cooperative advertising programs
with some retailers, supported by Company-paid or Company-subsidized
demonstrators, and coordinated in-store promotions and displays.
The Company distributes unique marketing materials such as the "Revlon
Report," which highlights seasonal and other fashion and color trends, describes
the Company's products that address those trends and can include coupons, rebate
offers and other promotional material to encourage consumers to try the
Company's products. Other marketing materials designed to introduce the
Company's newest products to consumers and encourage trial and purchase include
point-of-sale testers on the Company's wall displays that provide information
about, and permit consumers to test, the Company's products, thereby achieving
the benefits of an in-store demonstrator without the corresponding cost;
magazine inserts containing samples of the Company's newest products; trial-size
products; and "shade samplers," which are collections of trial-size products in
different shades. Additionally, the Company maintains separate websites,
www.revlon.com and www.almay.com devoted to the REVLON and ALMAY brands,
respectively. Each of these websites feature current product and promotional
information for the REVLON and ALMAY brands, respectively, and are updated
regularly to stay current with the Company's new product launches and other
advertising and promotional campaigns.
NEW PRODUCT DEVELOPMENT AND RESEARCH AND DEVELOPMENT
The Company believes that it is an industry leader in the development of
innovative and technologically-advanced consumer products. The Company's
marketing and research and development groups identify consumer needs and shifts
in consumer preferences in order to develop new products, tailor line extensions
and promotions and redesign or reformulate existing products to satisfy such
needs or preferences. The Company's research and development group comprises
departments specialized in the technologies critical to the Company's various
product categories, as well as an advanced technology department that promotes
inter-departmental, cross-functional research on a wide range of technologies to
develop new and innovative products. The Company independently develops
substantially all of its new products. In connection with the stabilization and
growth phase of the Company's plan, the Company is developing a new
cross-functional new product development process intended to optimize the
Company's ability to bring to market its new product offerings to ensure that
the Company has products in key trend categories.
The Company operates an extensive cosmetics research and development
facility in Edison, New Jersey. The scientists at the Edison facility are
responsible for all of the Company's new product research worldwide, performing
research for new products, ideas, concepts and packaging. The research and
development group at the Edison facility also performs extensive safety and
quality tests on the Company's products, including toxicology, microbiology and
package testing. Additionally, quality control testing is performed at each
manufacturing facility.
7
As of December 31, 2002, the Company employed approximately 160 people in
its research and development activities, including specialists in pharmacology,
toxicology, chemistry, microbiology, engineering, biology, dermatology and
quality control. In 2002, 2001 and 2000, the Company spent approximately $23.3
million, $24.4 million and $27.3 million, respectively, on research and
development activities.
MANUFACTURING AND RELATED OPERATIONS AND RAW MATERIALS
Since late 2000, the Company completed a number of measures related to
rationalizing its global manufacturing capacity, which are designed to
substantially reduce costs and increase operating efficiencies. The Company sold
or closed approximately 55% of its manufacturing and distribution facility
square footage, including the sale of the Company's facilities in Phoenix,
Arizona; Maesteg, South Wales; and Sao Paulo, Brazil; and the closure of the
Company's manufacturing operations in Canada and New Zealand.
In connection with the sale of the Phoenix facility and the closing of the
Canadian facility, the Company consolidated North American manufacturing into
its Oxford, North Carolina facility, which consolidation was completed in late
2001. Revlon Beauty Tools for sale throughout the world are manufactured and/or
assembled at the Company's Irvington, New Jersey facility.
During 2002, cosmetics and personal care products also were produced at the
Company's facilities in Venezuela, France, South Africa and China and personal
care products in Mexico and at third-party owned facilities in Maesteg, South
Wales, Sao Paulo, Brazil, Buenos Aires, Argentina and Samutprakarn, Thailand.
The Company continually reviews its manufacturing needs against its
manufacturing capacity for opportunities to reduce costs and produce more
efficiently.
The Company purchases raw materials and components throughout the world.
The Company continuously pursues reductions in cost of goods through the global
sourcing of raw materials and components from qualified vendors, utilizing its
large purchasing capacity to maximize cost savings. The global sourcing of raw
materials and components from accredited vendors also ensures the quality of the
raw materials and components. The Company believes that alternate sources of raw
materials and components exist and does not anticipate any significant shortages
of, or difficulty in obtaining, such materials.
DISTRIBUTION
The Company's products are sold in more than 100 countries across five
continents. The Company's worldwide sales force had approximately 400 people as
of December 31, 2002, including a dedicated sales force for cosmetics, skin
care, fragrance and personal care products in the mass-market distribution
channel in the U.S. In addition, the Company utilizes sales representatives and
independent distributors to serve specialized markets and related distribution
channels.
United States and Canada. Net sales in the U.S. and Canada accounted for
approximately 68% of the Company's 2002 net sales, a majority of which were made
in the mass-market distribution channel. The Company also sells a broad range of
consumer products to U.S Government military exchanges and commissaries. The
Company licenses its trademarks to select manufacturers for products that the
Company believes have the potential to extend the Company's brand names and
image. As of December 31, 2002, 13 licenses were in effect relating to 17
product categories to be marketed principally in the mass-market distribution
channel. Pursuant to such licenses, the Company retains strict control over
product design and development, product quality, advertising and use of its
trademarks. These licensing arrangements offer opportunities for the Company to
generate revenues and cash flow through royalties.
As part of its strategy to increase consumption of the Company's products
at retail, the Company has increased the number of retail merchandisers who
stock and maintain the Company's point-of-sale wall displays intended to ensure
that high-selling SKUs are in stock and to ensure the optimal presentation of
the Company's products in retail outlets. Additionally, the Company continues to
upgrade the technology available to its sales force to provide real-time
information regarding inventory levels and other relevant information.
8
International. Net sales outside the U.S. and Canada accounted for
approximately 32% of the Company's 2002 net sales. The ten largest countries in
terms of these sales, which include the United Kingdom, Australia, South Africa,
Mexico, Brazil, Hong Kong, Japan, Italy, France and China, accounted for
approximately 25% of the Company's net sales in 2002. The Company distributes
its products through drug stores/chemists, hypermarkets/mass volume retailers
and variety stores. The Company also distributes outside the U.S. through
department stores and specialty stores such as perfumeries. At December 31,
2002, the Company actively sold its products through wholly-owned subsidiaries
established in 17 countries outside of the U.S. and through a large number of
distributors and licensees elsewhere around the world.
CUSTOMERS
The Company's principal customers include large mass volume retailers and
chain drug stores, including such well-known retailers as Wal-Mart, Target,
Kmart, Walgreen, Rite Aid, CVS, Eckerd, Albertsons Drugs and Longs in the U.S.,
Boots in the United Kingdom, Watsons in the Far East and Wal-Mart
internationally. Wal-Mart and its affiliates worldwide accounted for
approximately 22.5% of the Company's 2002 consolidated net sales. The Company
expects that Wal-Mart and a small number of other customers will, in the
aggregate, continue to account for a large portion of the Company's net sales.
Although the loss of Wal-Mart or one or more of the Company's other customers
that may account for a significant portion of the Company's sales, or any
significant decrease in sales to these customers or any significant decrease in
retail display space in any of these customers' stores, could have a material
adverse effect on the Company's business, financial condition or results of
operations, the Company has no reason to believe that any such loss of customers
or decrease in sales will occur. In January 2002, Kmart Corporation filed a
petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. On
January 24, 2003, Kmart announced that it had filed its proposed plan of
reorganization with the U.S. Bankruptcy Court and that it was positioned to
emerge from bankruptcy on or about April 30, 2003. Throughout 2002 and
continuing into 2003 Kmart continued to close underperforming stores. Kmart
accounted for less than 5% of the Company's net sales in 2002. Although the
Company plans to continue doing business with Kmart for the foreseeable future
and, based upon the information currently available, believes that Kmart's
bankruptcy proceedings and store closings will not have a material adverse
effect on the Company's business, financial condition or results of operations,
there can be no assurances that further deterioration, if any, in Kmart's
financial condition will not have such an effect on the Company. In January
2003, J.C. Penney Corp. announced that it will be discontinuing color cosmetics
in most of its stores. J.C. Penney carries the Company's Ultima II brand,
however the Company's sales to J.C. Penney accounted for less than 1% of the
Company's total sales during 2002. Accordingly, the Company does not believe
that this discontinuance will have a material adverse effect on the Company's
future business, financial condition or results of operations.
COMPETITION
The consumer products business is highly competitive. The Company competes
on the basis of numerous factors. Brand recognition, product quality,
performance and price, product availability at the retail stores and the extent
to which consumers are educated on product benefits have a marked influence on
consumers' choices among competing products and brands. Advertising, promotion,
merchandising and packaging, and the timing of new product introductions and
line extensions, also have a significant impact on buying decisions, and the
structure and quality of the Company's sales force, as well as consumer
consumption of the Company's products, affect in-store position, retail display
space and inventory levels in retail outlets. The Company has experienced
declines in its market share in the U.S. mass-market in color cosmetics since
the end of the first half of 1998 through the first half of 2002, including a
decline in its color cosmetics market share from 32.0% in the second quarter of
1998 to 22.3% in the second quarter of 2002. However, for the second half of
2002 and for the full year 2002, the market share for the Company's Revlon
branded color cosmetics in the U.S. mass-market increased over the prior year.
There can be no assurance that declines in market share will not occur in the
future or that the Company's recent share increases will continue. In addition,
the Company competes in selected product categories against a number of
multinational manufacturers, some of which are larger and have substantially
greater resources than the Company, and which may therefore have the ability to
spend more aggressively on advertising and marketing and more flexibility to
respond to changing business and economic conditions than the Company. Certain
of the Company's competitors have increased their spending on discounting and
advertising and promotional activities in U.S. mass-market cosmetics. In
addition to products sold in the mass-market and demonstrator-assisted channels,
the Company's products also compete with similar products sold door-to-door or
through mail-order or telemarketing by representatives of direct sales
9
companies. The Company's principal competitors include L'Oreal S.A., The Procter
& Gamble Company, Unilever N.V. and The Estee Lauder Companies Inc.
PATENTS, TRADEMARKS AND PROPRIETARY TECHNOLOGY
The Company's major trademarks are registered in the U.S. and in
well over 100 other countries, and the Company considers trademark protection to
be very important to its business. Significant trademarks include REVLON,
COLORSTAY, REVLON AGE DEFYING, SKINLIGHTS, HIGH DIMENSION, FROST & GLOW,
ILLUMINANCE, FLEX, CUTEX (outside the U.S.), MITCHUM, ETERNA 27, ALMAY, ALMAY
Kinetin, ULTIMA II, CHARLIE, JEAN NATE, MOON DROPS, SUPER LUSTROUS and
COLORSILK.
The Company utilizes certain proprietary, patent pending or patented
technologies in the formulation or manufacture of a number of the Company's
products, including COLORSTAY cosmetics, classic REVLON nail enamel, SKINLIGHTS
skin brightener, HIGH DIMENSION hair color, SUPER TOP SPEED nail enamel, REVLON
AGE DEFYING foundation and cosmetics, NEW COMPLEXION makeup, ALMAY Kinetin skin
care, TIME-OFF makeup, AMAZING LASTING cosmetics and ALMAY ONE COAT cosmetics.
The Company also protects certain of its packaging and component concepts
through design patents. The Company considers its proprietary technology and
patent protection to be important to its business.
GOVERNMENT REGULATION
The Company is subject to regulation by the Federal Trade Commission and
the Food and Drug Administration (the "FDA") in the United States, as well as
various other federal, state, local and foreign regulatory authorities. The
Oxford, North Carolina manufacturing facility is registered with the FDA as a
drug manufacturing establishment, permitting the manufacture of cosmetics that
contain over-the-counter drug ingredients such as sunscreens. Compliance with
federal, state, local and foreign laws and regulations pertaining to discharge
of materials into the environment, or otherwise relating to the protection of
the environment, has not had, and is not anticipated to have, a material effect
upon the Company's capital expenditures, earnings or competitive position. State
and local regulations in the U.S. that are designed to protect consumers or the
environment have an increasing influence on the Company's product claims,
contents and packaging.
INDUSTRY SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS
The Company operates in a single segment. Certain geographic, financial and
other information of the Company is set forth in Note 18 of the Notes to
Consolidated Financial Statements of the Company.
EMPLOYEES
As of December 31, 2002, the Company employed approximately 6,000 people.
As of December 31, 2002, approximately 130 of such employees in the U.S. were
covered by collective bargaining agreements. The Company believes that its
employee relations are satisfactory. Although the Company has experienced minor
work stoppages of limited duration in the past in the ordinary course of
business, such work stoppages have not had a material effect on the Company's
results of operations or financial condition.
ITEM 2. PROPERTIES
The following table sets forth as of December 31, 2002 the Company's major
manufacturing, research and warehouse/distribution facilities, all of which are
owned except where otherwise noted.
APPROXIMATE FLOOR
LOCATION USE SPACE SQ. FT.
- -------- --- -------------
Oxford, North Carolina ....... Manufacturing, warehousing, distribution and office 1,012,000
Edison, New Jersey ........... Research and office (leased) 175,000
Irvington, New Jersey ........ Manufacturing, warehousing and office 96,000
10
APPROXIMATE FLOOR
LOCATION USE SPACE SQ. FT.
- -------- --- -------------
Mexico City, Mexico .......... Manufacturing, distribution and office 150,000
Caracas, Venezuela ........... Manufacturing, distribution and office 145,000
Kempton Park, South Africa ... Warehousing, distribution and office (leased) 127,000
Canberra, Australia .......... Warehousing, distribution and office 125,000
Isando, South Africa ......... Manufacturing, warehousing, distribution and office 94,000
In addition to the facilities described above, the Company owns and leases
additional facilities in various areas throughout the world, including the lease
for the Company's executive offices in New York, New York (346,000 square feet,
of which approximately 5,000 square feet were sublet to affiliates of the
Company and approximately 174,000 square feet were sublet to unaffiliated third
parties as of December 31, 2002). Management considers the Company's facilities
to be well-maintained and satisfactory for the Company's operations, and
believes that the Company's facilities and third party contractual supplier
arrangements provide sufficient capacity for its current and expected production
requirements. The Company is exploring plans to relocate its executive offices
to a new location in New York City.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various routine legal proceedings incident to
the ordinary course of its business. The Company believes that the outcome of
all pending legal proceedings in the aggregate is unlikely to have a material
adverse effect on the business or consolidated financial condition of the
Company.
On April 17, 2000, the plaintiffs in the six purported class actions filed
in October and November 1999 by each of Thomas Comport, Boaz Spitz, Felix Ezeir
and Amy Hoffman, Ted Parris, Jerry Krim and Dan Gavish individually and
allegedly on behalf of others similarly situated to them against Revlon, Inc.,
certain of its present and former officers and directors and the parent of
Revlon, Inc., REV Holdings Inc. (a Delaware corporation and the predecessor of
REV Holdings LLC, a Delaware limited liability company ("REV Holdings")),
alleging among other things, violations of Rule 10b-5 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), filed an amended
complaint, which consolidated all of the actions under the caption "In Re
Revlon, Inc. Securities Litigation" and limited the alleged class to security
purchasers during the period from October 29, 1997 through October 1, 1998. In
December 2002, the defendants, including the Company, entered into an agreement
in principle to settle the litigation. The final written agreement reflecting
this agreement in principle, which was executed in January 2003 and which
remains subject to approval by the court, provides that the defendants will
obtain complete releases from the participating members of the alleged class. In
connection with this tentative settlement and a related settlement of the
defendants' insurance claim for this matter and the Gavish matter described
below (the "Insurance Settlement"), the Company recorded the settlement in the
fourth quarter of 2002.
A purported class action lawsuit was filed on September 27, 2000, in the
United States District Court for the Southern District of New York on behalf of
Dan Gavish, Tricia Fontan and Walter Fontan individually and allegedly on behalf
of all others similarly situated who purchased the securities of Revlon, Inc.
and REV Holdings between October 2, 1998 and September 30, 1999 (the "Second
Gavish Action"). In November 2001, plaintiffs amended their complaint. The
amended complaint alleges, among other things, that Revlon, Inc., certain of its
present and former officers and directors and REV Holdings violated, among other
things, Rule 10b-5 under the Exchange Act. In December 2001, the defendants
moved to dismiss the amended complaint. The Company believes the allegations in
the amended complaint are without merit and, if its motion to dismiss is not
granted, intends to vigorously defend against them. In light of the Insurance
Settlement, the Company does not expect to incur any further expense in this
matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MacAndrews & Forbes, which is indirectly wholly owned by Ronald O.
Perelman, through REV Holdings, beneficially owns (i) 11,650,000 shares of the
Class A Common Stock of Revlon, Inc. (representing approximately 57% of the
outstanding shares of Class A Common Stock of Revlon, Inc.), (ii) all of the
outstanding 31,250,000 shares of Class B Common Stock of Revlon, Inc., which
together with the shares referenced in clause (i) above represent approximately
83% of the combined outstanding shares of Revlon, Inc. Common Stock, and (iii)
all of the outstanding 4,333 shares of Series B Convertible Preferred Stock
("Series B Preferred Stock") of Revlon, Inc. (each of which is entitled to 100
votes and each of which is convertible into 100 shares of Class A Common Stock).
Based on the shares referenced in clauses (i), (ii) and (iii) above, Mr.
Perelman through Mafco Holdings (through REV Holdings) had at December 31, 2002
approximately 97% of the combined voting power of the outstanding shares of the
Company's Common Stock entitled to vote at its 2003 Annual Meeting of
Stockholders. The remaining 8,866,135 shares of Revlon, Inc.'s Class A Common
Stock outstanding at December 31, 2002 are owned by the public and are listed
and traded on the NYSE. As of December 31, 2002, there were 805 holders of
record of Revlon, Inc.'s Class A Common Stock. No dividends were declared or
paid during 2002 or 2001. The terms of the 2001 Credit Agreement, the Mafco
Loans, the 8 5/8% Notes, the 8 1/8% Notes, the 9% Notes and the 12% Notes (each
as hereinafter defined) currently restrict the ability of Products Corporation
to pay dividends or make distributions to Revlon, Inc., except in limited
circumstances. See the Consolidated Financial Statements of the Company and the
Notes thereto.
The table below shows the Company's high and low quarterly stock prices of
the Company's Class A Common Stock on the NYSE for the years ended December 31,
2002 and 2001.
2002 QUARTERLY STOCK PRICES(1)
---------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ------------ ------------
High .......... $ 6.60 $ 6.15 $ 5.16 $ 4.55
Low ........... 3.82 4.35 2.99 2.10
2001 QUARTERLY STOCK PRICES(1)
---------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ------------ ------------
High .......... $ 6.15 $ 7.25 $ 8.95 $ 7.25
Low ........... 4.42 4.34 4.77 5.05
(1) Represents the closing price per share of the Company's Class A Common
Stock on the NYSE, the exchange on which such shares are listed. The Company's
stock trading symbol is "REV".
ITEM 6. SELECTED FINANCIAL DATA
The Consolidated Statements of Operations Data for each of the years in the
five-year period ended December 31, 2002 and the Balance Sheet Data as of
December 31, 2002, 2001, 2000, 1999 and 1998 are derived from the Consolidated
Financial Statements of the Company, which have been audited by KPMG LLP,
independent certified public accountants. The Selected Consolidated Financial
Data should be read in conjunction with the Consolidated Financial Statements of
the Company and the Notes to the Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
12
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- --------- --------- ----------- -----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
STATEMENTS OF OPERATIONS DATA
(a)(b)(c)(l):
Net sales ................................... $ 1,119.4 $ 1,277.6 $ 1,409.4 $ 1,629.8 $ 2064.1
Operating (loss) income ..................... (114.9)(d)(k) 16.1(e) 15.9(f) (212.0)(g) 124.7(h)
Loss from continuing operations ............. (286.5) (153.7)(i) (129.7) (370.9) (79.0)(j)
Basic and diluted loss from continuing
operations per common share ................. $ (5.49) $ (2.94) $ (2.49) $ (7.12) $ (1.52)
=========== ========== ========== ========== ==========
Weighted average number of common
shares outstanding: (m)
Basic and diluted ........................... 52.2 52.2 52.2 52.1 52.1
=========== ========== ========== ========== ==========
DECEMBER 31,
-----------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- --------- ---------- ----------- -----------
(IN MILLIONS)
BALANCE SHEET DATA(b)(c):
Total assets ................................ $ 939.5 $ 997.6 $ 1,101.8 $ 1,558.9 $ 1,831.0
Long-term debt, including current
portion ..................................... 1,750.1 1,643.6 1,563.1 1,772.1 1,660.0
Total stockholders' deficiency .............. (1,640.8) (1,282.7) (1,106.7) (1,015.0) (647.7)
(a) 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 (Including 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 first portion of
these new Guidelines effective January 1, 2001. The Company adopted the second
portion of these new Guidelines (formerly EITF Issue 00-25) addressing certain
sales incentives effective January 1, 2002, and accordingly, all prior period
financial statements reflect the implementation of the Guidelines.
(b) On July 16, 2001, the Company completed the disposition of the Colorama
brand in Brazil. Accordingly, the selected financial data includes the results
of operations of the Colorama brand through the date of disposition.
(c) On March 30, 2000 and May 8, 2000, the Company completed the dispositions of
its worldwide professional products line and the Plusbelle brand in Argentina,
respectively. Accordingly, the selected financial data include the results of
operations of the professional products line and the Plusbelle brand through the
dates of their respective dispositions.
(d) Includes restructuring costs and other, net and additional consolidation
costs associated with the shutdown of the Company's Phoenix and Canada
facilities of $13.6 million and $1.6 million, respectively, and executive
separation costs of $9.4 million. (See Note 2 to the Consolidated Financial
Statements).
(e) Includes restructuring costs and other, net, and additional consolidation
costs associated with the shutdown of the Phoenix and Canada facilities of $38.1
million and $43.6 million, respectively. (See Note 2 to the Consolidated
Financial Statements).
(f) Includes restructuring costs and other, net, and additional consolidation
costs associated with the shutdown of the Phoenix facility of $54.1 million and
$4.9 million, respectively. (See Note 2 to the Consolidated Financial
Statements).
(g) Includes restructuring costs and other, net of $40.2 million and executive
separation costs of $22.0 million. (See Note 2 to the Consolidated Financial
Statements).
(h) Includes restructuring costs and other, net, aggregating $35.8 million.
13
(i) Includes a loss of $3.6 million from early extinguishments of debt.
(j) Includes a loss of $51.7 million from early extinguishments of debt.
(k) Includes expenses of $104.2 million (of which $99.3 million was recorded in
the fourth quarter of 2002) related to the acceleration of the implementation of
the stabilization and growth phase of the Company's plan.
(l) In July 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets". Statement No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually in accordance with the provisions of
Statement No. 142. Statement No. 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 No. 142 effective January 1, 2002.
In connection with the adoption of Statement No. 142, the Company performed a
transitional goodwill impairment test as required by such rule and determined
that no goodwill impairment existed at January 1, 2002. Amortization of goodwill
ceased on January 1, 2002, upon adoption of Statement No. 142. Amortization
expense for goodwill was $7.7 million in 2001, $9.0 million in 2000, $12.8
million in 1999 and $12.1 million in 1998.
(m) Represents the weighted average number of common shares outstanding for the
period. (See Note 1 to the Consolidated Financial Statements).
ITEM 7. 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.
As discussed in further detail under "Recent Developments", the Company has
accelerated the implementation of the stabilization and growth phase of its
three-part plan, which, following detailed evaluations and research, is based on
the following key actions and investments: (i) increasing advertising and media
spending and effectiveness; (ii) increasing the marketing effectiveness of the
Company's wall displays, by among other things, reconfiguring wall displays at
its existing retail customers, streamlining its product assortment and
reconfiguring product placement on its wall displays and rolling out the new
wall displays, which it began in 2002; (iii) selectively adjusting prices on
certain SKUs; (iv) further strengthening the Company's new product development
process; and (v) implementing a comprehensive program to develop and train the
Company's employees. Based upon the responses of its retail customers and the
M&F Investments, the Company determined to accelerate the implementation of the
stabilization and growth phase of its plan.
On March 30, 2000, May 8, 2000 and July 16, 2001 Products Corporation
completed the dispositions of its worldwide professional products line,
Plusbelle brand in Argentina and Colorama brand in Brazil, respectively (the
"Product Line and Brands Sold"). Accordingly, the Consolidated Condensed
Financial Statements include the results of operations of the professional
products line and the Plusbelle and Colorama brands through the dates of their
respective dispositions.
In November 2001, the EITF reached consensus on EITF Issue 01-9, 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 second portion of these new Guidelines
(formerly EITF Issue 00-25) addressing certain sales incentives effective
January 1, 2002, and accordingly, all prior period financial statements reflect
the implementation of the second portion of the Guidelines.
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 U.S. operations. During
14
the third quarter of 2002, the Company reclassified its South African operations
from the European region to the Far East region to reflect the management
organization responsibility for that country. Accordingly, management's
discussion and analysis data reflect these changes for all periods presented.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES:
In the ordinary course of its 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 U.S. 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 Companyestablished 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 and cost of sales, and an increase in accrued
liabilities and inventories. 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. Cost of sales includes the cost of refurbishment of returned
products. Actual returns, as well as realized values on returned products, may
differ significantly, either favorably or unfavorably, from the Company's
estimates if factors such as product discontinuances, customer inventory levels
or competitive conditions differ from the Company's estimates and expectations
and, in the case of actual returns, if economic conditions differ significantly
from the Company's 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, as well as
retailer participation levels, differ from the Company's estimates and
expectations.
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, return levels or competitive conditions differ from the
Company's 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
15
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.
Included in other assets are permanent wall displays, which are recorded at
cost and amortized on a straight-line basis over the estimated useful lives of
such assets. Intangibles other than goodwill are recorded at cost and amortized
on a straight-line basis over the estimated useful lives of such assets.
Long-lived assets, including fixed assets, permanent wall displays 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 undiscounted cash flows (excluding
interest) from the use and eventual disposition of the asset 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. Additionally,
goodwill is reviewed for impairment at least annually. The Company recognizes an
impairment loss to the extent that carrying value exceeds the fair value of the
asset.
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 estimate 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. Differences from these assumptions 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 2003 will be approximately $10
higher than in 2002.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
Net sales
Net sales were $1,119.4 and $1,277.6 for 2002 and 2001, respectively, a
decrease of $158.2, or 12.4%, and a decrease of 10.4% after excluding the impact
of currency fluctuations.
United States and Canada. Net sales in the U.S. and Canada were
$760.1 for 2002, compared with $870.3 for 2001, a decrease of $110.2, or 12.7%.
Of this decrease, $100.6 was due to increased sales returns and allowances
related to the Company's plan to selectively reduce SKUs and reduced
distribution of the Ultima II brand, sales allowances for selective price
adjustments on certain SKUs related to the stabilization and growth phase of the
Company's plan, and higher sales returns and allowances not directly related to
the stabilization and growth phase of the Company's plan. In addition, brand
support increased by $37.0. These factors were partially offset by an increase
in sales volume of $21.6 and an increase in licensing revenues of $5.8,
primarily stemming from the prepayment by a licensee of certain minimum
royalties.
International. Net sales in the Company's international operations were
$359.3 for 2002, compared with $407.3 for 2001, a decrease of $48.0, or 11.8%,
and a decrease of 5.2% after excluding the impact of currency fluctuations. Net
sales in 2001 include $16.4 of net sales related to the Colorama brand.
16
Sales in the Company's international operations are divided by the Company
into three geographic regions. In Europe, which is comprised of Europe and the
Middle East, net sales decreased by $11.3, or 9.5%, to $107.8 for 2002, as
compared with 2001. The decrease in the European region is primarily due to the
conversion of the Company's Benelux and Israeli businesses to distributors
(which factor the Company estimates contributed to an approximate 8.5% reduction
in net sales for the region), production disruption at the Company's third party
manufacturer in Maesteg, Wales (which factor the Company estimates contributed
to an approximate 5.6% reduction in net sales for the region) and increased
competitive activity in Italy (which factor the Company estimates contributed to
an approximate 2.3% reduction in net sales for the region). Such factors were
partially offset by increased sales volume in the U.K. (which factor the Company
estimates contributed to an approximate 6.7% increase in net sales for the
region) and impact from favorable currency fluctuations (which factor the
Company estimates contributed to an approximate 2.7% increase in net sales for
the region).
In Latin America, which is comprised of Mexico, Central America and South
America, net sales decreased by $46.9, or 33.3%, to $94.1 for 2002, as compared
with 2001. The decrease in the Latin American region is primarily due to the
impact of adverse currency fluctuations (which factor the Company estimates
contributed to an approximate 19.0% reduction in net sales for the region), the
sale of the Colorama brand (which factor the Company estimates contributed to an
approximate 10.6% reduction in net sales for the region), the effect of
political and economic difficulties in Venezuela (which factor the Company
estimates contributed to an approximate 6.4% reduction in net sales for the
region), and increased competitive activity in Mexico (which factor the Company
estimates contributed to an approximate 5.4% reduction in net sales for the
region). Such factors were partially offset by sales tax increases and increased
sales volume in Brazil (which factor the Company estimates contributed to an
approximate 6.3% increase in net sales for the region) and increased sales
volume in distributor markets in Latin America (which factor the Company
estimates contributed to an approximate 2.6% increase in net sales for the
region).
In the Far East and Africa, net sales increased by $10.2, or 6.9%, to
$157.4 for 2002, as compared with 2001. The increase in the Far East region is
primarily due to increased sales volume in South Africa, China, Hong Kong and
distributor markets in the Far East (which factor the Company estimates
contributed to an approximate 9.6% increase in net sales for the region). Such
factors were partially offset by the impact of adverse currency fluctuations
(which factor the Company estimates contributed to an approximate 2.8% reduction
in net sales for the region) and increased competitive activity in Australia and
New Zealand (which factor the Company estimates contributed to an approximate
0.9% reduction in net sales for the region).
Net sales in the Company's international operations may be adversely
affected by weak economic conditions, political uncertainties, adverse currency
fluctuations, and competitive activities. During 2002, the Company experienced
significant adverse currency fluctuations in Argentina, Brazil, Venezuela and
South Africa. During 2002, the Company continued to experience production
difficulties with its principal third party manufacturer for Europe and certain
other international markets which operates the Maesteg facility. To rectify this
situation, on October 31, 2002 Products Corporation and such manufacturer
terminated the long-term supply agreement and entered into a new, more flexible
agreement. This new agreement has significantly reduced volume commitments and,
among other things, Products Corporation agreed to loan such supplier
approximately $2.0. To address the past production difficulties, under the new
arrangement, the supplier can earn performance-based payments of approximately
$6.3 over a 4-year period contingent upon the supplier achieving specific
production service level objectives. During 2002, the Company accrued $1.6 as a
result of such supplier meeting the required production service level
objectives. Under the new arrangement, Products Corporation also intends to
source certain products from its Oxford facility and other suppliers. The
Company expects that under the new supply arrangement, the production
difficulties at the Maesteg facility will be resolved during the first half of
2003.
Gross profit
Gross profit was $615.7 for 2002, compared with $733.4 for 2001. As a
percentage of net sales, gross profit margins were 55.0% for 2002, compared with
57.4% for 2001. The decrease in gross profit margin in 2002 compared to the
comparable 2001 period is due to the implementation of various aspects of the
stabilization and growth phase of the Company's plan, referred to above in the
discussion of the Company's net sales and higher sales returns and allowances
not directly related to such plan, which combined equal $127.1, and higher brand
support of $30.8 in 2002. These factors were partially offset by lower
additional consolidation costs of $36.7 associated with
17
the 2001 shutdown of the Company's Phoenix and Canada facilities, an increase in
licensing revenue of $5.8 in 2002 due to the prepayment of certain minimum
royalties, and $1.7 in respect of an insurance claim for certain losses in Latin
America.
SG&A expenses
SG&A expenses were $717.0 for 2002, compared with $679.2 for 2001. The
increase in SG&A expenses for 2002, as compared to 2001, is due primarily to
higher personnel-related expenses (including executive separation costs) and
higher professional fees (including expenses related to the stabilization and
growth phase of the Company's plan and costs related to litigation) of $42.0,
higher wall display amortization of $8.9 due to the accelerated amortization
associated with the roll out of the Company's new wall displays which the
Company began in 2002 and accelerated amortization charges of $4.0 and a
write-off of $2.2, both of which relate to certain information systems as a
result of the Company's decision to, among other things, upgrade its information
systems. These factors were partially offset by the elimination of goodwill
amortization of $7.7, lower distribution costs of $7.3, the elimination of SG&A
expenses of $9.1 related to the Colorama brand and $5.3 of additional
consolidation costs in 2001 associated with the shutdown of the Company's
Phoenix and Canada facilities, and $0.7 in respect of an insurance claim for
certain losses in Latin America.
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. During 2001, the Company
continued to implement the 2000 restructuring program and recorded a charge of
$38.1, principally for additional employee severance and other personnel
benefits and relocation and other costs related to the consolidation of the
Company's worldwide operations.
During 2002, the Company continued to implement the 2000 restructuring
program, as well as other restructuring actions, and recorded charges of $13.6,
principally for additional employee severance and other personnel benefits,
primarily resulting from reductions in the Company's worldwide sales force and
relocation and other costs related to the consolidation of the Company's
worldwide operations.
The Company anticipates annualized savings of approximately $10 to $12
relating to the restructuring charges recorded during 2002.
Other expenses (income)
Interest expense was $159.0 for 2002, compared with $140.5 for 2001. The
increase in interest expense for 2002, as compared to 2001, is primarily due to
the repayment of a portion of the Credit Agreement with the 12% Notes (which
were issued in late November 2001 and which have a higher interest rate than the
Credit Agreement) and higher overall outstanding borrowings.
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 net loss of $1.0 in
the first quarter of 2002.
18
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 net 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.
In July 2001, Products Corporation completed the disposition of its
subsidiary that owned and operated its manufacturing facility in Maesteg, Wales
(UK), including all production equipment. As part of this sale, Products
Corporation entered into a long-term supply agreement with the purchaser
pursuant to which the purchaser manufactured and supplied to Products
Corporation cosmetics and personal care products for sale throughout Europe. In
connection with such disposition, the Company recognized a pre-tax and after-tax
net loss of $8.6 in 2001. The supply agreement was subsequently terminated and
certain aspects of the purchase agreement were revised. (See Note 3 to the
Consolidated Financial Statements).
In December 2001, Products Corporation sold a facility in Puerto Rico
for approximately $4. In connection with such disposition, the Company
recorded a pre-tax and after-tax net gain on the sale of $3.1 in the fourth
quarter of 2001.
Loss on early extinguishment of debt
The loss on early extinguishment of debt of $3.6 in 2001 resulted primarily
from the write-off of financing costs in connection with Products Corporation
entering into the 2001 Credit Agreement (as hereinafter defined).
Provision for income taxes
The provision for income taxes was $4.8 for 2002, compared with $4.1 for
2001. The increase in the provision for income taxes for 2002, as compared to
2001, was attributable to higher taxable income in certain markets outside the
U.S., which was partially offset by the recognition of tax benefits of
approximately $0.9 relating to the carryback of alternative minimum tax losses
resulting from tax legislation enacted in the first quarter of 2002.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Net sales
Net sales were $1,277.6 and $1,409.4 for 2001 and 2000, respectively, a
decrease of $131.8, or 9.4%, and a decrease of 5.9% after excluding the impact
of currency fluctuations.
United States and Canada. Net sales in the U.S. and Canada were $870.3 for
2001, compared with $874.0 for 2000, a decrease of $3.7, or 0.4%. Net sales in
2000 include net sales of $35.8 related to the Product Line and Brands Sold. The
decline for 2001, as compared with the comparable 2000 period, was primarily due
to net sales of $35.8 related to the Product Line and Brands Sold, higher sales
allowances of $13.7 and reduced sales volume of $16.5. This volume decline is
net of $14.0 of increased sales in the fourth quarter of 2001 resulting from the
decision by the Company's major U.S. retail customers to shift planned
plan-o-gram timing for 2002 new products into the fourth quarter of 2001, mostly
offset by lower sales returns of $60.2 as a result of the Company's revised
trade terms.
International. Net sales in the Company's international operations were
$407.3 for the 2001, compared with $535.4 for 2000, a decrease of $128.1, or
23.9%, and a decrease of 16.8% after excluding the impact of currency
fluctuations. Net sales in 2001 and 2000 include net sales of $16.4 and $108.3,
respectively, related to the Product Line and Brands Sold.
Sales in the Company's international operations are divided by the Company
into three geographic regions. In Europe, which is comprised of Europe and the
Middle East, net sales decreased by $49.3 to $119.1 for 2001, or by 29.3%, as
compared with 2000. The decrease in the European region is primarily due to the
Product Line and Brands Sold (which factor the Company estimates contributed to
an approximate 20.8% reduction in net sales for
19
the region), the conversion of the Company's Israeli business to a distributor
(which factor the Company estimates contributed to an approximate 2.8% reduction
in net sales for the region) and the unfavorable impact of adverse currency
fluctuations (which factor the Company estimates contributed to an approximate
3.7% reduction in net sales for the region).
In Latin America, which comprises Mexico, Central America and South
America, net sales decreased by $54.5, or 27.9%, to $141.0 for 2001, as compared
with 2000. The decrease in the Latin American region is primarily due to the
Product Line and Brands Sold (which factor the Company estimates contributed to
an approximate 15.1% reduction in net sales for the region) and the impact of
adverse currency fluctuations (which factor the Company estimates contributed to
an approximate 9.2% reduction in net sales for the region).
In the Far East and Africa, net sales decreased by $24.3, or 14.1%, to
$147.2 for 2001, as compared with 2000. The decrease in the Far East region is
primarily due to the impact of adverse currency fluctuations (which factor the
Company estimates contributed to an approximate 9.1% reduction in net sales for
the region) and the Product Line and Brands Sold (which factor the Company
estimates contributed to an approximate 3.1% reduction in net sales for the
region).
Net sales in the Company's international operations may be adversely
affected by weak economic conditions, political uncertainties, adverse currency
fluctuations, and competitive activities.
Gross profit
Gross profit was $733.4 for 2001, compared with $835.1 for 2000. As a
percentage of net sales, gross profit margins were 57.4% for 2001, compared with
59.3% for 2000. The decline in gross profit and gross profit margin in 2001
compared to 2000 is primarily due to the incremental gross profit of $71.3 in
2000 which was related to the Product Line and Brands Sold and higher additional
consolidation costs of $33.3 in 2001 associated with the 2001 shutdown of the
Company's Phoenix and Canada facilities ($6.1 of which represents increased
depreciation recorded for the Phoenix facility - See Note 2 to the Consolidated
Financial Statements). These factors were partially offset by the improvement in
sales returns and allowances in 2001 and the dispositions of lower margin
businesses in 2001.
SG&A expenses
SG&A expenses were $679.2 for 2001, compared with $765.1 for 2000. The
decrease in SG&A expenses for 2001, as compared to the comparable 2000 period,
is due primarily to incremental SG&A expenses of $63.1 in 2000 related to the
Product Line and Brands Sold and the Company's restructuring efforts to reduce
personnel and related costs in 2001. These factors were partially offset by an
increase in brand support expenses of $12.4 in 2001 and $5.4 of additional
consolidation costs associated with the shutdown of the Company's Phoenix and
Canada facilities in 2001.
Restructuring costs
In the first quarter of 2000, the Company recorded a charge of $9.5
relating to the 1999 restructuring program that began in the fourth quarter of
1999. The Company continued to implement the 1999 restructuring program during
the second quarter of 2000 during which it recorded a charge of $5.1.
During the third quarter of 2000, the Company continued to re-evaluate its
organizational structure. As part of this re-evaluation, 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 Company recorded a charge of $13.7
in the third quarter of 2000 for programs begun in such quarter, as well as for
the expanded scope of programs previously commenced. 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
20
elimination of several domestic and international executive and operational
positions, each of which were effected to reduce and streamline corporate
overhead costs. In the fourth quarter of 2000, the Company recorded a charge of
$25.8 related to the 2000 restructuring program, principally for additional
employee severance and other personnel benefits and to consolidate worldwide
operations.
During 2001, the Company recorded a charge of $38.1 related to the 2000
restructuring program, principally for additional employee severance and other
personnel benefits and relocation and other costs related to the consolidation
of the Company's worldwide operations. Included in the $38.1 charge for 2001 was
an adjustment in the fourth quarter of 2001 to previous estimates of
approximately $6.6.
Other expenses (income)
Interest expense was $140.5 for 2001, compared with $144.5 for 2000. The
decrease in interest expense for 2001, as compared to 2000, is primarily due to
the repayment of borrowings under the 1997 Credit Agreement with the net
proceeds from the disposition of the worldwide professional products line, the
Plusbelle brand in Argentina and the Colorama brand in Brazil and by lower
interest rates under the Credit Agreement, partially offset by interest on the
12% Notes (which were issued in November 2001).
Sale of product line, brands and facilities, net
Described below are the principal sales of certain brands and facilities
entered into by Products Corporations during 2001:
In December 2001, Products Corporation sold a facility in Puerto Rico for
approximately $4. In connection with such disposition, the Company recorded a
pre-tax and after-tax net gain on the sale of $3.1 in the fourth quarter of
2001.
In July 2001, Products Corporation completed the disposition of the
Colorama brand of cosmetics and hair care products, as well as Products
Corporation's manufacturing facility located in Sao Paulo, Brazil, for
approximately $57. Products Corporation used $22 of the net proceeds, after
transaction costs and retained liabilities, to permanently reduce commitments
under the 1997 Credit Agreement (as hereinafter defined). In connection with
such disposition, the Company recognized a pre-tax and after-tax net loss of
$6.7.
In July 2001, Products Corporation completed the disposition of its
subsidiary that owned and operated its manufacturing facility in Maesteg, Wales
(UK), including all production equipment. As discussed above, in October 2002,
after experiencing production difficulties with this supplier, Products
Corporation and such supplier terminated their long-term supply agreement,
revised certain aspects of the purchase agreement and entered into a new, more
flexible supply agreement with significantly reduced volume commitments. In
connection with such disposition, the Company recognized a pre-tax and after-tax
net loss of $8.6 in 2001. (See Note 3 to the Consolidated Financial Statements).
In May 2001, Products Corporation sold its Phoenix, Arizona facility for
approximately $7 and leased it back through the end of 2001. After recognition
of increased depreciation in the first quarter of 2001, the Company recorded a
pre-tax and after-tax net loss on the sale of $3.7 in the second quarter of
2001, which is included in SG&A expenses.
In April 2001, Products Corporation sold the Aoyama Property in Japan for
approximately $28. In connection with such disposition, the Company recognized a
pre-tax and after-tax net loss of $0.8 during the second quarter of 2001.
Loss on early extinguishment of debt
The loss on early extinguishment of $3.6 in 2001 resulted primarily from
the write-off of financing costs in connection with Products Corporation
entering into the 2001 Credit Agreement.
21
Provision for income taxes
The provision for income taxes was $4.1 for 2001, compared with $8.6 for
2000. The decrease in the provision for income taxes for 2001, as compared 2000,
was attributable to adjustments to certain deferred tax assets and higher taxes
associated with the worldwide professional products line in the first quarter of
2000 and lower taxable income in 2001 in certain markets outside the U.S.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities was $112.3, $86.5 and $84.0 for
2002, 2001 and 2000, respectively. The increase in net cash used for operating
activities for 2002 compared to 2001 resulted primarily from a higher net loss,
partially offset by lower inventories and an increase in accrued expenses and
other, mainly associated with the Company's implementation of various aspects of
the stabilization and growth phase of its plan. In addition, purchases of
permanent wall displays increased in 2002 due to the roll out of the Company's
newly-reconfigured wall displays. The slight increase in net cash used for
operating activities for 2001 compared to 2000 resulted primarily from a higher
net loss and changes in working capital, partially offset by lower purchases of
wall displays.
Net cash (used for) provided by investing activities was $(14.2), $87.2 and
$322.1 for 2002, 2001 and 2000, respectively. Net cash used for investing
activities for 2002 consisted primarily of capital expenditures. Net cash
provided by investing activities for 2001 consisted of net proceeds from the
sale of the Company's Colorama brand in Brazil, the Company's subsidiary in
Maesteg, Wales (UK), the Aoyama Property in Japan, the Phoenix facility and a
facility in Puerto Rico, partially offset by capital expenditures. Net cash
provided by investing activities for 2000 consisted of proceeds from the sale of
the Company's worldwide professional products line and the Plusbelle brand in
Argentina, partially offset by cash used for capital expenditures.
Net cash provided by (used for) financing activities was $110.3, $46.3 and
$(203.7) for 2002, 2001 and 2000, respectively. Net cash provided by financing
activities for 2002 included cash drawn under the Credit Agreement, partially
offset by the repayment of borrowings under the Credit Agreement and payment of
debt issuance costs. Net cash provided by financing activities for 2001 included
cash drawn under the 2001 and 1997 Credit Agreements and proceeds from the
issuance of the 12% Notes, partially offset by the repayment of borrowings under
the 1997 Credit Agreement with the net proceeds from the disposition of the
Colorama brand in Brazil, and subsequently with proceeds from the issuance of
the 12% Notes and proceeds from the 2001 Credit Agreement and payment of debt
issuance costs in connection with the issuance of the 12% Notes and the 2001
Credit Agreement. Net cash used for financing activities for 2000 included
repayments of borrowings under the Credit Agreement with the net proceeds from
the disposition of the worldwide professional products line and the Plusbelle
brand in Argentina and the repayment of Products Corporation's Japanese
yen-denominated credit agreement, partially offset by cash drawn under the 1997
Credit Agreement.
On November 26, 2001, Products Corporation issued and sold $363 in
aggregate principal amount of 12% Senior Secured Notes due 2005 (the "Original
12% Notes") in a private placement, receiving gross proceeds of $350.5. Products
Corporation used the proceeds from 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 new 12%
Senior Secured Exchange Notes due 2005 which have substantially identical terms
as the Original 12% Notes (the "12% Notes"), except that the 12% Notes are
registered with the Commission under the Securities Act of 1933 (as amended, the
"Securities Act") 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 a credit agreement
(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 December 31, 2002, the 2001 Credit Agreement
provided up to $248.7, which is comprised of a $116.6 term loan facility (the
"Term Loan Facility") and a $132.1 multi-currency revolving credit facility (the
"Multi-Currency Facility"). At December 31, 2002, the Term
22
Loan Facility was fully drawn and $0.3 was available under the Multi-Currency
Facility, including the letters of credit.
In connection with the transactions with MacAndrews & Forbes described in
"Recent Developments," and as a result of the Company's operating results for
the fourth quarter of 2002 and the effect of acceleration of the Company's
implementation of the stabilization and growth phase of its plan, Products
Corporation entered into an amendment in February 2003 of its Credit Agreement
and secured waivers of compliance with certain covenants under the Credit
Agreement. In particular, EBITDA (as defined in the Credit Agreement) was $35.2
for the four consecutive fiscal quarters ended December 31, 2002, which was less
than the minimum of $210 required under the EBITDA covenant of the Credit
Agreement for that period and the Company's leverage ratio was 5.09:1.00, which
was in excess of the maximum ratio of 1.4:1.00 permitted under the leverage
ratio covenant of the Credit Agreement for that period. Accordingly, the Company
sought and secured waivers of compliance with these covenants for the fourth
quarter of 2002 and, in light of the Company's expectation that the continued
implementation of the stabilization and growth phase of the Company's plan would
affect the ability of Products Corporation to comply with these covenants during
2003, the Company also secured an amendment to eliminate the EBITDA and leverage
ratio covenants for the first three quarters of 2003 and a waiver of compliance
with such covenants for the fourth quarter of 2003 expiring on January 31, 2004.
The amendment to the Credit Agreement also included the substitution of a
minimum liquidity covenant requiring the Company to maintain a minimum of $20 in
liquidity from all available sources at all times through January 31, 2004 and
certain other amendments to allow for the M&F Investments and the implementation
of the stabilization and growth phase of the Company's plan, including specific
exceptions from the limitations under the indebtedness covenant to permit the
MacAndrews & Forbes $100 million term loan and the MacAndrews & Forbes $40-65
million line of credit and to exclude the proceeds from the M&F Investments from
the mandatory prepayment provisions of the Credit Agreement, and to increase the
maximum limit on capital expenditures and permanent display purchases from $100
to $115 for 2003. The amendment also increased the applicable margin on loans
under the Credit Agreement by 0.5%, the incremental cost of which to the
Company, assuming the Credit Agreement is fully drawn, would be $1.1 from
February 5, 2003 through the end of 2003. As of March 7, 2003, the Company had
approximately $213 of available liquidity from all available sources.
As discussed under "Recent Developments", pursuant to the Investment
Agreement MacAndrews & Forbes agreed, among other things, (i) to purchase such
shares of Revlon, Inc.'s Class A Common Stock represented by its pro rata share
of the rights distributed in the Rights Offering (approximately 83%, or $41.5)
and to back-stop the Rights Offering by purchasing the remaining shares of Class
A Common Stock offered to, but not purchased by, other stockholders
(approximately 17%, or an additional $8.5), (ii) to provide Products Corporation
with the MacAndrews & Forbes $100 million term loan (the terms and conditions of
which the parties agreed to on February 5, 2003), (iii) if, prior to the
consummation of the Rights Offering, Products Corporation has fully drawn the
MacAndrews & Forbes $100 million term loan and the implementation of the
stabilization and growth phase of the Company's plan causes the Company to
require some or all of the $50 of funds that the Company would raise from the
Rights Offering, MacAndrews & Forbes would advance the Company these funds prior
to closing the Rights Offering by making the $50 million Series C preferred
stock investment, which would be redeemed with the proceeds the Company receives
from the Rights Offering, and (iv) to provide Products Corporation with the
MacAndrews & Forbes $40-65 million line of credit (the terms and conditions of
which the parties agreed to on February 5, 2003), provided that the MacAndrews &
Forbes $100 million term loan is fully drawn and MacAndrews & Forbes had made
the $50 million Series C preferred stock investment (or if the Company has
consummated the Rights Offering and redeemed any outstanding shares of Series C
preferred stock).
The Company's principal sources of funds are expected to be operating
revenues, cash on hand, the proceeds from the Rights Offering (which may be
advanced to the Company as a result of the $50 million Series C preferred stock
investment prior to the consummation of the Rights Offering if Products
Corporation has fully drawn the MacAndrews & Forbes $100 million term loan) and
funds available for borrowing under the Credit Agreement and the Mafco Loans.
The Company expects that the Rights Offering will be consummated in the second
quarter of 2003, subject to the effectiveness of the registration statement,
which the Company filed with the Commission on February 5, 2003. Based on this
expectation, the Company anticipates that Products Corporation will draw on the
MacAndrews & Forbes $100 million term loan before the Rights Offering is
consummated in order to continue the implementation of the stabilization and
growth phase of the Company's plan and for general corporate purposes.
23
However, the Company currently does not anticipate that, based upon a second
quarter 2003 closing of the Rights Offering, it will require that MacAndrews &
Forbes make the $50 million Series C preferred stock investment. The Credit
Agreement, the Mafco Loans, 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 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 Company's principal uses of funds are expected to be the payment of
operating expenses, including expenses in connection with the stabilization and
growth phase of the Company's plan, purchases of permanent wall displays,
capital expenditure requirements, including costs in connection with the ERP
System (as hereinafter defined), payments in connection with the Company's
restructuring programs referred to below and debt service payments.
The Company currently estimates that charges related to the implementation
of the stabilization and growth phase of the Company's plan will not exceed $60
during 2003 and 2004. In addition, the Company currently estimates that the cash
payments related to this phase of the plan for charges recorded in 2002 will be
approximately $75 during 2003 and 2004.
The Company developed a new design for its wall displays (which the Company
refined as part of the stabilization and growth phase of its plan) and began
installing them at certain customers' retail stores during 2002. The Company is
also reconfiguring existing wall displays at its retail customers on an
accelerated basis. Accordingly, the Company has accelerated the amortization of
its existing wall displays. The installation of these newly-reconfigured wall
displays resulted in accelerated amortization in 2002 of approximately $11. The
Company estimates that purchases of wall displays for 2003 will be approximately
$75 to $85.
The Company estimates that capital expenditures for 2003 will be
approximately $25 to $30. The Company estimates that cash payments related to
the restructuring programs referred to in Note 2 to the Consolidated Financial
Statements and executive separation costs will be $10 to $15 in 2003.
The Company has evaluated its management information systems and
determined, among other things, to upgrade to an Enterprise Resource Planning
("ERP") System. As a result of this decision, certain existing information
systems are being amortized on an accelerated basis. Based upon the estimated
time required to implement an ERP System and related IT actions, the Company
expects that it will record additional amortization charges for its current
information system in 2002 through 2005. The additional amortization recorded in
2002 was $4. The Company expects that the additional amortization for 2003 will
be approximately $5.
The Company expects that operating revenues, cash on hand, proceeds from
the Rights Offering (which may be advanced to the Company as a result of the $50
million Series C preferred stock investment prior to the consummation of the
Rights Offering if Products Corporation has fully drawn the MacAndrews & Forbes
$100 million term loan) and funds available for borrowing under the Credit
Agreement and the Mafco Loans will be sufficient to enable the Company to cover
its operating expenses, including cash requirements in connection with the
Company's operations, the stabilization and growth phase of the Company's plan,
cash requirements in connection with the Company's restructuring programs
referred to above and the Company's debt service requirements for 2003. The
Mafco Loans and the proceeds from the Rights Offering are intended to help fund
the stabilization and growth phase of the Company's plan and to decrease the
risk that would otherwise exist if the Company were to fail to meet its debt and
ongoing obligations as they became due in 2003. However, there can be no
assurance that such funds will be sufficient to meet the Company's cash
requirements on a consolidated basis. If the Company's anticipated level of
revenue growth is not achieved because, for example, of decreased consumer
spending in response to weak economic conditions or weakness in the cosmetics
category, increased competition from the Company's competitors or the Company's
marketing plans are not as successful as anticipated, or if the Company's
expenses associated with implementation of the stabilization and growth phase of
the Company's plan exceed the anticipated level of expenses, the Company's
current sources of funds may be insufficient to meet the Company's cash
requirements. Additionally, in the event of a decrease in demand for Products
Corporation's products or reduced sales or lack of increases in demand and sales
as a result of the Company's plan, such development, if significant, could
reduce Products Corporation's operating revenues and could adversely affect
Products Corporation's ability to achieve certain financial covenants under the
Credit Agreement and in such event the Company could be required to take
24
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 delaying the implementation of or
revising aspects of the stabilization and growth phase of its plan, reducing or
delaying purchases of wall displays or advertising or promotional expenses,
reducing or delaying capital spending, delaying, reducing or revising
restructuring programs, restructuring indebtedness, selling assets or
operations, seeking additional capital contributions or loans from MacAndrews &
Forbes, the Company's other affiliates and/or third parties, selling additional
equity securities of Revlon, Inc. or reducing other discretionary spending. The
Company has substantial debt maturing in 2005 which will require refinancing,
consisting of $246.3 (assuming the maximum amount is borrowed) under the Credit
Agreement and $363.0 of 12% Notes, as well as amounts, if any, borrowed under
the MacAndrews & Forbes $100 million term loan and the MacAndrews & Forbes
$40-65 million line of credit.
The Company expects that Products Corporation will need to seek a further
amendment to the Credit Agreement or a waiver of the EBITDA and leverage ratio
covenants under the Credit Agreement prior to the expiration of the existing
waiver on January 31, 2004 because the Company does not expect that its
operating results, including after giving effect to various actions under the
stabilization and growth phase of the Company's plan, will allow Products
Corporation to satisfy those covenants for the four consecutive fiscal quarters
ending December 31, 2003. The minimum EBITDA required to be maintained by
Products Corporation under the Credit Agreement is $230 for each of the four
consecutive fiscal quarters ending on December 31, 2003 (which covenant was
waived through January 31, 2004), March 31, 2004, June 30, 2004 and September
30, 2004 and $250 for any four consecutive fiscal quarters ending December 31,
2004 and thereafter and the leverage ratio covenant under the Credit Agreement
will permit a maximum ratio of 1.10:1.00 for any four consecutive fiscal
quarters ending on or after December 31, 2003 (which limit was waived through
January 31, 2004 for the four fiscal quarters ending December 31, 2003). In
addition, after giving effect to the amendment, the Credit Agreement also
contains a $20 minimum liquidity covenant. While the Company expects that
Products Corporation's bank lenders will consent to such amendment or waiver
request, there can be no assurance that they will or that they will do so on
terms that are favorable to the Company. If the Company is unable to secure such
amendment or waiver, it could be required to refinance the Credit Agreement or
repay it with proceeds from sale of assets or operations, or additional capital
contributions or loans from MacAndrews & Forbes or the Company's other
affiliates or third parties, or the sale of additional equity securities of
Revlon, Inc. In the event that Products Corporation were unable to secure such a
waiver or amendment and Products Corporation were not able to refinance or repay
the Credit Agreement, Products Corporation's inability to meet the financial
covenants for the four consecutive fiscal quarters ending December 31, 2003
would constitute an event of default under Products Corporation's Credit
Agreement, which would permit the bank lenders to accelerate the Credit
Agreement, which in turn would constitute an event of default under the
indentures governing Products Corporation's debt if the amount accelerated
exceeds $25.0 and such default remains uncured within 10 days of notice from the
trustee under the applicable indenture.
There can be no assurance that the Company would be able to take any of the
actions referred to in the preceding two paragraphs because of a variety of
commercial or market factors or constraints in the Company's debt instruments,
including, for example, Products Corporation's inability to reach agreement with
its bank lenders on refinancing terms that are acceptable to the Company before
the waiver of its financial covenants expires on January 31, 2004, market
conditions being unfavorable for an equity or debt offering, or that the
transactions may not be permitted under the terms of the Company's various debt
instruments then in effect, because of restrictions on the incurrence of debt,
incurrence of liens, asset dispositions and related party transactions. In
addition, such actions, if taken, may not enable the Company to satisfy its cash
requirements if the actions do not generate a sufficient amount of additional
capital.
Revlon, Inc., as a holding company, will be dependent on the earnings and
cash flow of, and dividends and distributions from, Products Corporation to pay
its expenses and to pay any cash dividend or distribution on Revlon, Inc.'s
Class A Common Stock that may be authorized by the Board of Directors of Revlon,
Inc. The terms of the Credit Agreement, the Mafco Loans, 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 fees, 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
25
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 (as may be amended and restated from time to time, the
"Amended Stock Plan").
Pursuant to a tax sharing agreement, Revlon, Inc. may be required to make
tax sharing payments to Mafco Holdings as if Revlon, Inc. 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. Revlon, Inc. currently anticipates that, as a
result of net operating tax losses and prohibitions under the Credit Agreement,
no cash federal tax payments or cash payments in lieu of federal taxes pursuant
to the tax sharing agreement will be required for 2003.
As a result of dealing with suppliers and vendors in a number of foreign
countries, 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 $10.8 outstanding at December 31, 2002. The
fair value of foreign currency forward exchange contracts outstanding at
December 31, 2002 was nil.
DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table aggregates all contractual commitments and commercial
obligations that affect the Company's financial condition and liquidity position
as of December 31, 2002:
PAYMENTS DUE BY PERIOD
(DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS LESS THAN 1
TOTAL YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
- --------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT $1,750.1 Nil $1,100.2 $649.9 Nil
CAPITAL LEASE OBLIGATIONS 4.1 $1.8 2.3 Nil Nil
OPERATING LEASES 56.7 21.3 17.5 7.1 $10.8
UNCONDITIONAL PURCHASE
OBLIGATIONS 103.8(a) 48.9 54.9 Nil Nil
OTHER LONG-TERM OBLIGATIONS 49.0(b) 25.6 23.4 Nil Nil
TOTAL CONTRACTUAL CASH
OBLIGATIONS $1,963.7 $97.6 $1,198.3 $657.0 $10.8
(a) Consists of purchase commitments for finished goods, raw materials,
components and services pursuant to enforceable and legally binding
obligations which include all significant terms, including fixed or minimum
quantities to be purchased; fixed, minimum or variable price provisions;
and the approximate timing of the transaction.
(b) Consists primarily of obligations related to insurance, employment
contracts and other personnel service contracts. Such amounts exclude
severance and other contractual commitments related to restructuring, which
are discussed under "Restructuring Costs".
OFF-BALANCE SHEET TRANSACTIONS
The Company does not maintain any off-balance sheet transactions,
arrangements, obligations or other relationships with unconsolidated entities or
others that are reasonable likely to have a material current or future
26
effect on the Company's financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources.
SENIOR FINANCIAL OFFICER CODE OF ETHICS
The Company has a written Code of Business Conduct (the "Code") that
includes a code of ethics (the "Senior Financial Officer Code of Ethics") that
applies to the Company's Chief Executive Officer and senior financial officers
(including the Company's Chief Financial Officer, Controller and persons
performing similar functions) (collectively, the "Senior Financial Officers").
The Company will provide a copy of the Senior Financial Officer Code of Ethics,
without charge, upon written request to Robert K. Kretzman, Senior Vice
President, General Counsel and Corporate Secretary, Revlon, Inc., 625 Madison
Avenue, New York NY, 10022. If the Company changes the Senior Financial Officer
Code of Ethics in any material respect or waives any provision of the Senior
Financial Officer Code of Ethics for any of its Senior Financial Officers, the
Company expects to provide the public with notice of any such change or waiver
by publishing an appropriate description of such event on its corporate website,
www.revloninc.com, or by other appropriate means as required or permitted under
applicable rules of the Commission.
EFFECT OF NEW ACCOUNTING STANDARDS
In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations". Statement No. 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. This 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 No. 143 effective January 1, 2003 and has determined
that it will not have a significant effect on the Company's financial statements
or disclosures.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This statement nullifies EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." Statement No. 146 requires that a liability for the fair value
of costs associated with an exit or disposal activity be recognized when the
liability is incurred. The provisions of Statement No. 146 are effective for
exit or disposal activities initiated after December 31, 2002 and thus became
effective for the Company on January 1, 2003. The Company will continue to apply
the provisions of EITF Issue 94-3 to any exit activities that have been
initiated under an exit plan that met the criteria of EITF Issue 94-3 before the
adoption of Statement No. 146. The adoption of Statement No. 146 is not
currently expected to have a material effect on the financial position, results
of operations or cash flows of the Company upon adoption.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." Interpretation No. 45 requires the
guarantor to recognize a liability for the contingent and non-contingent
component of a guarantee; which means (a) the guarantor has undertaken an
obligation to stand ready to perform in the event that specified triggering
events or conditions occur and (b) the guarantor has undertaken a contingent
obligation to make future payments if such triggering events or conditions
occur. The initial measurement of this liability is the fair value of the
guarantee at inception. The Company is required to recognize the liability even
if it is not probable that payments will be required under the guarantee or if
the guarantee was issued with a premium payment or as part of a transaction with
multiple elements. Interpretation No. 45 also requires additional disclosures
related to guarantees that have certain specified characteristics. The Company
was required to adopt, and has adopted the disclosure provisions of
Interpretation No. 45 in its financial statements as of and for the year ended
December 31, 2002. Additionally, the recognition and measurement provisions of
Interpretation No. 45 are effective for all guarantees entered into or modified
after December 31, 2002. The Company has evaluated the effect of the recognition
and measurement provisions of this Interpretation. The adoption of this
Interpretation is not anticipated to have a material effect on the Company's
financial statements or disclosures.
27
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure". SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. Should the Company elect to
transition to fair value recognition of stock-based employee compensation, not
all of the alternatives outlined in SFAS No. 148 will be available after
December 31, 2002. The Company has included the disclosure requirements of SFAS
No. 148 in its consolidated financial statements and is currently evaluating the
impact of the fair value transition alternatives.
INFLATION
In general, the Company's costs are affected by inflation and the effects
of inflation may be experienced by the Company in future periods. Management
believes, however, that such effects have not been material to the Company
during the past three years in the United States and in foreign
non-hyperinflationary countries. The Company operates in certain countries
around the world, such as Argentina, Brazil, Venezuela and Mexico that have in
the past experienced hyperinflation. In hyperinflationary foreign countries, the
Company attempts to mitigate the effects of inflation by increasing prices in
line with inflation, where possible, and efficiently managing its working
capital levels.
SUBSEQUENT EVENT
See "Recent Developments."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
The Company has exposure to changing interest rates, primarily in the
U.S. The Company's policy is to manage interest rate risk through the use of a
combination of fixed and floating rate debt. The Company from time to time makes
use of derivative financial instruments to adjust its fixed and floating rate
ratio. There were no such derivative financial instruments outstanding at
December 31, 2002. The table below provides information about the Company's
indebtedness that is sensitive to changes in interest rates. The table presents
cash flows with respect to principal on indebtedness and related weighted
average interest rates by expected maturity dates. Weighted average variable
rates are based on implied forward rates in the yield curve at December 31,
2002. The information is presented in U.S. dollar equivalents, which is the
Company's reporting currency.
Exchange Rate Sensitivity
The Company manufactures and sells its products in a number of countries
throughout the world and, as a result, is exposed to movements in foreign
currency exchange rates. In addition, a portion of the Company's borrowings are
denominated in foreign currencies, which are also subject to market risk
associated with exchange rate movement. The Company from time to time hedges
major foreign currency cash exposures generally through foreign exchange forward
and option contracts. The contracts are entered into with major financial
institutions to minimize counterparty risk. These contracts generally have a
duration of less than twelve months and are primarily against the U.S. dollar.
In addition, the Company enters into foreign currency swaps to hedge
intercompany financing transactions.
28
The Company does not hold or issue financial instruments for trading
purposes. The following table presents the information required by Item 7A of
Form 10-K as of December 31, 2002:
EXPECTED MATURITY DATE FOR THE YEAR ENDED DECEMBER 31, FAIR VALUE
----------------------------------------------------------------- DEC. 31,
2003 2004 2005 2006 2007 THEREAFTER TOTAL 2002
---- ---- ---- ---- ---- ---------- ----- ----
(DOLLARS IN MILLIONS)
DEBT
- ------
Short term variable rate (various
currencies) ......................... $ 25.0 $ 25.0 $ 25.0
Average interest rate(a) ............ 6.0%
Long-term fixed rate ($US) .......... $ 353.3 $ 499.7 $649.9 1,502.9 989.0
Average interest rate ............... 12.0% 8.6% 8.6%
Long-term variable rate ($US) ....... 215.9* 215.9 215.9
Average interest rate(a) ............ 7.6%
Long-term variable rate (various
currencies) ......................... 7.2* 7.2 7.2
Average interest rate(a) ............ 9.4%
-------- -------- --------- ---------- ------- --------- ---------- ---------
Total debt .......................... $ 25.0 $ - $ 576.4 $ 499.7 $ - $649.9 $ 1,751.0 $ 1,237.1
======== ======== ========= ========== ======= ========= ========== =========
AVERAGE ORIGINAL CONTRACT
CONTRACTUAL US DOLLAR VALUE FAIR VALUE
FORWARD CONTRACTS RATE $/FC NOTIONAL DEC. 31, DEC. 31,
- ----------------- ----------- AMOUNT 2002 2002
---------- --------- ----------
Buy Euro/Sell USD ............... 0.8706 $ 1.1 $ 1.3 $ 0.2
Sell British Pounds/Buy USD ..... 1.5340 1.1 1.0 (0.1)
Buy British Pounds/Sell USD ..... 1.5942 3.6 3.6 -
Sell Australian Dollars/Buy USD . 0.5154 0.9 0.8 (0.1)
Sell Canadian Dollars/Buy USD ... 0.6249 2.4 2.4 -
Buy Australian Dollars/Sell New
Zealand Dollars ................. 1.2250 0.3 0.3 -
Buy British Pounds/Sell Euros ... 0.6159 0.7 0.7 -
Sell British Pounds/Buy Euros ... 0.6213 0.7 0.7 -
------- ------ -------
Total forward contracts ......... $ 10.8 $ 10.8 $ -
======= ====== =======
____________________
(a) Weighted average variable rates are based upon implied forward rates from
the yield curves at December 31, 2002. * Represents Products Corporation's
Credit Agreement which matures in May 2005.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index on page F-1 of the Consolidated Financial
Statements of the Company and the Notes thereto contained herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the Directors
and executive officers of the Company. Each Director holds office until his
successor is duly elected and qualified or until his resignation or removal, if
earlier.
NAME POSITION
- ---- --------
Ronald O. Perelman Chairman of the Board, Chairman of the Executive Committee
of the Board and Director
Jack L. Stahl President, Chief Executive Officer and Director
Douglas H. Greeff Executive Vice President and Chief Financial Officer
Paul E. Shapiro Executive Vice President and Chief Administrative Officer
Donald G. Drapkin Director
Professor Meyer Feldberg Director
Howard Gittis Director
Vernon E. Jordan, Jr. Director
Edward J. Landau Director
Linda Gosden Robinson Director
Terry Semel Director
Martha Stewart Director
The name, age (as of December 31, 2002), principal occupation for the last
five years, and selected biographical information for each of the Directors and
executive officers of the Company are set forth below.
MR. PERELMAN (59) has been Chairman of the Board of Directors of the
Company and of the Company's wholly-owned subsidiary, Products Corporation,
since June 1998, Chairman of the Executive Committee of the Board of the Company
and of Products Corporation since November 1995, and a Director of the Company
and of Products Corporation since their respective formations in 1992. Mr.
Perelman has been Chairman of the Board and Chief Executive Officer of
MacAndrews & Forbes and various of its affiliates since 1980. Mr. Perelman is
also Chairman of the Executive Committee of the Board of Directors of M&F
Worldwide Corp. ("M&F Worldwide") and Chairman of the Board of Directors of
Panavision Inc. ("Panavision"). Mr. Perelman is also a Director of the following
companies which file reports pursuant to the Exchange Act: M&F Worldwide and
Panavision.
MR. STAHL (49) has been President and Chief Executive Officer of the
Company and Products Corporation since February 2002. Mr. Stahl served as
President and Chief Operating Officer of The Coca-Cola Company ("Coca-Cola")
from February 2000 to March 2001. Prior to that, Mr. Stahl held various senior
executive positions at Coca-Cola where he began his career in 1979. Mr. Stahl is
also a Director of the United Negro College Fund and a trustee of Claremont
University.
MR. GREEFF (46) has been Executive Vice President and Chief Financial
Officer of the Company and of Products Corporation since May 2000. From
September 1998 to May 2000, he was Managing Director, Fixed Income Global Loans,
and Co-head of Leverage Finance at Salomon Smith Barney Inc. From January 1994
until August 1998, Mr. Greeff was Managing Director, Global Loans and Head of
Leverage and Acquisition Finance at Citibank N.A.
MR. SHAPIRO (61) has been Executive Vice President and Chief Administrative
Officer of the Company since August 2001 and of Products Corporation since
September 2001. From June 1998 until July 2001, he was Executive Vice President
and Chief Administrative Officer of Sunbeam Corporation ("Sunbeam") and The
Coleman Company, Inc. ("Coleman"). Mr. Shapiro served as a Director of Coleman
from June 1998 until July 2001. Mr. Shapiro previously held the position of
Executive Vice President of Coleman from July 1997 until its acquisition by
Sunbeam in March 1998. From January 1994, before joining Coleman, he was
Executive Vice President and Chief Administrative Officer of Marvel
Entertainment Group, Inc. Mr. Shapiro is a member of the Board of Directors of
Toll Brothers, Inc., which files reports pursuant to the Exchange Act.
30
MR. DRAPKIN (54) has been a Director of the Company and of Products
Corporation since their respective formations in 1992. He has been Vice Chairman
of the Board of MacAndrews & Forbes and various of its affiliates since 1987.
Mr. Drapkin was a partner in the law firm of Skadden, Arps, Slate, Meagher &
Flom for more than five years prior to 1987. Mr. Drapkin is also a Director of
the following companies which file reports pursuant to the Exchange Act:
Anthracite Capital, Inc., BlackRock Asset Investors, The Molson Companies
Limited, Panavision, Playboy Enterprises, Inc., SIGA Technologies, Inc. and
Warnaco Group, Inc.
PROFESSOR FELDBERG (60) has been a Director of the Company since February
1997. Professor Feldberg has been the Dean of Columbia Business School, New York
City, for more than the past five years. Professor Feldberg is also a Director
of the following companies which file reports pursuant to the Exchange Act:
Federated Department Stores, Inc., PRIMEDIA Inc. ("PRIMEDIA"), Sappi Limited and
Select Medical Corporation. In addition, UBS Global Asset Management (US) Inc.
(formerly known as Brinson Advisors, Inc.) is a wholly-owned subsidiary of UBS
AG and Professor Feldberg is also a director or trustee of 34 investment
companies (consisting of 55 portfolios) for which UBS Global Asset Management,
Inc., UBS Paine Webber Inc. or one of its affiliates serves as investment
advisor, sub-advisor or manager (the "UBS Investment Companies"). In addition to
being a member of the Company's Audit Committee, Professor Feldberg also serves
as Chairman of the Audit Committee of PRIMEDIA and is a member of the Audit
Committee of each of the UBS Investment Companies.
MR. GITTIS (68) has been a Director of the Company and of Products
Corporation since their respective formations in 1992 and Vice Chairman of
Products Corporation since June 2002. He has been Vice Chairman of the Board of
MacAndrews & Forbes and various of its affiliates since 1985. Mr. Gittis is also
a Director of the following companies which file reports pursuant to the
Exchange Act: Jones Apparel Group, Inc., Loral Space & Communications Ltd. and
M&F Worldwide.
MR. JORDAN (67) has been a Director of the Company since June 1996. Mr.
Jordan has been a Senior Managing Director of Lazard Freres & Co., LLC since
January 2000. Since January 2000, Mr. Jordan has been Of Counsel at the
Washington, D.C. law firm of Akin Gump Strauss Hauer & Feld LLP and was a Senior
Partner of such firm for more than five years prior thereto. Mr. Jordan is also
a Director of the following companies which file reports pursuant to the
Exchange Act: America OnLine Latin America, Inc., American Express Company,
Asbury Automotive Group, Inc., Callaway Golf Company, Clear Channel
Communications, Inc., Dow Jones & Company, J.C. Penney Company, Sara Lee
Corporation and Xerox Corporation. He is also a trustee of Howard University.
MR. LANDAU (72) has been a Director of the Company since June 1996. Prior
to his retirement in January 2003, Mr. Landau was Of Counsel at the law firm of
Wolf, Block, Schorr and Solis-Cohen LLP since February 1998, and was a Senior
Partner of Lowenthal, Landau, Fischer & Bring, P.C., a predecessor to such firm,
for more than five years prior to that date. He has been a Director of Products
Corporation since June 1992.
MS. ROBINSON (49) has been a Director of the Company since June 1996. Ms.
Robinson has been Chairman of Robinson Lerer & Montgomery, LLC, a New York City
strategic communications consulting firm, since May 1996. Ms. Robinson was Chief
Executive Officer of Robinson Lerer & Montgomery from May 1996 until January
2002. In March 2000, Robinson Lerer & Montgomery was acquired by Young & Rubicam
Inc. ("Y&R") and Ms. Robinson has served as Vice Chairman of Y&R since March
2000. In October 2000, Y&R was acquired by the WPP Group plc. For more than five
years prior to May 1996, she was Chairman of the Board and Chief Executive
Officer of Robinson Lerer Sawyer Miller Group or it s predecessors. Ms. Robinson
is also a member of the NYU Hospitals Center Board of Trustees.
MR. SEMEL (59) has been a Director of the Company since June 1996. Mr.
Semel has been Chairman and Chief Executive Officer of Yahoo! Inc. ("Yahoo!")
since May 2001. Mr. Semel has been Chairman of Windsor Media, Inc., Los Angeles,
a diversified media company, since October 1999. He was Chairman of the Board
and Co-Chief Executive Officer of the Warner Bros. Division of Time Warner
Entertainment LP ("Warner Brothers"), Los Angeles, from March 1994 until October
1999 and of Warner Music Group, Los Angeles, from November 1995 until October
1999. For more than ten years prior to that he was President of Warner Brothers
or its predecessor, Warner Bros. Inc. Mr. Semel is also a Director of the
following companies which file reports pursuant to the Exchange Act: Yahoo! and
Polo Ralph Lauren Corporation.
31
MS. STEWART (61) has been a Director of the Company since June 1996. Ms.
Stewart is the Chairman of the Board and Chief Executive Officer of Martha
Stewart Living Omnimedia, Inc., New York City (formerly Martha Stewart Living
Omnimedia, LLC, New York City). She is an author, founder of the magazine
"Martha Stewart Living," creator of a syndicated daily television series, a
syndicated newspaper column and a catalog company, and has been a lifestyle
consultant and lecturer for more than twenty years. Ms. Stewart is also a
Director of Martha Stewart Living Omnimedia, Inc., which files reports pursuant
to the Exchange Act.
COMPENSATION OF DIRECTORS
Directors who currently are not receiving compensation as officers or
employees of the Company or any of its affiliates ("Non-Employee Directors") are
paid an annual retainer fee of $35,000, payable in quarterly installments, and a
fee of $1,000 for each meeting of the Board of Directors or any committee
thereof that they attend. In addition, on December 17, 2002, the Compensation
and Stock Plan Committee of the Board of Directors (the "Compensation
Committee"), consisting of Messrs. Gittis, Drapkin, Landau and Semel, granted
awards under the Amended Stock Plan ("Awards") of options to purchase 7,500
shares of the Company's Class A Common Stock to each of the Company's
Non-Employee Directors, which options consist of non-qualified options having a
term of 10 years, vest 25% on each anniversary of the grant date and will become
100% vested on the fourth anniversary of the grant date, and have an exercise
price equal to $3.45, the per share closing price on the NYSE of the Company's
Class A Common Stock on the grant date.
Effective January 1, 2003, in recognition of their increased
responsibilities, members of the Audit Committee, consisting of Messrs. Feldberg
and Landau (Chairman) and Ms. Robinson, are paid an annual Audit Committee
retainer fee of $10,000, in addition to any annual retainer fee for Board
membership, and a per meeting fee of $1,500 for each meeting of the Audit
Committee that they attend.
On December 17, 2002, the Company's Board of Directors appointed a special
committee of independent directors (the "Special Committee") to evaluate
MacAndrews & Forbes' proposal for the M&F Investments. The Board designated
Messrs. Feldberg and Landau and Ms. Robinson as the members of the Special
Committee, which was authorized to evaluate the proposed M&F Investments between
the Company and MacAndrews & Forbes. The Special Committee retained independent
legal counsel and an investment advisor to assist in its evaluation. The Special
Committee held 10 meetings between December 17, 2002 and January 31, 2003. On
January 31, 2003, the Compensation Committee approved a one-time retainer fee of
$25,000 per member of the Special Committee, as well as a per meeting fee of
$2,000 for each meeting of the Special Committee that they attended.
32
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information for the years indicated
concerning the compensation awarded to, earned by or paid to the persons who
served as Chief Executive Officer of the Company during 2002 and the four most
highly paid executive officers (see footnote (a) below), other than the Chief
Executive Officer, who served as executive officers of the Company during 2002
(collectively, the "Named Executive Officers"), for services rendered in all
capacities to the Company and its subsidiaries during such periods.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION (a) AWARDS
------------------------------------ ----------------------------------------
RESTRICTED ALL OTHER
OTHER ANNUAL STOCK SECURITIES ANNUAL
SALARY BONUS COMPENSATION AWARDS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (b) OPTIONS ($)
- --------------------------------- -------- ---------- ---------- ------------- ----------- --------- --------------
Jack L. Stahl ................... 2002 1,125,000 1,300,000 82,999 3,060,000 400,000 3,966,746
President and Chief
Executive Officer(c)
Douglas H. Greeff ............... 2002 811,365 600,960 16,670 183,600 75,000 8,974
Executive Vice President 2001 731,375 511,200 16,513 153,000 50,000 8,786
and Chief Financial Officer (d) 2000 422,500 450,000 7,868 -- 100,000 --
Paul E. Shapiro ................. 2002 500,000 225,000 72,092 -- 200,000 --
Executive Vice President and 2001 207,692 500,000 5,671 153,000 100,000 --
Chief Administrative Officer (e)
Jeffrey M. Nugent ............... 2002 170,000 -- 31,986 -- -- 1,632,593
Former President and 2001 1,150,000 (f) 333,078 306,000 75,000 194,953
Chief Executive Officer (f) 2000 1,000,000 500,000 430,948 -- 100,000 489,454
____________________
(a) The amounts shown in Annual Compensation for 2002, 2001 and 2000 reflect
salary, bonus and other annual compensation (including perquisites and
other personal benefits valued in excess of $50,000) and amounts reimbursed
for payment of taxes awarded to, earned by or paid to the persons listed
for services rendered to the Company and its subsidiaries. For the periods
reported, the Company had an Executive Bonus Plan in which executives
participated (including Messrs. Stahl, Greeff and Shapiro) (see "Employment
Agreements and Termination of Employment Arrangements"). The Executive
Bonus Plan provided for payment of cash compensation upon the achievement
of predetermined business and personal performance objectives during the
calendar year which are established by the Compensation Committee. The
Company did not have any "executive officers" during 2002 other than
Messrs. Stahl, Greeff, Shapiro and Nugent. Accordingly, for 2002 the
Company is reporting the compensation of Messrs. Stahl, Greeff, Shapiro and
Nugent. On February 19, 2002, the Company announced its appointment of Jack
L. Stahl as its President and Chief Executive Officer. Mr. Shapiro's
compensation is reported for 2002 and 2001 only because he did not serve as
an executive officer of the Company prior to 2001. Effective February 14,
2002, Jeffrey M. Nugent, the Company's former President and Chief Executive
Officer, ceased employment with the Company.
(b) See footnotes (c), (d), (e) and (f) below for information concerning the
number, value and vesting schedules on restricted stock awards to the Named
Executive Officers under the Amended Stock Plan. The options granted to the
Named Executive Officers during 2002 pursuant to the Amended Stock Plan are
discussed below under "Option Grants in the Last Fiscal Year."
(c) Mr. Stahl became President and Chief Executive Officer of the Company
during February 2002. Mr. Stahl received a guaranteed bonus of $1,300,000
in respect of 2002 pursuant to the terms of his employment agreement. The
amount shown for Mr. Stahl under Other Annual Compensation for 2002
includes $82,999 in respect of gross ups for taxes on imputed income
arising out of (i) personal use of a Company-provided automobile, (ii)
premiums paid or reimbursed by the Company in respect of life insurance,
(iii) reimbursements for mortgage principal and interest payments pursuant
to Mr. Stahl's employment agreement and (iv) relocation expenses paid or
reimbursed by the Company in 2002. The amount shown under All Other
Compensation for 2002 reflects (i) $7,350 in Company-paid relocation
expenses, (ii) $13,081 in respect of life insurance
33
premiums, (iii) $79,315 of additional compensation in respect of interest
and principal payments on a mortgage loan which Products Corporation made
to Mr. Stahl to purchase a principal residence in the New York metropolitan
area pursuant to his employment agreement (See "Employment Agreements and
Termination of Employment Arrangements"), (iv) $6,000 in respect of
matching contributions under the Revlon Employees' Savings, Investment and
Profit Sharing Plan, (v) $15,000 in respect of matching contributions under
the Revlon Excess Savings Plan for Key Employees, and (vi) $3,846,000 for
imputed income in connection with receipt of an Award of restricted stock
reflected in the Summary Compensation Table as to which he made an election
pursuant to Section 83(b) of the Internal Revenue Code. On February 17,
2002 (the "Stahl Grant Date"), Mr. Stahl was awarded a grant of 470,000
shares of restricted stock under the Amended Stock Plan and 530,000 shares
of restricted stock under the Revlon, Inc. 2002 Supplemental Stock Plan
(the "Supplemental Stock Plan"). The value of the restricted stock Awards
to Mr. Stahl reflected in the table are based on $3.06, the per share
closing price of the Company's Class A Common Stock on the NYSE on December
31, 2002. Provided Mr. Stahl remains continuously employed by the Company,
his 2002 restricted stock Award will vest as to onethird of the restricted
shares on the day after which such 20-day average of the closing price of
the Company's Class A Common Stock on the NYSE equals or exceeds $20.00 per
share, an additional one-third of such restricted shares will vest on the
day after which such 20-day average closing price equals or exceeds $25.00
per share and the balance will vest on the day after which such 20-day
average closing price equals or exceeds $30.00 per share, provided (i)
subject to clause (ii) below, no portion of Mr. Stahl's restricted stock
Award will vest until the second anniversary of the Stahl Grant Date,
unless such 20-day average closing price has equaled or exceeded $25.00 per
share, (ii) all of the shares of restricted stock awarded to Mr. Stahl will
vest immediately in the event of a "change in control" as defined in Mr.
Stahl's restricted stock agreement and (iii) on June 18, 2004, restrictions
shall lapse as to 250,000 shares of such restricted stock, on the fourth
anniversary of the Stahl Grant Date restrictions shall lapse as to an
additional 250,000 shares of such restricted stock and on the fifth
anniversary of the Stahl Grant Date, restrictions shall lapse as to 500,000
shares of such restricted stock as to which restrictions had not previously
lapsed. In the event that, prior to the fifth anniversary of the Stahl
Grant Date, and subject to clause (ii) of the prior sentence, Mr. Stahl's
employment with the Company terminates (a) as a result of Mr. Stahl's
disability, (b) is terminated by Mr. Stahl with "good reason" or (c) is
terminated by the Company other than for "cause" (as each such term is
defined or described in Mr. Stahl's employment agreement), restrictions
shall lapse with respect to an additional number of shares of restricted
stock, if any, such that the aggregate number of shares of restricted stock
as to which restrictions shall have lapsed will equal the greater of (i)
250,000 and (ii) the product of (X) 1,000,000 and (Y) a fraction, the
numerator of which is the number of full calendar months during which Mr.
Stahl was employed after the Stahl Grant Date (disregarding service prior
to March 1, 2002) and the denominator of which is 60. In addition, if Mr.
Stahl's employment is terminated by Mr. Stahl for "good reason" or is
terminated by the Company other than for "cause" or "disability" (as each
such term is defined or described in Mr. Stahl's employment agreement)
during the 120- day period immediately preceding the date of a "change in
control" (as defined in Mr. Stahl's restricted stock agreement), then the
shares of restricted stock previously forfeited upon such termination of
employment will be reinstated and the restrictions relating thereto will
lapse and such shares will be deemed fully vested as of the date of the
change in control. In the event that cash or any in-kind distributions are
made in respect of the Company's Common Stock prior to the lapse of the
restrictions relating to any of Mr. Stahl's restricted stock as to which
the restrictions have not lapsed, such dividends will be held by the
Company and paid to Mr. Stahl when, and if, the restrictions on such
restricted stock lapse (other than the subscription rights that the Company
intends to offer in the Rights Offering, which Mr. Stahl has waived).
(d) Mr. Greeff served as Executive Vice President and Chief Financial Officer
of the Company during 2000, 2001 and 2002. In 2002, Mr. Greeff received a
bonus of $600,960, of which $200,960 was paid pursuant to the terms of his
employment agreement as a special bonus in respect of a loan payment (see
"Employment Agreements and Termination of Employment Arrangements") and the
balance of $400,000 was a discretionary bonus paid in respect of 2002
pursuant to the Revlon Executive Bonus Plan. The amount shown for Mr.
Greeff under Other Annual Compensation for 2002 includes $16,670 in respect
of gross ups for taxes on imputed income arising out of personal use of a
Company-provided automobile. The amount shown under All Other Compensation
for 2002 reflects (i) $2,974 in respect of life insurance premiums and (ii)
$6,000 in respect of matching contributions under the Revlon Employees'
Savings, Investment and Profit Sharing Plan. On September 17, 2002 (the
"2002 Grant Date"), Mr. Greeff was awarded a grant of 60,000 shares of
restricted stock under the Amended Stock Plan. The value of the 2002
restricted stock Award to Mr. Greeff reflected in the table is based on
$3.06, the per share closing price of the Company's Class A Common Stock on
the NYSE on December 31,
34
2002. Provided Mr. Greeff remains continuously employed by the Company, his
2002 restricted stock Award will vest as to one-third of the restricted
shares on the day after which the 20-day average of the closing price of
the Company's Class A Common Stock on the NYSE equals or exceeds $20.00 per
share, an additional one- third of such restricted shares will vest on the
day after which such 20-day average closing price equals or exceeds $25.00
per share and the balance will vest on the day after which such 20-day
average closing price equals or exceeds $30.00 per share, provided (i)
subject to clause (ii) below, no portion of Mr. Greeff's 2002 restricted
stock Award will vest until the second anniversary of the 2002 Grant Date,
(ii) all of the shares of restricted stock awarded to Mr. Greeff in 2002
will vest immediately in the event of a "change in control" (as defined in
Mr. Greeff's restricted stock agreement) and (iii) all of the shares of
restricted stock granted to Mr. Greeff in 2002 which have not previously
vested will fully vest on the third anniversary of the 2002 Grant Date. No
dividends will be paid on Mr. Greeff's unvested restricted stock granted in
2002. Mr. Greeff received a bonus of $511,200 in respect of 2001, of which
$211,200 was paid pursuant to the terms of his employment agreement as a
special bonus in respect of a loan payment (see "Employment Agreements and
Termination of Employment Arrangements") and the balance of $300,000 was
paid in respect of 2001 pursuant to the Revlon Executive Bonus Plan as a
short-term cash bonus in recognition of the Company's successful
refinancing of its credit agreement in 2001 with a new 2001 Credit
Agreement and issuing Products Corporation's new 12% Senior Secured Notes.
$150,000 of Mr. Greeff's bonus in respect of 2001 was paid in 2002 and the
remaining $150,000 was paid in 2003. The amount shown for Mr. Greeff under
Other Annual Compensation for 2001 includes $16,513 in respect of gross ups
for taxes on imputed income arising out of personal use of a Company-
provided automobile. The amounts shown under All Other Compensation for
2001 reflect (i) $4,436 in respect of life insurance premiums and (ii)
$4,350 in respect of matching contributions under the Revlon Employees'
Savings, Investment and Profit Sharing Plan. On June 18, 2001 (the "2001
Grant Date"), Mr. Greeff was awarded a grant of 50,000 shares of restricted
stock under the Amended Stock Plan. The value of the 2001 restricted stock
Award to Mr. Greeff reflected in the table is based on $3.06, the per share
closing price of the Company's Class A Common Stock on the NYSE on December
31, 2002. Provided Mr. Greeff remains continuously employed by the Company,
his 2001 restricted stock Award will vest as to one-third of the restricted
shares on the day after which the 20-day average of the closing price of
the Company's Class A Common Stock on the NYSE equals or exceeds $20.00 per
share, an additional one-third of such restricted shares will vest on the
day after which such 20-day average closing price equals or exceeds $25.00
per share and the balance will vest on the day after which such 20-day
average closing price equals or exceeds $30.00 per share, provided (i)
subject to clause (ii) below, no portion of Mr. Greeff's 2001 restricted
stock Award will vest until the second anniversary of the 2001 Grant Date,
(ii) all of the shares of restricted stock awarded to Mr. Greeff in 2001
will vest immediately in the event of a "change in control" (as defined in
Mr. Greeff's restricted stock agreement), and (iii) all of the shares of
restricted stock awarded to Mr. Greeff in 2001 which have not previously
vested will fully vest on the third anniversary of the 2001 Grant Date. No
dividends will be paid on Mr. Greeff's unvested restricted stock granted in
2001. Mr. Greeff received a bonus of $450,000 in respect of 2000 pursuant
to the terms of his employment agreement. The amount shown for Mr. Greeff
under Other Annual Compensation for 2000 includes $7,868 in respect of
gross ups for taxes on imputed income arising out of personal use of a
Company-provided automobile.
(e) Mr. Shapiro served as Executive Vice President and Chief Administrative
Officer of the Company during 2001 and 2002. Mr. Shapiro received a
discretionary bonus of $225,000 in respect of 2002 pursuant to the Revlon
Executive Bonus Plan. The $72,092 shown for Mr. Shapiro under Other Annual
Compensation for 2002 includes (i) $17,014 in respect of gross ups for
taxes on imputed income arising out of personal use of a Company-provided
automobile, (ii) $18,908 in respect of health and country club membership
reimbursements and (iii) $20,450 relating to personal use of a Company car.
Mr. Shapiro received a bonus of $500,000 in respect of 2001 pursuant to the
terms of his employment agreement. The amount shown for Mr. Shapiro under
Other Annual Compensation for 2001 includes $5,671 in respect of gross ups
for taxes on imputed income arising out of personal use of a
Company-provided automobile. On the 2001 Grant Date, Mr. Shapiro was
awarded a grant of (subject to his election as an executive officer of the
Company) 50,000 shares of restricted stock under the Amended Stock Plan.
The value of the 2001 restricted stock Award to Mr. Shapiro reflected in
the table is based on $3.06, the per share closing price of the Company's
Class A Common Stock on the NYSE on December 31, 2002. Provided Mr. Shapiro
remains continuously employed by the Company, his 2001 restricted stock
Award will vest as to one-third of the restricted shares on the day after
which the 20-day average of the closing price of the Company's Class A
Common Stock on the NYSE equals or exceeds $20.00 per share, an additional
one-third of such restricted shares will vest on the day after which such
20-day average
35
closing price equals or exceeds $25.00 per share and the balance will vest
on the day after which such 20-day average closing price equals or exceeds
$30.00 per share, provided (i) subject to clause (ii) below, no portion of
Mr. Shapiro's 2001 restricted stock Award will vest until the second
anniversary of the 2001 Grant Date, (ii) all of the shares of restricted
stock awarded to Mr. Shapiro in 2001 will vest immediately in the event of
a "change in control" (as defined in Mr. Shapiro's restricted stock
agreement), and (iii) all of the shares of restricted stock granted to Mr.
Shapiro in 2001 which have not previously vested will fully vest on the
third anniversary of the 2001 Grant Date. Mr. Shapiro will be considered to
have been continuously employed by the Company if his employment agreement
is not extended beyond its initial term, which expires on July 31, 2003, or
his employment is terminated prior to June 18, 2003, unless (i) Mr. Shapiro
terminates his employment other than for "good reason" (as such term is
defined in the Revlon Executive Severance Policy) or (ii) he is terminated
by the Company for "cause" (as such term is defined in Mr. Shapiro's
employment agreement). No dividends will be paid on Mr. Shapiro's unvested
restricted stock granted in 2001.
(f) Mr. Nugent served as President and Chief Executive Officer of the Company
during all of 2000 and 2001 and part of 2002. Mr. Nugent ceased employment
with the Company effective February 14, 2002 and was not entitled to a
bonus in respect of 2001 or 2002. The amount shown for Mr. Nugent under
Other Annual Compensation for 2002 includes $31,986 in respect of gross ups
for taxes on imputed income arising out of (i) personal use of a
Company-provided automobile, (ii) premiums paid or reimbursed by the
Company in respect of life insurance and (iii) reimbursements for mortgage
principal and interest payments pursuant to Mr. Nugent's employment
agreement. The amount shown under All Other Compensation for 2002 includes
(i) $33,933 in respect of life insurance premiums, (ii) $11,801 of
additional compensation in respect of interest and principal payments on a
bank loan obtained by Mr. Nugent to purchase a principal residence in the
New York metropolitan area pursuant to his employment agreement and (iii)
$1,586,859 pursuant to Mr. Nugent's separation agreement. See "Employment
Agreements and Termination of Employment Arrangements." The amount shown
for Mr. Nugent under Other Annual Compensation for 2001 includes $333,078
in respect of gross ups for taxes on imputed income arising out of (i)
personal use of a Company-provided automobile, (ii) premiums paid or
reimbursed by the Company in respect of life insurance, (iii)
reimbursements for mortgage principal and interest payments pursuant to Mr.
Nugent's employment agreement and (iv) relocation expenses paid or
reimbursed by the Company in 2001. The amount shown under All Other
Compensation for 2001 reflects (i) $15,289 in respect of Company-paid
relocation expenses, (ii) $38,058 in respect of life insurance premiums and
(iii) $141,606 of additional compensation in respect of interest and
principal payments on a bank loan obtained by Mr. Nugent to purchase a
principal residence in the New York metropolitan area pursuant to his
employment agreement. On the 2001 Grant Date, Mr. Nugent was awarded a
grant of 100,000 shares of restricted stock under the Amended Stock Plan.
The value of the 2001 restricted stock Award to Mr. Nugent reflected in the
table is based on $3.06, the per share closing price of the Company's Class
A Common Stock on the NYSE on December 31, 2002. Such restricted shares
were cancelled upon Mr. Nugent's resignation. Mr. Nugent received a bonus
of $500,000 in respect of 2000 pursuant to the terms of his employment
agreement. The amount shown for Mr. Nugent under Other Annual Compensation
for 2000 includes $430,948 in respect of gross ups for taxes on imputed
income arising out of (i) personal use of a Company-provided automobile,
(ii) premiums paid or reimbursed by the Company in respect of life
insurance, (iii) reimbursements for mortgage principal and interest
payments pursuant to Mr. Nugent's employment agreement and (iv) relocation
expenses paid or reimbursed by the Company in 2000. The amount shown under
All Other Compensation for 2000 reflects (i) $17,369 in respect of life
insurance premiums, (ii) $365,880 in respect of Company-paid relocation
expenses and (iii) $106,205 of additional compensation in respect of
interest and principal payments on a bank loan obtained by Mr. Nugent to
purchase a principal residence in the New York metropolitan area pursuant
to his employment agreement.
36
OPTION GRANTS IN THE LAST FISCAL YEAR
During 2002, the following grants of stock options were made pursuant to
the Amended Stock Plan to the Named Executive Officers:
GRANT
DATE
INDIVIDUAL GRANTS VALUE (a)
---------------------------------------------------------------------- ----------------
NUMBER OF PERCENT OF GRANT
SECURITIES TOTAL OPTIONS DATE
UNDERLYING GRANTED TO EXERCISE OR PRESENT
OPTIONS GRANTED EMPLOYEES IN BASE PRICE EXPIRATION VALUE
NAME (#) FISCAL YEAR ($/SH) DATE ($)
- --------------------- ---------------- -------------- -------------- --------------- ----------------
Jack L. Stahl ............ 400,000 12.0% 3.82 2/17/12 1,173,080
Douglas H. Greeff ........ 50,000 1.5% 3.82 2/15/12 130,279
25,000 0.75% 3.78 9/17/12 61,521
Paul E. Shapiro .......... 100,000 3.0% 4.05 8/8/12 273,245
100,000 3.0% 3.78 9/17/12 246,083
Jeffrey M. Nugent ........ -- -- -- -- --
The option granted during 2002 under the Amended Stock Plan to Mr. Stahl
was awarded on the Stahl Grant Date pursuant to his employment agreement,
consists of non-qualified options having a term of 10 years and has an exercise
price equal to $3.82, the per share closing price on the NYSE of the Company's
Class A Common Stock on the Stahl Grant Date, as indicated on the table above.
Provided Mr. Stahl continues his employment with the Company, such options will
become exercisable as to one-half of the shares on the day after which the
20-day average of the closing price of the Company's Class A Common Stock on the
NYSE equals or exceeds $30.00 per share and the balance will vest on the day
after which such 20-day average closing price equals or exceeds $40.00 per
share, provided (i) all of the shares underlying such option will vest
immediately in the event of a "change in control" (as defined in Mr. Stahl's
stock option agreement) and (ii) all of the shares underlying such option will
fully vest on the fifth anniversary of the Stahl Grant Date, provided, however,
that subject to clause (i) above, in the event that Mr. Stahl's employment with
the Company terminates as a result of (a) Mr. Stahl's "disability," (b) is
terminated by Mr. Stahl with "good reason" or (c) is terminated by the Company
other than for "cause" (as each such term is defined or described in Mr. Stahl's
employment agreement), the option will become exercisable as of the date of such
termination with respect to an additional number of option shares, if any, such
that the aggregate number of option shares that have become exercisable pursuant
to his stock option agreement will equal the greater of (X) 100,000 and (Y) the
product of (A) 400,000 and (B) a fraction, the numerator of which is the number
of full calendar months during which Mr. Stahl was employed after the Stahl
Grant Date (disregarding service prior to March 1, 2002) and the denominator of
which is 60. Messrs. Shapiro and Greeff were each awarded a grant of options on
the 2002 Grant Date which consist of non-qualified options having a term of 10
years, will vest 33.3% on each anniversary of the 2002 Grant Date, will vest
immediately in the event of a "change in control" (as defined in each of Messrs.
Shapiro's and Greeff's stock option agreements), will become 100% vested on the
third anniversary of the 2002 Grant Date and have an exercise price equal to
$3.78, the per share closing price on the NYSE of the Company's Class A Common
Stock on the 2002 Grant Date, as indicated in the table above. The other options
granted to Mr. Greeff in 2002 under the Amended Stock Plan were awarded on
February 15, 2002 pursuant to his amended employment agreement, consist of
non-qualified options having a term of 10 years, vest 25% on each anniversary of
the grant date, will become 100% vested on the fourth anniversary of the grant
date and have an exercise price equal to $3.82, the per share closing price on
the NYSE of the Company's Class A Common Stock on such grant date, as indicated
in the table above. The other options granted to Mr. Shapiro in 2002 under the
Amended Stock Plan were awarded on August 8, 2002 pursuant to his employment
agreement, consist of nonqualified options having a term of 10 years, vest 25%
on each anniversary of the grant date, will become 100% vested on the fourth
anniversary of the grant date and have an exercise price equal to $4.05, the per
share closing price on the NYSE of the Company's Class A Common Stock on such
grant date, as indicated in the table above. On the 2002 Grant Date, the Company
also granted an option to purchase 100,000 shares of the Company's Class A
Common Stock pursuant to the Amended Stock Plan to Mr. Perelman, the Chairman of
the Board of Directors of the
37
Company. Such option will vest 33.3% on each anniversary of the 2002 Grant Date,
will vest immediately in the event of a "change in control" (as defined in Mr.
Perelman's stock option agreement), will become 100% vested on the third
anniversary of the 2002 Grant Date and has an exercise price of $3.78, the per
share closing price on the NYSE of the Company's Class A Common Stock on the
2002 Grant Date. Also on the 2002 Grant Date, the Company granted 50,000
restricted shares of Class A Common Stock to Mr. Perelman pursuant to the
Amended Stock Plan. Provided Mr. Perelman continues to provide services as a
director to the Company, such 2002 restricted stock Award will vest as to
one-third of the restricted shares on the day after which the 20-day average of
the closing price of the Company's Class A Common Stock on the NYSE equals or
exceeds $20.00 per share, an additional onethird of such restricted shares will
vest on the day after which such 20-day average closing price equals or exceeds
$25.00 per share and the balance will vest on the day after which such 20-day
average closing price equals or exceeds $30.00 per share, provided (i) subject
to clause (ii) below, no portion of such restricted stock Award will vest until
the second anniversary of 2002 Grant Date, (ii) all of the shares of such
restricted stock Award will vest immediately in the event of a "change in
control" (as defined in Mr. Perelman's restricted stock agreement), and (iii)
all of the shares of such restricted stock Award will fully vest on the third
anniversary of the 2002 Grant Date.
____________________
(a) Grant Date Present Values were calculated using the Black-Scholes option
pricing model. The model as applied used the Stahl Grant Date with respect
to options granted to Mr. Stahl on such date, February 15, 2002 with
respect to options granted to Mr. Greeff on such date, August 8, 2002 with
respect to options granted to Mr. Shapiro on such date and the 2002 Grant
Date with respect to options granted to Messrs. Greeff and Shapiro on such
date. Stock option models require a prediction about the future movement of
stock price. The following assumptions were made for purposes of
calculating Grant Date Present Values: (i) a risk-free rate of return of
4.66% with respect to options granted to Mr. Stahl on the Stahl Grant Date,
4.66% with respect to options granted to Mr. Greeff on February 15, 2002,
3.96% with respect to options granted to Mr. Shapiro on August 8, 2002 and
3.49% with respect to options granted to Messrs. Greeff and Shapiro on the
2002 Grant Date, which were the rates as of the applicable grant dates for
the U.S. Treasury Zero Coupon Bond issues with a remaining term similar to
the expected term of the options; (ii) stock price volatility of 71% based
upon the volatility of the stock price of the Company's Class A Common
Stock; (iii) a constant dividend rate of zero percent; and (iv) that the
options normally would be exercised on the final day of their seventh year
after grant. No adjustments to the theoretical value were made to reflect
the waiting period, if any, prior to vesting of the stock options or the
transferability (or restrictions related thereto) of the stock options. The
real value of the options in the table depends upon the actual performance
of the Company's Class A Common Stock during the applicable period and upon
when they are exercised.
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following chart shows the number of stock options exercised during 2002
and the 2002 year-end value of the stock options held by the Named Executive
Officers:
NUMBER OF
SECURITIES VALUE OF IN-THE-
UNDERLYING MONEY OPTIONS
UNEXERCISED AT FISCAL YEAR-END
SHARES OPTIONS AT FISCAL EXERCISABLE/
ACQUIRED ON VALUE YEAR-END UNEXERCISABLE
EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE AT DECEMBER 31,
NAME DURING 2002 DURING 2002 AT DECEMBER 31, 2002 (#) 2002 (a) ($)
- --------------------- --------------- --------------- --------------------------- ----------------
Jack L. Stahl ............. -- -- --/400,000 --
Douglas H. Greeff ......... -- -- 62,500/162,500 --
Paul E. Shapiro ........... -- -- 25,000/275,000 --
Jeffrey M. Nugent ......... -- -- --/-- --
____________________
(a) Amounts shown represent the difference between the exercise price of the
options (exercisable or unexercisable, as the case may be) and the market
value of the underlying shares of the Company's Class A Common Stock at
year end, calculated using $3.06, the December 31, 2002 per share closing
price on the NYSE of the Company's Class A Common Stock. The actual value,
if any, an executive may realize upon exercise of a stock option
38
depends upon the amount by which the market price of shares of the
Company's Class A Common Stock exceeds the exercise price per share when
the stock options are exercised.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
Each of Messrs. Stahl, Greeff and Shapiro has a current executive
employment agreement with Products Corporation. Mr. Stahl's employment agreement
provides that he will serve as President and Chief Executive Officer at a base
salary of not less than $1,300,000 per annum, and that he receive a bonus of not
less than $1,300,000 in respect of 2002 (which bonus was paid in February 2003)
and grants of 1,000,000 shares of restricted stock and 400,000 options during
2002 (which grants were made on the Stahl Grant Date). At any time after
February 28, 2002, Products Corporation may terminate Mr. Stahl's employment by
36 months' prior written notice of nonrenewal.
Mr. Greeff's employment agreement with Products Corporation, as amended,
provides that he will serve as Chief Financial Officer at a base salary of not
less than $650,000 per annum and that he receive a grant of (i) 50,000
restricted shares in 2001 (which grant was made on the 2001 Grant Date), (ii)
50,000 options in 2001 (which grant was made on March 26, 2001) and (iii) 50,000
options in 2002 (which grant was made on February 15, 2002). At any time after
May 8, 2003, Products Corporation may terminate Mr. Greeff's employment by 24
months' prior written notice of non-renewal. During any such period after notice
of non-renewal, Mr. Greeff would be deemed an employee at will and would be
eligible for severance under Products Corporation's Executive Severance Policy
(see "Executive Severance Policy").
Mr. Shapiro's employment agreement with Products Corporation provides that
he will serve as Executive Vice President and Chief Administrative Officer at a
base salary of not less than $500,000 per annum and that he receive a $500,000
bonus in respect of 2001 (which bonus was paid in 2002) and a grant of (i)
50,000 restricted shares in 2001 (which grant was made on the 2001 Grant Date),
(ii) 100,000 options in 2001 (which grant was made on the 2001 Grant Date) and
(iii) 100,000 options in 2002 (which grant was made on August 8, 2002). At any
time after July 31, 2003, either Products Corporation or Mr. Shapiro may
terminate Mr. Shapiro's employment by providing written notice of non-renewal.
Each of Messrs. Stahl's, Greeff's and Shapiro's employment agreement
provides for participation in the Revlon Executive Bonus Plan and other
executive benefit plans on a basis equivalent to other senior executives of the
Company generally and for Company-paid supplemental disability insurance (except
that Mr. Shapiro waived Company-provided life insurance coverage). Mr. Stahl's
agreement provides for Company-paid supplemental term life insurance coverage
with a death benefit of $10,000,000 during employment. The employment agreement
for each of Messrs. Stahl, Greeff and Shapiro provides for protection of Company
confidential information and includes a non-compete obligation.
Mr. Stahl's employment agreement provides that in the event of termination
of the term by Mr. Stahl for breach by the Company of a material provision of
such agreement for "good reason" (as defined in Mr. Stahl's employment
agreement), or by the Company prior to February 28, 2005 (otherwise than for
"cause" or "disability" as each such term is defined or described in Mr. Stahl's
employment agreement), Mr. Stahl would be entitled, at his election, to
severance pursuant to Products Corporation's Executive Severance Policy (see
"Executive Severance Policy") (other than the six-month limit on lump sum
payments provided for in such policy, which six-month limit provision would not
apply to Mr. Stahl) or continued payments of base salary through February 28,
2005 and continued participation in the Company's life insurance plan, which
life insurance coverage is subject to a limit of two years, and medical plans
subject to the terms of such plans through February 28, 2005 or until Mr. Stahl
were covered by like plans of another company, and continued Company-paid
supplemental term life insurance. In addition, Mr. Stahl's employment agreement
provides that if he remains employed by Products Corporation or its affiliates
until age 60, then upon any subsequent retirement he will be entitled to a
supplemental pension benefit in a sufficient amount so that his annual pension
benefit from all qualified and non-qualified pension plans of Products
Corporation and its affiliates, as well as any such plans of Mr. Stahl's past
employers or their affiliates (expressed as a straight life annuity), equals
$500,000. If Mr. Stahl's employment were to terminate on or after February 28,
2003 and prior to February 28, 2004, then he would receive 8.33% of the
supplemental pension benefit otherwise payable pursuant to his employment
agreement and thereafter an additional 8.33% would accrue as of each February
28th on which Mr. Stahl is still employed (but in no event more than would have
been payable to Mr. Stahl under the
39
foregoing provision had he retired at age 60). Mr. Stahl would not receive any
supplemental pension benefit and any amounts then being paid for supplemental
pension benefits would immediately cease if he were to terminate his employment
prior to March 1, 2005 other than for "good reason" (as defined in Mr. Stahl's
employment agreement), or if he were to breach such agreement or be terminated
by the Company for "cause" (as defined in Mr. Stahl's employment agreement). Mr.
Stahl's employment agreement provides for continuation of group life insurance
and executive medical insurance coverage in the event of permanent disability.
Mr. Greeff's employment agreement provides that in the event of termination
of the term by Mr. Greeff for breach by the Company of a material provision of
such agreement or failure of the Compensation Committee to adopt and implement
the recommendations of management with respect to stock option grants, or by the
Company prior to May 8, 2003 (otherwise than for "cause" as defined in Mr.
Greeff's employment agreement or disability), Mr. Greeff would be entitled, at
his election, to severance pursuant to the Executive Severance Policy (see
"Executive Severance Policy") (other than the six-month limit on lump sum
payments provided for in the Executive Severance Policy, which six-month limit
provision would not apply to Mr. Greeff) or continued payments of base salary
through May 8, 2005 and continued participation in the Company's life insurance
plan, which life insurance coverage is subject to a limit of two years, and
medical plans subject to the terms of such plans through May 8, 2005 or until
Mr. Greeff were covered by like plans of another company, and continued
Company-paid supplemental disability insurance. In addition, Mr. Greeff's
agreement provides that if he remains employed by Products Corporation or its
affiliates until age 62, then upon any subsequent retirement he will be entitled
to a supplemental pension benefit in a sufficient amount so that his annual
pension benefit from all qualified and non-qualified pension plans of Products
Corporation and its affiliates, as well as any such plans of Mr. Greeff's past
employers or their affiliates (expressed as a straight life annuity), equals
$400,000. If Mr. Greeff's employment were to terminate on or after January 31,
2003 and prior to January 31, 2004, then he would receive 27.27% of the
supplemental pension benefit otherwise payable pursuant to his employment
agreement and thereafter an additional 9.09% would accrue as of each January
31st on which Mr. Greeff is still employed (but in no event more than would have
been payable to Mr. Greeff under the foregoing provision had he retired at age
62). Mr. Greeff would not receive any supplemental pension benefit and would be
required to reimburse the Company for any supplemental pension benefits received
if he were to terminate his employment prior to May 8, 2003 other than for "good
reason" (as defined in Mr. Greeff's employment agreement), or if he were to
breach such agreement or be terminated by the Company for "cause" (as defined in
Mr. Greeff's employment agreement). Mr. Greeff's employment agreement provides
for continuation of group life insurance and executive medical insurance
coverage in the event of permanent disability.
Mr. Shapiro's employment agreement provides that in the event of
termination of the term (i) by Mr. Shapiro for breach by the Company of a
material provision of such agreement or failure of the Compensation Committee to
adopt and implement the recommendations of management with respect to stock
option or restricted stock grants, (ii) by the Company prior to July 31, 2003
(otherwise than for "cause" as defined in Mr. Shapiro's employment agreement or
disability), or (iii) by Mr. Shapiro or the Company upon providing notice of
non-renewal of the term at any time on or after July 31, 2003, Mr. Shapiro would
be entitled to continued payments of base salary and monthly payments of
one-twelfth of the maximum annual bonus to which he would be eligible under his
employment agreement, continued participation in the Company's medical plans,
subject to the terms of such plans, and continued Company-paid supplemental
disability insurance through the later of January 31, 2005 or 18 months after
the effective date of termination. In addition, Mr. Shapiro's employment
agreement provides that at age 65 he will be entitled to a supplemental pension
benefit in a sufficient amount so that his annual pension benefit from all
qualified and non-qualified pension plans of Products Corporation and its
affiliates, as well as any such plans of Mr. Shapiro's past employers or their
affiliates (expressed as a straight life annuity), equals $400,000. Mr. Shapiro
would not receive any supplemental pension benefit and would be required to
reimburse the Company for any supplemental pension benefits received if he were
to terminate his employment prior to July 31, 2003 other than for "good reason"
(as defined in Mr. Shapiro's employment agreement), or if he were to breach the
agreement or be terminated by the Company for "cause" (as defined in Mr.
Shapiro's employment agreement). Mr. Shapiro's employment agreement provides for
continuation of executive medical insurance coverage in the event of permanent
disability.
Mr. Stahl's employment agreement provides that he is entitled to a loan
from Products Corporation to satisfy state, local and federal income taxes
(including any withholding taxes) incurred by him as a result of his making an
election under Section 83(b) of the Internal Revenue Code in connection with the
1,000,000 shares of
40
restricted stock which were granted to him by the Company on the Stahl Grant
Date. Mr. Stahl received such a loan from Products Corporation in the amount of
$1,800,000 in March 2002. Interest on such loan is payable at the applicable
federal rate required to avoid imputation of income tax liability. The full
principal amount of such loan and all accrued interest is due and payable on the
fifth anniversary of the Stahl Grant Date, provided that if Mr. Stahl terminates
his employment for "good reason" or the Company terminates him other than for
"disability" or "cause" (as each such term is defined or described in Mr.
Stahl's employment agreement), the outstanding balance of such loan and all
accrued interest would be forgiven. Such loan is secured by a pledge of the
1,000,000 shares of restricted stock which were granted to Mr. Stahl on the
Stahl Grant Date and such loan and pledge are evidenced by a Promissory Note and
a Pledge Agreement, each dated March 13, 2002. Mr. Stahl's employment agreement
also provides that he is entitled to a mortgage loan to cover the purchase of a
principal residence in the New York metropolitan area and/or a Manhattan
apartment, in the principal amount of $2,000,000, which loan was advanced by
Products Corporation to Mr. Stahl on May 20, 2002. The principal of the mortgage
loan is repayable on a monthly basis during the period from June 1, 2002 through
and including May 1, 2032, with interest at the applicable federal rate, or 90
days after Mr. Stahl's employment with the Company terminates, whichever occurs
earlier. Pursuant to his employment agreement, Mr. Stahl is entitled to receive
additional compensation payable on a monthly basis equal to the amount repaid by
him in respect of interest and principal on the mortgage loan, plus a gross up
for any taxes resulting from such additional compensation. If during the term of
his employment agreement, Mr. Stahl terminates his employment for "good reason"
or the Company terminates his employment other than for "disability" or "cause"
(as each such term is defined or described in Mr. Stahl's employment agreement),
the mortgage loan from the Company would be forgiven in its entirety.
Mr. Greeff's employment agreement provides that he is entitled to a loan
from Products Corporation in the amount of $800,000 (which loan he received in
2000), with the principal to be payable in five equal installments of $160,000,
plus interest at the applicable federal rate, on each of May 9, 2001, May 9,
2002 (which installments were repaid) and the three successive anniversaries
thereafter, provided that the total principal amount of such loan and any
accrued but unpaid interest at the applicable federal rate (the "Loan Payment")
shall be due and payable upon the earlier of the January 15th immediately
following the termination of Mr. Greeff's employment for any reason or May 9,
2005. In addition, Mr. Greeff's employment agreement provides that he shall be
entitled to a special bonus, payable on each May 9th (which was paid on May 9,
2001 and May 9, 2002) and ending with May 9, 2005 equal to the sum of the Loan
Payment with respect to such year, provided that he is employed on each such May
9th, and provided further that in the event that Mr. Greeff terminates his
employment for "good reason" or is terminated for a reason other than "cause"
(as such terms are defined in Mr. Greeff's employment agreement), he shall be
entitled to a special bonus in the amount of $800,000 minus the sum of any
special bonuses paid through the date of such termination plus accrued but
unpaid interest at the applicable federal rate. Notwithstanding the above, if
Mr. Greeff terminates his employment other than for "good reason" or the Company
terminates his employment for "cause" (as such terms are defined in Mr. Greeff's
employment agreement), or if he breaches certain post-employment covenants, any
bonus described above shall be forfeited or repaid by Mr. Greeff, as the case
may be.
Mr. Nugent resigned from his employment with the Company effective February
14, 2002 and entered into a separation agreement with Products Corporation dated
as of February 14, 2002 (the "Nugent Agreement"), which provides that he receive
a separation allowance at the rate of $1,300,000 per annum payable over the
period from February 15, 2002 to December 31, 2004 (the "Payment Period"), which
allowance would be reduced on account of any compensation earned by Mr. Nugent
from employment or consulting services during the Payment Period. Pursuant to
the Nugent Agreement, the Company made an additional lump sum payment to Mr.
Nugent in the amount of $285,000 on April 15, 2002. Additionally, in the Nugent
Agreement, Mr. Nugent and Products Corporation agreed to an offset of
obligations whereby Products Corporation canceled Mr. Nugent's obligation to
repay principal and interest on a loan in the amount of $500,000 that was made
in installments of $400,000 in 1999 and $100,000 in 2000 pursuant to his
employment agreement with Products Corporation effective as of November 2, 1999
(the "Nugent Employment Agreement"), in exchange for the cancellation of Product
Corporation's obligation to pay Mr. Nugent a special bonus on January 15, 2003
pursuant to the Nugent Employment Agreement. Mr. Nugent's stock options were
cancelled upon his resignation.
EXECUTIVE SEVERANCE POLICY
Products Corporation's Executive Severance Policy provides that upon
termination of employment of eligible executive employees, including Messrs.
Stahl, Greeff and Shapiro, other than voluntary resignation or
41
termination by Products Corporation for good reason, in consideration for the
executive's execution of a release and confidentiality agreement and the
Company's standard employee non-competition agreement, the eligible executive
will be entitled to receive, in lieu of severance under any employment agreement
then in effect or under Products Corporation's basic severance plan, a number of
months of severance pay in semi-monthly installments based upon such executive's
grade level and years of service, reduced by the amount of any compensation from
subsequent employment, unemployment compensation or statutory termination
payments received by such executive during the severance period, and, in certain
circumstances, by the actuarial value of enhanced pension benefits received by
the executive, as well as continued participation in medical and certain other
benefit plans for the severance period (or in lieu thereof, upon commencement of
subsequent employment, a lump sum payment equal to the then present value of 50%
of the amount of base salary then remaining payable through the balance of the
severance period). Pursuant to the Executive Severance Policy, upon meeting the
conditions set forth in such policy, as of December 31, 2002 Messrs. Stahl,
Greeff and Shapiro would be entitled to severance pay equal to 18, 20 and 19
months' of base salary, respectively, at the base salary rate in effect on the
date of employment termination, plus continued participation in the medical and
dental plans for the same respective periods on the same terms as active
employees.
DEFINED BENEFIT PLANS
In accordance with the terms of the Revlon Employees' Retirement Plan (the
"Retirement Plan"), the following table shows the estimated annual retirement
benefits payable (as of December 31, 2002) under the noncash balance program of
the Retirement Plan (the "Non-Cash Balance Program") at normal retirement age
(65) to a person retiring with the indicated average compensation and years of
credited service, on a straight life annuity basis, after Social Security
offset, including amounts attributable to the Revlon Pension Equalization Plan,
as amended (the "Pension Equalization Plan"), as described below.
HIGHEST CONSECUTIVE ESTIMATED ANNUAL STRAIGHT LIFE ANNUITY BENEFITS AT RETIREMENT
FIVE-YEAR AVERAGE WITH INDICATED YEARS OF CREDITED SERVICE ($) (a)
COMPENSATION -------------------------------------------------------------------------
DURING FINAL TEN YEARS ($) 15 20 25 30 35
- -------------------------- --------- --------- --------- --------- ----------
600,000 151,020 201,360 251,700 302,040 302,040
700,000 177,020 236,027 295,033 354,040 354,040
800,000 203,020 270,693 338,367 406,040 406,040
900,000 229,020 305,360 381,700 458,040 458,040
1,000,000 255,020 340,027 425,033 500,000 500,000
1,100,000 281,020 374,693 468,367 500,000 500,000
1,200,000 307,020 409,360 500,000 500,000 500,000
1,300,000 333,020 444,027 500,000 500,000 500,000
1,400,000 359,020 478,693 500,000 500,000 500,000
1,500,000 385,020 500,000 500,000 500,000 500,000
2,000,000 500,000 500,000 500,000 500,000 500,000
2,500,000 500,000 500,000 500,000 500,000 500,000
____________________
(a) The normal form of benefit for the Retirement Plan and the Pension
Equalization Plan is a straight life annuity.
The Retirement Plan is intended to be a tax qualified defined benefit plan.
Non-Cash Balance Program benefits are a function of service and final average
compensation. The Non-Cash Balance Program is designed to provide an employee
having 30 years of credited service with an annuity generally equal to 52% of
final average compensation, less 50% of estimated individual Social Security
benefits. Final average compensation is defined as average annual base salary
and bonus (but not any part of bonuses in excess of 50% of base salary) during
the five consecutive calendar years in which base salary and bonus (but not any
part of bonuses in excess of 50% of base salary) were highest out of the last 10
years prior to retirement or earlier termination. Except as otherwise indicated,
credited service includes all periods of employment with the Company or a
subsidiary prior to retirement or earlier termination. Messrs. Stahl, Greeff and
Shapiro do not participate in the Non-Cash Balance Program.
Effective January 1, 2001, Products Corporation amended the Retirement Plan
to provide for a cash balance program under the Retirement Plan (the "Cash
Balance Program"). Under the Cash Balance Program, eligible employees will
receive quarterly credits to an individual cash balance bookkeeping account
equal to 5% of their
42
compensation for the previous quarter. Interest credits, which commenced June
30, 2001, are allocated quarterly (based on the yield of the 30-year Treasury
bond for November of the preceding calendar year). Employees who as of January
1, 2001 were at least age 45, had 10 or more years of service with the Company
and whose age and years of service totaled at least 60 were "grandfathered" and
continue to participate in the Non-Cash Balance Program under the same
retirement formula described in the preceding paragraph. All other eligible
employees had their benefits earned (if any) under the Non-Cash Balance Program
"frozen" on December 31, 2000 and began to participate in the Cash Balance
Program on January 1, 2001. The "frozen" benefits will be payable at normal
retirement age and will be reduced if the employee elects early retirement. Any
employee who, as of January 1, 2001 was at least age 40 but not part of the
"grandfathered" group will, in addition to the "basic" 5% quarterly pay credits,
receive quarterly "transition" pay credits of 3% of compensation each year for
up to 10 years or until he/she leaves employment with the Company, whichever is
earlier. Messrs. Stahl, Greeff and Shapiro participate in the Cash Balance
Program. Mr. Nugent was and Mr. Greeff is eligible to receive basic and
transition pay credits. As they were not employed by the Company on January 1,
2001 (the date on which a "transition" employee was determined), Messrs. Stahl
and Shapiro are eligible to receive only basic pay credits. The estimated annual
benefits payable under the Cash Balance Program as a single life annuity
(assuming Messrs. Stahl, Greeff and Shapiro remain employed by the Company until
age 65 at their current level of compensation) is $199,400 for Mr. Stahl,
$264,000 for Mr. Greeff and $17,700 for Mr. Shapiro. Messrs. Stahl's, Greeff's
and Shapiro's total retirement benefits will be determined in accordance with
their respective employment agreements, each of which provides for a guaranteed
retirement benefit provided that certain conditions are met.
The Employee Retirement Income Security Act of 1974, as amended, places
certain maximum limitations upon the annual benefit payable under all qualified
plans of an employer to any one individual. In addition, the Omnibus Budget
Reconciliation Act of 1993 limits the annual amount of compensation that can be
considered in determining the level of benefits under qualified plans. The
Pension Equalization Plan, as amended effective December 14, 1998, is a
non-qualified benefit arrangement designed to provide for the payment by the
Company of the difference, if any, between the amount of such maximum
limitations and the annual benefit that would be payable under the Retirement
Plan (including the Non-Cash Balance Program and the Cash Balance Program) but
for such limitations, up to a combined maximum annual straight life annuity
benefit at age 65 under the Retirement Plan and the Pension Equalization Plan of
$500,000. Benefits provided under the Pension Equalization Plan are conditioned
on the participant's compliance with his or her non-competition agreement and on
the participant not competing with Products Corporation for one year after
termination of employment.
The number of full years of service under the Retirement Plan and the
Pension Equalization Plan as of January 1, 2003 for Mr. Greeff is two years and
for Mr. Shapiro is one year. Mr. Stahl did not have any years of credited
service as of January 1, 2003.
43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth as of December 31, 2002 the number of shares
of the Company's Common Stock beneficially owned, and the percent so owned, by
(i) each person known to the Company to be the beneficial owner of more than 5%
of the outstanding shares of the Company's Common Stock, (ii) each director of
the Company, (iii) the Chief Executive Officer during 2002 and each of the other
Named Executive Officers during 2002 and (iv) all directors and executive
officers of the Company as a group. The number of shares owned are those
beneficially owned, as determined under the Commission's rules, and such
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rules, beneficial ownership includes any shares of Common
Stock as to which a person has sole or shared voting power or investment power
and any shares of Common Stock which the person has the right to acquire within
60 days through the exercise of any option, warrant or right, through conversion
of any security or pursuant to the automatic termination of a power of attorney
or revocation of a trust, discretionary account or similar arrangement.
NAME AND ADDRESS AMOUNT AND NATURE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENTAGE OF CLASS
- ------------------------- --------------------------- ---------------------------------
Ronald O. Perelman .................... 43,989,583 83.02%
35 E. 62nd St. (Class A, Class B and Series B (Class A, Class B and Series B
New York, NY 10021 Preferred)(1) Preferred)
Donald G. Drapkin ..................... 12,550 (Class A)(2) *
Meyer Feldberg ........................ 5,625 (Class A)(3) *
Howard Gittis ......................... 113,300 (Class A)(4) *
Douglas H. Greeff ..................... 177,500 (Class A)(5) *
Vernon E. Jordan, Jr. ................. 5,625 (Class A) (6) *
Edward J. Landau ...................... 5,725 (Class A)(7) *
Jeffrey M. Nugent ..................... -- *
Linda Gosden Robinson ................. 5,625 (Class A)(8) *
Terry Semel ........................... 10,625 (Class A)(9) *
Paul E. Shapiro ....................... 99,000 (Class A) (10) *
Jack L. Stahl ......................... 160,000 (Class A) (11) *
Martha Stewart ........................ 6,125 (Class A)(12) *
All Directors and Executive Officers
as a Group (12 Persons) ............ 12,907,950 (Class A)(13) 60.58%
31,250,000 (Class B) 100.0%
4,333 (Series B Preferred) 100.0%
____________________
* Less than one percent.
(1) Mr. Perelman through Mafco Holdings (which through REV Holdings)
beneficially owns (i) 11,650,000 shares of the Company's Class A Common
Stock, which represent approximately 57% of the outstanding shares of the
Company's Class A Common Stock, (ii) all of the outstanding 31,250,000
shares of the Company's Class B Common Stock, which together with the
shares referenced in subclause (i) above represent approximately 83% of the
outstanding shares of the Company's Common Stock, and (iii) all of the
outstanding 4,333 shares of the Company's Series B Preferred Stock, which
are convertible into 433,333 shares of the Company's Class A Common Stock.
Based on the shares referenced in clauses (i), (ii) and (iii) above, Mr.
Perelman through Mafco Holdings (which through REV Holdings) had at
December 31, 2002 approximately 97% of the combined voting power of the
outstanding shares of the Company's stock entitled to vote at the 2003
Annual Meeting. As of December 31, 2002, 4,186,104 shares of the Company's
Class A Common Stock owned by REV Holdings were pledged by REV Holdings
(the "Pledged Shares") to secure $80.5 million principal amount of REV
Holdings' 12% Senior Secured Notes due 2004. From time to time, additional
shares of the Company's Class A Common Stock or shares of intermediate
holding companies between the Company and Mafco Holdings may be pledged to
secure obligations of Mafco Holdings or its affiliates. A default under REV
Holdings' obligations which are secured by the Pledged Shares could cause a
foreclosure with respect to such shares of the Company's Class A Common
Stock pledged by REV Holdings. Mr. Perelman also holds an option to acquire
300,000 shares of the Company's Class A Common Stock, which option vested
on February 12, 1999, an option to acquire 300,000 shares of the Company's
Class A Common Stock, which option vested on April 4, 2002, and an
additional option to acquire 56,250 shares of the Company's Class A Common
Stock, which option vested on June 18, 2002. Such vested options to acquire
656,250 shares of the Company's Class A Common Stock, together with
44
the Class A Common Stock, Class B Common Stock and Series B Preferred Stock
beneficially owned by Mr. Perelman, represents approximately 83% of the
outstanding shares of the Company's Common Stock.
(2) Includes 12,050 shares which are held by trusts for Mr. Drapkin's children
and 500 shares held by a minor son. In all instances, beneficial ownership
is disclaimed.
(3) Includes 1,875 shares which Mr. Feldberg may acquire under options which
vested on May 22, 2001, 1,875 shares which Mr. Feldberg may acquire under
options which vested on May 22, 2002 and 1,875 shares which Mr. Feldberg
may acquire under options which vested on July 13, 2002.
(4) Includes 113,300 shares held directly by Mr. Gittis.
(5) Includes 102,500 shares held directly by Mr. Greeff, 25,000 shares which
Mr. Greeff may acquire under options which vested on May 22, 2001, 25,000
shares which Mr. Greeff may acquire under options which vested on May 22,
2002, 12,500 shares which Mr. Greeff may acquire under options which vested
on March 26, 2002 and 12,500 shares which Mr. Greeff may acquire under
options which vested on February 15, 2003.
(6) Includes 1,875 shares which Mr. Jordan may acquire under options which
vested on May 22, 2001, 1,875 shares which Mr. Jordan may acquire under
options which vested on May 22, 2002 and 1,875 shares which Mr. Jordan may
acquire under options which vested on July 13, 2002.
(7) Includes 100 shares held directly by Mr. Landau, 1,875 shares which Mr.
Landau may acquire under options which vested on May 22, 2001, 1,875 shares
which Mr. Landau may acquire under options which vested on May 22, 2002 and
1,875 shares which Mr. Landau may acquire under options which vested on
July 13, 2002.
(8) Includes 1,875 shares which Ms. Robinson may acquire under options which
vested on May 22, 2001, 1,875 shares which Ms. Robinson may acquire under
options which vested on May 22, 2002 and 1,875 shares which Ms. Robinson
may acquire under options which vested on July 13, 2002.
(9) Includes 2,000 shares owned by Mr. Semel's children as to which beneficial
ownership is disclaimed, 3,000 shares owned jointly with Mr. Semel's wife,
1,875 shares which Mr. Semel may acquire under options which vested on May
22, 2001, 1,875 shares which Mr. Semel may acquire under options which
vested on May 22, 2002 and 1,875 shares which Mr. Semel may acquire under
options which vested on July 13, 2002.
(10) Includes 74,000 shares held directly by Mr. Shapiro and 25,000 shares which
Mr. Shapiro may acquire under options which vested on June 18, 2002.
(11) Includes 150,000 shares held directly by Mr. Stahl and 10,000 shares held
by his wife, as to which beneficial ownership is disclaimed.
(12) Includes 500 shares owned indirectly by the Martha Stewart Inc. Defined
Benefit Pension Plan, 1,875 shares which Ms. Stewart may acquire under
options which vested on May 22, 2001, 1,875 shares which Ms. Stewart may
acquire under options which vested on May 22, 2002 and 1,875 shares which
Ms. Stewart may acquire under options which vested on July 13, 2002.
(13) Includes only shares beneficially held by persons who were directors and
executive officers of the Company as of December 31, 2002.
45
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth as of December 31, 2002, with respect to all
compensation plans of the Company previously approved and not previously
approved by its stockholders (i) the number of securities to be issued upon the
exercise of outstanding options, warrants and rights, (ii) the weighted-average
exercise price of such outstanding options, warrants and rights and (iii) the
number of securities remaining available for future issuance under such equity
compensation plans, excluding securities reflected in item (i). A description of
the Supplemental Stock Plan follows the table.
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
-------------------------------------------------------------------------------------------
NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO BE AVAILABLE FOR FUTURE ISSUANCE
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE UNDER EQUITY COMPENSATION
OUTSTANDING OPTIONS, WARRANTS PRICE OF OUTSTANDING OPTIONS, PLANS (EXCLUDING SECURITIES
PLAN CATEGORY AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
-------------------------------------------------------------------------------------------
Previously Approved by
Stockholders:
Amended Stock Plan 9,361,064 (1) $12.83 (3) 1,064,986
Not Previously Approved by
Stockholders: (4)
Supplemental Stock Plan 530,000 (2) N/A (3) --
____________________
(1) Includes 1,475,000 shares of restricted stock and 7,886,064 options issued
under the Amended Stock Plan.
(2) Includes 530,000 shares of restricted stock issued under the Supplemental
Stock Plan, the entire amount of securities issuable under such plan.
(3) Weighted-average exercise price excludes restricted stock.
(4) The Supplemental Stock Plan was not required to be approved by the
Company's stockholders.
On February 17, 2002, the Company adopted the Supplemental Stock Plan, the
purpose of which is to provide Mr. Stahl, the sole eligible participant, with
inducement awards to entice him to join the Company and to enhance the Company's
long-term performance and profitability. The Supplemental Stock Plan covers
530,000 shares of the Company's Class A Common Stock. Awards may be made under
the Supplemental Stock Plan in the form of stock options, stock appreciation
rights and restricted or unrestricted stock. The terms of the Supplemental Stock
Plan and the grant of restricted shares to Mr. Stahl as described below are
substantially the same as the Amended Stock Plan and the grant of restricted
shares to Mr. Stahl under such plan. On February 17, 2002, the Compensation
Committee granted Mr. Stahl an award of 530,000 restricted shares of Class A
Common Stock, the full amount of the shares of Class A Common Stock issuable
under the Supplemental Stock Plan. Pursuant to the terms of the Supplemental
Stock Plan, such grant was made conditioned upon Mr. Stahl's execution of the
Company's standard employee confidentiality and non-competition agreement. See
"Employment Agreements and Termination of Employment Agreements."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MacAndrews & Forbes beneficially owns shares of the Company's Common Stock
and Series B Preferred Stock having approximately 97% of the combined voting
power of the outstanding shares of Common Stock and Series B Preferred Stock. As
a result, MacAndrews & Forbes is able to elect the entire Board of Directors of
the Company and control the vote on all matters submitted to a vote of the
Company's stockholders. MacAndrews & Forbes is wholly owned by Ronald O.
Perelman, Chairman of the Board of Directors of the Company.
46
TRANSFER AGREEMENTS
In June 1992, Revlon, Inc. and Products Corporation entered into an asset
transfer agreement with Revlon Holdings Inc. (a Delaware corporation which in
2002 converted into a Delaware limited liability company known as Revlon
Holdings LLC ("Holdings") and which is an affiliate and an indirect wholly-owned
subsidiary of Mafco Holdings) and certain of its wholly-owned subsidiaries (the
"Asset Transfer Agreement"), and Revlon, Inc. and Products Corporation entered
into a real property asset transfer agreement with Holdings (the "Real Property
Transfer Agreement" and, together with the Asset Transfer Agreement, the
"Transfer Agreements"), and pursuant to such agreements, on June 24, 1992
Holdings transferred assets to Products Corporation and Products Corporation
assumed all of the liabilities of Holdings, other than certain specifically
excluded assets and liabilities (the liabilities excluded are referred to as the
"Excluded Liabilities"). Certain consumer products lines sold in
demonstratorassisted distribution channels considered not integral to Revlon,
Inc.'s business and which historically had not been profitable (the "Retained
Brands") and certain other assets and liabilities were retained by Holdings.
Holdings agreed to indemnify Revlon, Inc. and Products Corporation against
losses arising from the Excluded Liabilities, and Revlon, Inc. and Products
Corporation agreed to indemnify Holdings against losses arising from the
liabilities assumed by Products Corporation. The amount reimbursed by Holdings
to Products Corporation for the Excluded Liabilities for 2002 was $0.5 million.
REIMBURSEMENT AGREEMENTS
Revlon, Inc., Products Corporation and MacAndrews Holdings have entered
into reimbursement agreements (the "Reimbursement Agreements") pursuant to which
(i) MacAndrews Holdings is obligated to provide (directly or through affiliates)
certain professional and administrative services, including employees, to
Revlon, Inc. and its subsidiaries, including Products Corporation, and purchase
services from third party providers, such as insurance, legal and accounting
services and air transportation services, on behalf of Revlon, Inc. and its
subsidiaries, including Products Corporation, to the extent requested by
Products Corporation, and (ii) Products Corporation is obligated to provide
certain professional and administrative services, including employees, to
MacAndrews Holdings (and its affiliates) and purchase services from third party
providers, such as insurance and legal and accounting services, on behalf of
MacAndrews Holdings (and its affiliates) to the extent requested by MacAndrews
Holdings, provided that in each case the performance of such services does not
cause an unreasonable burden to MacAndrews Holdings or Products Corporation, as
the case may be. Products Corporation reimburses MacAndrews Holdings for the
allocable costs of the services purchased for or provided to Products
Corporation and its subsidiaries and for reasonable out-of-pocket expenses
incurred in connection with the provision of such services. MacAndrews Holdings
(or such affiliates) reimburses Products Corporation for the allocable costs of
the services purchased for or provided to MacAndrews Holdings (or such
affiliates) and for the reasonable out-of-pocket expenses incurred in connection
with the purchase or provision of such services. The net amount reimbursed by
MacAndrews Holdings to Products Corporation for the services provided under the
Reimbursement Agreements for 2002 was $0.8 million. Each of Revlon, Inc. and
Products Corporation, on the one hand, and MacAndrews Holdings, on the other,
has agreed to indemnify the other party for losses arising out of the provision
of services by it under the Reimbursement Agreements other than losses resulting
from its willful misconduct or gross negligence. The Reimbursement Agreements
may be terminated by either party on 90 days' notice. Products Corporation does
not intend to request services under the Reimbursement Agreements unless their
costs would be at least as favorable to Products Corporation as could be
obtained from unaffiliated third parties. The Company participates in MacAndrews
& Forbes' directors and officers insurance program, which covers the Company as
well as MacAndrews & Forbes and its other affiliates. The limits of coverage are
available on aggregate losses to any or all of the participating companies and
their respective directors and officers. The Company reimburses MacAndrews &
Forbes for its allocable portion of the premiums for such coverage which, the
Company believes, is more favorable than the premiums the Company could secure
were it to secure stand-alone coverage. The amount paid by the Company to
MacAndrews & Forbes for premiums is included in the amounts paid under the
Reimbursement Agreement.
TAX SHARING AGREEMENT
Revlon, Inc. and Products Corporation, for federal income tax purposes, are
included in the affiliated group of which Mafco Holdings is the common parent,
and Revlon, Inc.'s and Products Corporation's federal taxable income and loss
are included in such group's consolidated tax return filed by Mafco Holdings.
Revlon, Inc. and
47
Products Corporation also may be included in certain state and local tax returns
of Mafco Holdings or its subsidiaries. In June 1992, Holdings, Revlon, Inc.,
Products Corporation and certain of its subsidiaries, and Mafco Holdings entered
into a tax sharing agreement (as subsequently amended and restated, the "Tax
Sharing Agreement"), pursuant to which Mafco Holdings has agreed to indemnify
Revlon, Inc. and Products Corporation against federal, state or local income tax
liabilities of the consolidated or combined group of which Mafco Holdings (or a
subsidiary of Mafco Holdings other than Revlon, Inc. and Products Corporation or
its subsidiaries) is the common parent for taxable periods beginning on or after
January 1, 1992 during which Revlon, Inc. and Products Corporation or a
subsidiary of Products Corporation is a member of such group. Pursuant to the
Tax Sharing Agreement, for all taxable periods beginning on or after January 1,
1992, Products Corporation will pay to Revlon, Inc., which in turn will pay to
Holdings, amounts equal to the taxes that Products Corporation would otherwise
have to pay if it were to file separate federal, state or local income tax
returns (including any amounts determined to be due as a result of a
redetermination arising from an audit or otherwise of the consolidated or
combined tax liability relating to any such period which is attributable to
Products Corporation), except that Products Corporation will not be entitled to
carry back any losses to taxable periods ending prior to January 1, 1992. No
payments are required by Products Corporation or Revlon, Inc. if and to the
extent Products Corporation is prohibited under the terms of its Credit
Agreement from making tax sharing payments to Revlon, Inc. The Credit Agreement
prohibits Products Corporation from making such tax sharing payments other than
in respect of state and local income taxes. Since the payments to be made under
the Tax Sharing Agreement will be determined by the amount of taxes that
Products Corporation would otherwise have to pay if it were to file separate
federal, state or local income tax returns, the Tax Sharing Agreement will
benefit Mafco Holdings to the extent Mafco Holdings can offset the taxable
income generated by Products Corporation against losses and tax credits
generated by Mafco Holdings and its other subsidiaries. The Tax Sharing
Agreement was amended, effective as of January 1, 2001, to eliminate a
contingent payment to Revlon, Inc. under certain circumstances in return for a
$10 million note with interest at 12% and interest and principal payable by
Mafco Holdings on December 31, 2005. As a result of net operating tax losses and
prohibitions under the Credit Agreement, there were no federal tax payments or
payments in lieu of taxes pursuant to the Tax Sharing Agreement for 2002.
Revlon, Inc. had a liability of $0.9 million to Holdings in respect of
alternative minimum taxes for 1997 under the Tax Sharing Agreement. However, as
a result of tax legislation enacted in the first quarter of 2002, Revlon, Inc.
was able to recognize tax benefits of $0.9 million in 2002, which completely
offset this liability.
INVESTMENT AGREEMENT AND MAFCO LOAN AGREEMENTS
See the description of the M&F Investments under "Recent Developments."
REGISTRATION RIGHTS AGREEMENT
Prior to the consummation of Revlon, Inc.'s initial public equity offering,
Revlon, Inc. and Revlon Worldwide Corporation (subsequently merged into REV
Holdings), the then direct parent of Revlon, Inc., entered into a registration
rights agreement (the "Registration Rights Agreement") and in February 2003,
Revlon, Inc. and MacAndrews Holdings entered into a joinder agreement to the
Registration Rights Agreement pursuant to which REV Holdings and certain
transferees of Revlon, Inc.'s Common Stock held by REV Holdings (the "Holders")
have the right to require Revlon, Inc. to register all or part of Revlon, Inc.'s
Class A Common Stock owned by such Holders, including shares of Class A Common
Stock purchased in connection with the Rights Offering and shares of Class A
Common Stock issuable upon conversion of Revlon, Inc.'s Class B Common Stock and
Series B Preferred Stock owned by such Holders under the Securities Act (a
"Demand Registration"); provided that Revlon, Inc. may postpone giving effect to
a Demand Registration up to a period of 30 days if Revlon, Inc. believes such
registration might have a material adverse effect on any plan or proposal by
Revlon, Inc. with respect to any financing, acquisition, recapitalization,
reorganization or other material transaction, or if Revlon, Inc. is in
possession of material non-public information that, if publicly disclosed, could
result in a material disruption of a major corporate development or transaction
then pending or in progress or in other material adverse consequences to Revlon,
Inc. In addition, the Holders have the right to participate in registrations by
Revlon, Inc. of its Class A Common Stock (a "Piggyback Registration"). The
Holders will pay all out-of-pocket expenses incurred in connection with any
Demand Registration. Revlon, Inc. will pay any expenses incurred in connection
with a Piggyback Registration, except for underwriting discounts, commissions
and expenses attributable to the shares of Revlon, Inc.'s Class A Common Stock
sold by such Holders.
48
OTHER
Pursuant to a lease dated April 2, 1993 (the "Edison Lease"), Holdings
leased to Products Corporation the Edison research and development facility for
a term of up to 10 years with an annual rent of $1.4 million and certain shared
operating expenses payable by Products Corporation which, together with the
annual rent, were not to exceed $2.0 million per year. In August 1998, Holdings
sold the Edison facility to an unrelated third party, which assumed
substantially all liability for environmental claims and compliance costs
relating to the Edison facility, and in connection with the sale Products
Corporation terminated the Edison Lease and entered into a new lease with the
new owner. Holdings agreed to indemnify Products Corporation through September
1, 2013 to the extent rent under the new lease exceeds rent that would have been
payable under the terminated Edison Lease had it not been terminated. The net
amount reimbursed by Holdings to Products Corporation with respect to the Edison
facility for 2002 was $0.2 million.
During 2002, Products Corporation leased certain facilities to MacAndrews &
Forbes or its affiliates pursuant to occupancy agreements and leases. These
included space at Products Corporation's New York headquarters. The rent paid to
Products Corporation for 2002 was $0.3 million.
The Credit Agreement and Products Corporation's 12% Notes are supported by,
among other things, guarantees from Revlon, Inc., and, subject to certain
limited exceptions, all of the domestic subsidiaries of Products Corporation.
The obligations under such guarantees are secured by, among other things, the
capital stock of Products Corporation and, subject to certain limited
exceptions, the capital stock of all of Products Corporation's domestic
subsidiaries and 66% of the capital stock of Products Corporation's and its
domestic subsidiaries' first-tier foreign subsidiaries.
In March 2002, prior to the passage of the Sarbanes-Oxley Act of 2002,
Products Corporation made an advance of $1.8 million to Mr. Stahl pursuant to
his employment agreement, which was entered into in February 2002, for tax
assistance related to a grant of restricted stock provided to Mr. Stahl pursuant
to such agreement, which loan bears interest at the applicable federal rate. In
May 2002, prior to the passage of the Sarbanes- Oxley Act of 2002, Products
Corporation made an advance of $2.0 million to Mr. Stahl pursuant to his
employment agreement in connection with the purchase of his principal residence
in the New York City metropolitan area, which loan bears interest at the
applicable federal rate, $79,314 of which was repaid during 2002. Pursuant to
his employment agreement, Mr. Stahl receives from Products Corporation
additional compensation payable on a monthly basis equal to the amount actually
paid by him in respect of interest and principal on such $2.0 million advance,
plus a gross up for any taxes payable by Mr. Stahl as a result of such
additional compensation.
During 2000, Products Corporation made an advance of $0.8 million to Mr.
Greeff, pursuant to his employment agreement, which loan bears interest at the
applicable federal rate. Mr. Greeff repaid $0.2 million during 2002. Pursuant to
his employment agreement, Mr. Greeff is entitled to receive bonuses from
Products Corporation, payable on each May 9th commencing on May 9, 2001 and
ending with May 9, 2005, in each case equal to the sum of the principal and
interest on the advance repaid in respect of such year by Mr. Greeff, provided
that he is employed by Products Corporation on each such May 9th, which bonus
installment was paid to Mr. Greeff in May 2002.
In the Nugent Agreement, Mr. Nugent and Products Corporation agreed to an
offset of obligations whereby Products Corporation canceled Mr. Nugent's
obligation to repay principal and interest on a loan in the amount of $0.5
million that was made in installments of $0.4 million in 1999 and $0.1 million
in 2000 pursuant to the Nugent Employment Agreement, in exchange for the
cancellation of Products Corporation's obligation to pay Mr. Nugent a special
bonus on January 15, 2003 pursuant to the Nugent Employment Agreement.
During 2002, Products Corporation made payments of $0.3 million to Ms.
Ellen Barkin (spouse of Mr. Perelman) under a written agreement pursuant to
which she provides voiceover services for certain of the Company's
advertisements, which payments were competitive with industry rates for
similarly situated talent.
The law firm of which Mr. Landau was Of Counsel to and from which he
retired in January 2003, Wolf, Block, Schorr and Solis-Cohen LLP, provided legal
services to Products Corporation during 2002 and it is anticipated that such
firm may continue to provide such services in 2003.
49
During 2002, Products Corporation placed advertisements in magazines and
other media operated by Martha Stewart Living Omnimedia, Inc. ("MSLO"), which is
controlled by Ms. Stewart, who also serves as MSLO's Chairman and Chief
Executive Officer. Products Corporation paid MSLO $2.5 million for such services
in 2002, which fees were less than 1% of the Company's estimate of MSLO's
consolidated gross revenues for 2002. Products Corporation's decision to place
advertisements for its products in MSLO's magazines and other media was based
upon their popular appeal to women and the rates paid were competitive with
industry rates for similarly situated magazines and media.
During 2002, Products Corporation obtained advertising, media buying and
direct marketing services from various subsidiaries of WPP Group plc ("WPP").
Ms. Robinson is employed by one of WPP's subsidiaries, however, Ms. Robinson is
neither an executive officer of, nor does she hold any material equity interest
in, WPP. Products Corporation paid WPP $1.1 million for such services in 2002,
which fees were less than 1% of the Company's estimate of WPP's consolidated
gross revenues for 2002. Products Corporation 's decision to engage WPP was
based upon its professional expertise in understanding the advertising needs of
the consumer packaged goods industry, as well as its global presence in many of
the international markets in which the Company operates, and the rates paid were
competitive with industry rates for similarly situated advertising agencies.
During 2002, Products Corporation employed Mr. Perelman's daughter in a
marketing position, with compensation paid for 2002 of less than $80,000.
During 2002, Products Corporation employed Mr. Drapkin's daughter in a
marketing position, with compensation paid for 2002 of less than $80,000.
ITEM 14. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
The Company's Chief Executive Officer and Chief Financial Officer (who are
its principal executive officer and principal financial officer, respectively)
have within 90 days prior to the filing date of this Annual Report on Form 10-K
(the "Evaluation Date"), evaluated the effectiveness of the Company's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Exchange Act). Based upon such evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that such disclosure controls and procedures
are effective to ensure that information required to be disclosed by the Company
in the reports filed or submitted by it under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and that such information is accumulated and communicated to
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding
disclosure.
The Chief Executive Officer and Chief Financial Officer have determined
that there were no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls
subsequent to the date of their evaluation, nor any significant deficiencies or
material weaknesses in such internal controls requiring corrective actions.
Forward-Looking Statements
This Annual Report on Form 10-K for the year ended December 31, 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:
(i) the Company's plans to update its retail presence and improve the
marketing effectiveness of its retail wall displays by installing
newly-reconfigured wall displays and reconfiguring existing wall
displays at its retail customers (and its estimates of the costs of
such wall displays, the effects of
50
such plans on the accelerated amortization of existing wall displays
and the estimated amount of such amortization);
(ii) the Company's plans to increase its advertising and media spending and
improve the effectiveness of its advertising;
(iii)the Company's plans to introduce new products and further strengthen
its new product development process;
(iv) the Company's plans to streamline its product assortment and
reconfigure product placement on its wall displays, selectively adjust
prices on certain of its products, improve customers' stock levels by
enhancing merchandiser coverage and reduce damages by continuing to
develop the Company's tamper evident program;
(v) the Company's plans to implement comprehensive programs to develop and
train its employees;
(vi) the Company's future financial performance;
(vii)the effect on sales of political and/or economic conditions, adverse
currency fluctuations and competitive activities;
(viii) the Company's plans to accelerate the implementation of the
stabilization and growth phase of its plan and the charges and the
cash costs resulting from implementing such plan and the timing of
such costs, as well as the Company's expectations as to improved
revenues over the long term as a result of such phase of its plan;
(ix) restructuring activities, restructuring costs, the timing of
restructuring payments and annual savings and other benefits from such
activities;
(x) operating revenues, cash on hand, cash available from the Rights
Offering and the $50 million Series C preferred stock investment, if
any, and availability of borrowings under the Mafco Loans and Products
Corporation's Credit Agreement being sufficient to satisfy the
Company's cash requirements in 2003, and the availability of funds
from restructuring indebtedness, selling assets or operations, capital
contributions or loans from MacAndrews & Forbes, the Company's other
affiliates and/or third parties and the sale of additional shares of
Revlon, Inc.;
(xi) the Company's uses of funds, including amounts required for the
purchase and reconfiguration of wall displays, increases in
advertising and media, and the costs and expenses of the stabilization
and growth phase of the Company's plan and its estimates of operating
expenses, working capital expenses, wall display costs, capital
expenditures, restructuring costs and debt service payments;
(xii) the effects of a loss of one or more of the Company's customers,
including, without limitation, Wal-Mart, and the status of the
Company's relationship with its customers;
(xiii) the effects of competitive responses to the implementation of the
Company's plan;
(xiv) the availability of raw materials and components and, with respect to
Europe, products;
(xv) the supply arrangement with the Company's principal third party
manufacturer for Europe being flexible and that production
difficulties with such supplier will be resolved during the first half
of 2003;
(xvi) matters concerning the Company's market-risk sensitive instruments;
51
(xvii) the effects of the assumptions and estimates underlying the
Company's critical accounting policies;
(xviii) the effects of the Company's adoption of certain accounting
principles;
(xix) the Company's receipt, and the amount and timing of the payment of
contingent deferred purchase price in connection with the sale of
certain assets;
(xx) the Company's ability to consummate the Rights Offering and as to the
timing thereof;
(xxi) Products Corporation securing a further waiver or amendment of
various provisions of its Credit Agreement, including the EBITDA and
leverage ratio covenants, or refinancing or repaying such debt before
January 31, 2004 in the event such waiver or amendment is not secured;
and
(xxii) the Company's plan to refinance Products Corporation's debt maturing
in 2005.
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 websites shall not be deemed
incorporated by reference into this Annual Report on Form 10-K. A number of
important factors could cause actual results to differ materially from those
contained in any forwardlooking 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 or unanticipated costs associated with
improving the marketing effectiveness of the Company's wall displays;
(ii) difficulties or delays in developing and/or presenting the Company's
increased advertising programs and/or improving the effectiveness of
its advertising;
(iii) difficulties or delays in developing and introducing new products or
failure of the Company's customers to accept new product offerings
and/or in further strengthening the Company's new product development
process;
(iv) difficulties or delays in implementing the Company's plans to
streamline its product assortment and reconfigure product placement on
its wall displays, selectively adjust prices on certain of its
products, improve stock levels by enhancing merchandiser coverage
and/or reduce damages by continuing to develop the Company's tamper
evident program;
(v) difficulties or delays in implementing comprehensive programs to train
the Company's employees;
(vi) unanticipated circumstances or results affecting the Company's
financial performance, including changes in consumer preferences, such
as reduced consumer demand for the Company's color cosmetics and other
current products, and actions by the Company's competitors, including
business combinations, technological breakthroughs, new products
offerings, promotional spending and marketing and promotional
successes, including increases in market share;
52
(vii) the effects of and changes in political and/or economic conditions,
including inflation, monetary conditions and military actions, and in
trade, monetary, fiscal and tax policies in international markets;
(viii) unanticipated costs or difficulties or delays in completing projects
associated with the stabilization and growth phase of the Company's
plan or lower than expected revenues over the long term as a result of
such plan;
(ix) difficulties, delays or unanticipated costs or less than expected
savings and other benefits resulting from the Company's restructuring
activities;
(x) lower than expected operating revenues, the inability to secure
capital contributions or loans from MacAndrews & Forbes, the Company's
other affiliates and/or third parties or the unavailability of funds
under Products Corporation's Credit Agreement, the Mafco Loans or the
$50 million Series C preferred stock investment, if any, or from the
Rights Offering;
(xi) higher than expected operating expenses, sales returns, working
capital expenses, wall display costs, capital expenditures,
restructuring costs or debt service payments;
(xii) combinations among the Company's significant customers or the loss,
insolvency or failure to pay debts by a significant customer or
customers;
(xiii) competitive responses to the implementation of the Company's plan;
(xiv) difficulties, delays or unexpected costs in sourcing raw materials or
components, and with respect to Europe, products;
(xv) difficulties, delays or unanticipated costs or effects arising from
the Company's supply arrangement with its principal European supplier
and resolving the production difficulties with such supplier;
(xvi) interest rate or foreign exchange rate changes affecting the Company
and its market sensitive financial instruments;
(xvii) actual events varying from the assumptions and estimates underlying
the Company's critical accounting policies;
(xviii) unanticipated effects of the Company's adoption of certain new
accounting standards;
(xix) difficulties or delays in the Company's receiving payment of certain
contingent deferred purchase price in connection with the sale of
certain assets;
(xx) difficulties, delays or the inability of the Company to consummate the
Rights Offering;
(xxi) difficulties, delays or inability to secure a further waiver or
amendment of the EBITDA and leverage ratio covenants under the Credit
Agreement or refinancing or repaying such debt on or before January
31, 2004 in the event such waiver or amendment is not secured; and
(xxii) difficulties, delays or the inability of the Company to refinance
Products Corporation's debt maturing in 2005.
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.
53
DISCLOSURE CONCERNING WEBSITE ACCESS TO COMPANY REPORTS
The Company's corporate website address is www.revloninc.com. The Company
makes available, free of charge, on such website its Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments
to those reports as soon as reasonably practicable after such material is
electronically filed with or furnished to the Commission.
54
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this Report:
(1) Consolidated Financial Statements and Independent Auditors' Report
included herein:
See Index on page F-1.
(2) Financial Statement Schedule:
See Index on page F-1.
All other schedules are omitted as they are inapplicable or the
required information is furnished in the Consolidated Financial
Statements of the Company or the Notes thereto.
(3) List of Exhibits:
2. PLAN OF ACQUISITION ETC.
2.1 Investment Agreement, dated as of February 5, 2003 among Revlon,
Inc., Products Corporation and MacAndrews & Forbes (incorporated by
reference to Exhibit 2.1 to the Current Report on Form 8-K of
Products Corporation filed with the Commission on February 5, 2003
(the "Products Corporation February 2003 Form 8-K"))
3. CERTIFICATE OF INCORPORATION AND BY-LAWS.
3.1 Amended and Restated Certificate of Incorporation of Revlon, Inc.
dated March 4, 1996 (incorporated by reference to Exhibit 3.4 to the
Quarterly Report on Form 10-Q of Revlon, Inc. for the quarterly
period ended March 31, 1996).
3.2 Amended and Restated By-laws of Revlon, Inc., dated as of June 30,
2001 (incorporated by reference to Exhibit 3.2 to the Quarterly
Report on Form 10-Q of Revlon, Inc. for the quarterly period ended
June 30, 2001 (the "Revlon 2001 Second Quarter Form 10-Q")).
3.3 Certificate of Designations, Powers, Preferences and Rights of
Series B Convertible Preferred Stock of Revlon, Inc. (incorporated
by reference to Exhibit 3.2 to the Registration Statement on Form
S-8 of Revlon, Inc. filed with the Commission on October 11, 2001,
File No. 333- 71378).
4. INSTRUMENTS DEFINING THE RIGHT OF SECURITY HOLDERS, INCLUDING
INDENTURES.
4.1 Indenture, dated as of November 26, 2001, among Products
Corporation, the Guarantors party thereto, including Revlon, Inc.,
as parent guarantor, and Wilmington Trust Company, as trustee,
relating to the 12% Senior Secured Notes due 2005 (incorporated by
reference to Exhibit 4.2 to the Current Report on Form 8-K of
Products Corporation filed with the Commission on November 30, 2001
(the "Products Corporation November 2001 Form 8-K")).
4.2 Revlon Pledge Agreement, dated as of November 30, 2001, between
Revlon, Inc., as pledgor, in favor of Wilmington Trust Company, as
note collateral agent (the "Note Collateral Agent") (incorporated by
reference to Exhibit 4.2 to the Annual Report on Form 10-K of
Products Corporation for the year ended December 31, 2001 (the
"Products Corporation 2001 Form 10- K")).
4.3 Company Pledge Agreement (Domestic), dated as of November 30, 2001,
between Products Corporation, as pledgor, in favor of Wilmington
Trust Company, as Note Collateral Agent (incorporated by reference
to Exhibit 4.3 to the Products Corporation 2001 Form 10-K).
55
4.4 Subsidiary Pledge Agreement (Domestic), dated as of November 30,
2001, between RIROS Corporation, as pledgor, in favor of Wilmington
Trust Company, as Note Collateral Agent (incorporated by reference
to Exhibit 4.4 to the Products Corporation 2001 Form 10-K).
4.5 Subsidiary Pledge Agreement (Domestic), dated as of November 30,
2001, between Revlon International Corporation, as pledgor, in favor
of Wilmington Trust Company, as Note Collateral Agent (incorporated
by reference to Exhibit 4.5 to the Products Corporation 2001 Form
10-K).
4.6 Subsidiary Pledge Agreement (Domestic), dated as of November 30,
2001, between PPI Two Corporation, as pledgor, in favor of
Wilmington Trust Company, as Note Collateral Agent (incorporated by
reference to Exhibit 4.6 to the Products Corporation 2001 Form
10-K).
4.7 Company Pledge Agreement (International), dated as of November 30,
2001, between Products Corporation, as pledgor, in favor of
Wilmington Trust Company, as Note Collateral Agent (incorporated by
reference to Exhibit 4.7 to the Products Corporation 2001 Form
10-K).
4.8 Subsidiary Pledge Agreement (International), dated as of November
30, 2001, between RIROS Corporation, as pledgor, in favor of
Wilmington Trust Company, as Note Collateral Agent (incorporated by
reference to Exhibit 4.8 to the Products Corporation 2001 Form
10-K).
4.9 Subsidiary Pledge Agreement (International), dated as of November
30, 2001, between Revlon International Corporation, as pledgor, in
favor of Wilmington Trust Company, as Note Collateral Agent
(incorporated by reference to Exhibit 4.9 to the Products
Corporation 2001 Form 10-K).
4.10 Subsidiary Pledge Agreement (International), dated as of November
30, 2001, between PPI Two Corporation, as pledgor, in favor of
Wilmington Trust Company, as Note Collateral Agent (incorporated by
reference to Exhibit 4.10 to the Products Corporation 2001 Form
10-K).
4.11 Company Security Agreement, dated as of November 30, 2001, between
Products Corporation, as grantor, in favor of Wilmington Trust
Company, as Note Collateral Agent (incorporated by reference to
Exhibit 4.11 to the Products Corporation 2001 Form 10-K).
4.12 Subsidiary Security Agreement, dated as of November 30, 2001, among
Almay, Inc., Carrington Parfums Ltd., Charles of the Ritz Group
Ltd., Charles Revson Inc., Cosmetics & More, Inc., North America
Revsale Inc., Pacific Finance & Development Corp., PPI Two
Corporation, Prestige Fragrances, Ltd., Revlon Consumer Corp.,
Revlon Government Sales, Inc., Revlon International Corporation,
Revlon Products Corp., Revlon Real Estate Corporation, RIROS
Corporation, RIROS Group Inc. and RIT Inc., each as grantor, in
favor of Wilmington Trust Company, as Note Collateral Agent
(incorporated by reference to Exhibit 4.12 to the Products
Corporation 2001 Form 10-K).
4.13 Company Copyright Security Agreement, dated as of November 30, 2001,
between Products Corporation, as grantor, in favor of Wilmington
Trust Company, as Note Collateral Agent (incorporated by reference
to Exhibit 4.13 to the Products Corporation 2001 Form 10-K).
4.14 Company Patent Security Agreement, dated as of November 30, 2001,
between Products Corporation, as grantor, in favor of Wilmington
Trust Company, as Note Collateral Agent (incorporated by reference
to Exhibit 4.14 to the Products Corporation 2001 Form 10-K).
4.15 Company Trademark Security Agreement, dated as of November 30, 2001,
between Products Corporation, as grantor, in favor of Wilmington
Trust Company, as Note Collateral Agent (incorporated by reference
to Exhibit 4.15 to the Products Corporation 2001 Form 10-K).
56
4.16 Subsidiary Trademark Security Agreement, dated as of November 30,
2001, between Charles Revson Inc., as grantor, in favor of
Wilmington Trust Company, as Note Collateral Agent (incorporated by
reference to Exhibit 4.16 to the Products Corporation 2001 Form
10-K).
4.17 Subsidiary Trademark Security Agreement, dated as of November 30,
2001, between Charles of the Ritz Group, Ltd., as grantor, in favor
of Wilmington Trust Company, as Note Collateral Agent (incorporated
by reference to Exhibit 4.17 to the Products Corporation 2001 Form
10- K).
4.18 Deed of Trust, Assignment of Rents and Leases and Security
Agreement, dated as of November 30, 2001, between Products
Corporation and First American Title Insurance Company for the use
and benefit of Wilmington Trust Company, as Note Collateral Agent
(incorporated by reference to Exhibit 4.18 to the Products
Corporation 2001 Form 10-K).
4.19 Amended and Restated Collateral Agency Agreement, dated as of May
30, 1997, and further amended and restated as of November 30, 2001,
between Products Corporation, JPMorgan Chase Bank, as bank agent and
as administrative agent, and Wilmington Trust Company, as trustee
and as Note Collateral Agent (incorporated by reference to Exhibit
4.19 to the Products Corporation 2001 Form 10-K).
4.20 Indenture, dated as of February 1, 1998, between Revlon Escrow Corp.
("Revlon Escrow") and U.S. Bank Trust National Association (formerly
known as First Trust National Association), as Trustee, relating to
the 8 1/8% Senior Notes due 2006 (the "8 1/8% Senior Notes
Indenture") (incorporated by reference to Exhibit 4.1 to the
Registration Statement on Form S-1 of Products Corporation filed
with the Commission on March 12, 1998, File No. 333-47875 (the
"Products Corporation March 1998 Form S-1")).
4.21 Indenture, dated as of February 1, 1998, between Revlon Escrow and
U.S. Bank Trust National Association (formerly known as First Trust
National Association), as Trustee, relating to the 8 5/8% Senior
Subordinated Notes Due 2008 (the "8 5/8% Senior Subordinated Notes
Indenture") (incorporated by reference to Exhibit 4.3 to the
Products Corporation March 1998 Form S-1).
4.22 First Supplemental Indenture, dated April 1, 1998, among Products
Corporation, Revlon Escrow, and the Trustee, amending the 8 1/8%
Senior Notes Indenture (incorporated by reference to Exhibit 4.2 to
the Products Corporation March 1998 Form S-1).
4.23 First Supplemental Indenture, dated March 4, 1998, among Products
Corporation, Revlon Escrow, and the Trustee, amending the 8 5/8%
Senior Subordinated Notes Indenture (incorporated by reference to
Exhibit 4.4 to the Products Corporation March 1998 Form S-1).
4.24 Indenture, dated as of November 6, 1998, between Products
Corporation and U.S. Bank Trust National Association, as Trustee,
relating to Products Corporation's 9% Senior Notes due 2006
(incorporated by reference to Exhibit 4.13 to the Quarterly Report
on Form 10-Q of Revlon, Inc. for the quarterly period ended
September 30, 1998).
4.25 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,
J.P. Morgan Securities Inc., as sole arranger and bookrunner, and
JPMorgan Chase Bank, as administrative agent (the "Second Amended
and Restated Credit Agreement") (incorporated by reference to
Exhibit 4.1 to the Products Corporation November 2001 Form 8-K).
4.26 First Amendment dated May 31, 2002 to the Second Amended and
Restated Credit Agreement (incorporated by reference to Exhibit
10.18 to the Quarterly Report on Form 10-Q of Revlon, Inc. for the
quarterly period ended June 30, 2002).
57
4.27 Second Amendment and First Waiver Agreement dated as of February 5,
2003 to the Second Amended and Restated Credit Agreement
(incorporated by reference to 10.19 to the Products Corporation
February 2003 Form 8-K).
10. MATERIAL CONTRACTS.
10.1 Asset Transfer Agreement, dated as of June 24, 1992, among Holdings,
National Health Care Group, Inc., Charles of the Ritz Group Ltd.,
Products Corporation and Revlon, Inc. (incorporated by reference to
Exhibit 10.1 to Amendment No. 1 to the Revlon, Inc. Registration
Statement on Form S-1 filed with the Commission on June 29, 1992,
File No. 33- 47100).
10.2 Tax Sharing Agreement, entered into as of June 24, 1992, among Mafco
Holdings, Revlon, Inc., Products Corporation and certain
subsidiaries of Products Corporation as amended and restated as of
January 1, 2001 (incorporated by reference to Exhibit 10.2 to the
Products Corporation 2001 Form 10-K).
10.3 Employment Agreement, dated as of February 17, 2002, between
Products Corporation and Jack L. Stahl (incorporated by reference to
Exhibit 10.17 to the Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2002 of Revlon, Inc.).
10.4 Revlon, Inc. 2002 Supplemental Stock Plan (incorporated by reference
to Exhibit 4.1 to the Registration Statement on Form S-8 of Revlon,
Inc. filed with the Commission on June 24, 2002, File No.
333-91040).
10.5 Employment Agreement, amended and restated as of May 9, 2000,
between Products Corporation and Douglas H. Greeff (the "Greeff
Employment Agreement")(incorporated by reference to Exhibit 10.22 to
the Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2000 of Revlon, Inc.).
10.6 Amendment dated June 18, 2001 to the Greeff Employment Agreement
(incorporated by reference to Exhibit 10.6 to the Products
Corporation 2001 Form 10-K).
10.7 Employment Agreement, effective as of August 1, 2001, between
Products Corporation and Paul E. Shapiro (incorporated by reference
to Exhibit 10.7 to the Products Corporation 2001 Form 10-K).
*10.8 Revlon Executive Bonus Plan (Amended and Restated as of September 1,
2002).
10.9 Amended and Restated Revlon Pension Equalization Plan, amended and
restated as of December 14, 1998 (incorporated by reference to
Exhibit 10.15 to the Annual Report on Form 10-K for year ended
December 31, 1998 of Revlon, Inc.).
*10.10 Executive Supplemental Medical Expense Plan Summary dated July 2000.
10.11 Benefit Plans Assumption Agreement, dated as of July 1, 1992, by and
among Holdings, Revlon, Inc. and Products Corporation (incorporated
by reference to Exhibit 10.25 to the Annual Report on Form 10-K for
the year ended December 31, 1992 of Products Corporation).
10.12 Revlon Amended and Restated Executive Deferred Compensation Plan
dated as of August 6, 1999 (incorporated by reference to Exhibit
10.27 to the Quarterly Report on Form 10-Q of Revlon, Inc. for the
quarterly period ended September 30, 1999).
*10.13 Revlon Executive Severance Policy as amended July 1, 2002.
58
10.14 Revlon, Inc. Fourth Amended and Restated 1996 Stock Plan
(incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-8 of Revlon, Inc. filed with the Commission on
June 24, 2002, File No. 333-91038).
10.15 Purchase Agreement, dated as of February 18, 2000, by and among
Revlon, Inc., Products Corporation, REMEA 2 B.V., Revlon Europe,
Middle East and Africa, Ltd., Revlon International Corporation,
Europeenne de Produits de Beaute S.A., Deutsche Revlon GmbH & Co.
K.G., Revlon Canada, Inc., Revlon de Argentina, S.A.I.C., Revlon
South Africa (Proprietary) Limited, Revlon (Suisse) S.A., Revlon
Overseas Corporation C.A., CEIL Comercial, Exportadora, Industrial
Ltda., Revlon Manufacturing Ltd., Revlon Belgium N.V., Revlon
(Chile) S.A., Revlon (Hong Kong) Limited, Revlon, S.A., Revlon
Nederland B.V., Revlon New Zealand Limited, European Beauty Products
S.p.A. and Beauty Care Professional Products Luxembourg, S.a.r.l.
(incorporated by reference to Exhibit 10.19 to the Annual Report on
Form 10-K for the year ended December 31, 1999 of Revlon, Inc.).
10.16 Purchase and Sale Agreement dated as of July 31, 2001 by and between
Holdings and Revlon, Inc. relating to the Charles of the Ritz
business (incorporated by reference to Exhibit 10.6 to the Products
Corporation 2001 Form 10-K).
10.17 Senior Unsecured Multiple-Draw Term Loan dated as of February 5,
2003, between MacAndrews & Forbes and Products Corporation
(incorporated by reference to Exhibit 10.17 to the Products
Corporation February 2003 Form 8-K).
10.18 Senior Unsecured Supplemental Line of Credit Agreement, dated as of
February 5, 2003, between MacAndrews & Forbes and Products
Corporation (incorporated by reference to Exhibit 10.18 of the
Products Corporation February 2003 Form 8-K).
21. SUBSIDIARIES.
*21.1 Subsidiaries of Revlon, Inc.
23. CONSENTS OF EXPERTS AND COUNSEL.
*23.1 Consent of KPMG LLP.
24. POWERS OF ATTORNEY.
*24.1 Power of Attorney executed by Ronald O. Perelman.
*24.2 Power of Attorney executed by Howard Gittis.
*24.3 Power of Attorney executed by Donald G. Drapkin.
*24.4 Power of Attorney executed by Meyer Feldberg.
*24.5 Power of Attorney executed by Vernon E. Jordan, Jr.
*24.6 Power of Attorney executed by Edward J. Landau
*24.7 Power of Attorney executed by Linda Gosden Robinson.
*24.8 Power of Attorney executed by Terry Semel.
*24.9 Power of Attorney executed by Martha Stewart.
99. ADDITIONAL EXHIBITS.
59
*99.1 Certification of Jack L. Stahl, Chief Executive Officer, dated March
21, 2003 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002.
*99.2 Certification of Douglas H. Greeff, Chief Financial Officer, dated
March 21, 2003 pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
* Filed herewith.
(b) Reports on Form 8-K. None
60
REVLON, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
----
Independent Auditors' Report ...................................................................................F-2
AUDITED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 2002 and 2001 ...................................................F-3
Consolidated Statements of Operations for each of the years in the three-year
period ended December 31, 2002 ...............................................................................F-4
Consolidated Statements of Stockholders' Deficiency and Comprehensive Loss for each of the years in
the three-year period ended December 31, 2002 ................................................................F-5
Consolidated Statements of Cash Flows for each of the years in the three-year
period ended December 31, 2002 ...............................................................................F-6
Notes to Consolidated Financial Statements .....................................................................F-7
FINANCIAL STATEMENT SCHEDULE:
Schedule II--Valuation and Qualifying Accounts .................................................................F-47
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Revlon, Inc.:
We have audited the accompanying consolidated balance sheets of Revlon, Inc. and
subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of operations, stockholders' deficiency and comprehensive loss and
cash flows for each of the years in the three-year period ended December 31,
2002. In connection with our audits of the consolidated financial statements, we
have also audited the financial statement schedule as listed on the index on
page F-1. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Revlon, Inc. and
subsidiaries as of December 31, 2002 and 2001 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted FASB Statement No. 142, "Goodwill and Other Intangible Assets," as of
January 1, 2002.
KPMG LLP
New York, New York
March 12, 2003
F-2
REVLON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
DECEMBER 31, DECEMBER 31,
ASSETS 2002 2001
-------------- --------------
Current assets:
Cash and cash equivalents ............................................. $ 85.8 $ 103.3
Marketable securities ................................................. - 2.2
Trade receivables, less allowances of $24.0
and $15.4, respectively ............................................ 212.3 203.9
Inventories ........................................................... 128.1 157.9
Prepaid expenses and other ............................................ 39.6 45.6
-------------- --------------
Total current assets ............................................... 465.8 512.9
Property, plant and equipment, net ....................................... 133.4 142.8
Other assets ............................................................. 154.4 156.0
Goodwill, net ............................................................ 185.9 185.9
-------------- --------------
Total assets ....................................................... $ 939.5 $ 997.6
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Short-term borrowings - third parties ................................. $ 25.0 $ 17.5
Accounts payable ...................................................... 92.9 87.0
Accrued expenses and other ............................................ 392.3 281.3
-------------- --------------
Total current liabilities ........................................... 510.2 385.8
Long-term debt - third parties ........................................... 1,726.0 1,619.5
Long-term debt - affiliates .............................................. 24.1 24.1
Other long-term liabilities .............................................. 320.0 250.9
Stockholders' deficiency:
Preferred stock, par value $.01 per share; 20,000,000
shares authorized, 546 shares of Series A Preferred Stock
issued and outstanding .............................................. 54.6 54.6
Preferred stock, par value $.01 per share; 20,000,000
shares authorized, 4,333 shares of Series B Convertible
Preferred Stock issued and outstanding .............................. - -
Class B Common Stock, par value $.01 per share; 200,000,000
shares authorized, 31,250,000 issued and outstanding ................ 0.3 0.3
Class A Common Stock, par value $.01 per share; 350,000,000
shares authorized, 20,516,135 issued and
outstanding, respectively ........................................... 0.2 0.2
Capital deficiency .................................................... (201.3) (201.3)
Accumulated deficit since June 24, 1992 ............................... (1,361.9) (1,075.4)
Accumulated other comprehensive loss .................................. (132.7) (61.1)
-------------- --------------
Total stockholders' deficiency ...................................... (1,640.8) (1,282.7)
-------------- --------------
Total liabilities and stockholders' deficiency ...................... $ 939.5 $ 997.6
============== ==============
See Accompanying Notes to Consolidated Financial Statements.
F-3
REVLON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------------------------
2002 2001 2000
------------ ------------ -------------
Net sales ..................................................... $ 1,119.4 $ 1,277.6 $ 1,409.4
Cost of sales ................................................. 503.7 544.2 574.3
------------ ------------ -------------
Gross profit ................................................ 615.7 733.4 835.1
Selling, general and administrative expenses .................. 717.0 679.2 765.1
Restructuring costs and other, net ............................ 13.6 38.1 54.1
------------ ------------ -------------
Operating (loss) income ..................................... (114.9) 16.1 15.9
------------ ------------ -------------
Other expenses (income):
Interest expense ............................................ 159.0 140.5 144.5
Interest income ............................................. (3.5) (3.9) (2.1)
Amortization of debt issuance costs ......................... 7.7 6.2 5.6
Foreign currency losses, net ................................ 1.4 2.2 1.6
Loss (gain) on sale of product line, brands and facilities, net 1.0 14.4 (10.8)
Loss on early extinguishment of debt ........................ -- 3.6 --
Miscellaneous, net .......................................... 1.2 2.7 (1.8)
------------ ------------ -------------
Other expenses, net ....................................... 166.8 165.7 137.0
------------ ------------ -------------
Loss before income taxes ...................................... (281.7) (149.6) (121.1)
Provision for income taxes .................................... 4.8 4.1 8.6
------------ ------------ -------------
Net loss ...................................................... $ (286.5) $ (153.7) $ (129.7)
============ =========== =============
Basic and diluted loss per common share:
Net loss per common share ................................... $ (5.49) $ (2.94) $ (2.49)
============ =========== =============
Weighted average number of common shares outstanding:
Basic and diluted ........................................... 52,199,468 52,199,349 52,166,980
============ =========== =============
See Accompanying Notes to Consolidated Financial Statements.
F-4
REVLON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY AND COMPREHENSIVE LOSS
(dollars in millions)
ACCUMULATED
OTHER TOTAL
PREFERRED COMMON CAPITAL ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
STOCK STOCK DEFICIENCY DEFICIT LOSS (a) DEFICIENCY
--------- -------- ---------- ----------- ------------------ -------------
Balance, January 1, 2000 ..................... $ 54.6 $0.5 $ (210.0) $ (792.0) $ (68.1) $ (1,015.0)
Issuance of common stock ................... 1.1 1.1
Net distribution from affiliate ............ (1.4)(c) (1.4)
Comprehensive loss:
Net loss ................................. (129.7) (129.7)
Adjustment for minimum
pension liability ....................... 1.3 1.3
Loss on marketable securities ............ 3.8(b) 3.8
Currency translation adjustment .......... 33.2(b) 33.2
-------------
Total comprehensive loss ................... (91.4)
--------- -------- ---------- ----------- ------------------ -------------
Balance, December 31, 2000 ................... 54.6 0.5 (210.3) (921.7) (29.8) (1,106.7)
Net distribution from affiliate ............ (1.0)(c) (1.0)
Capital contribution from indirect parent .. 10.0 10.0
Comprehensive loss:
Net loss ................................. (153.7) (153.7)
Adjustment for minimum
pension liability ....................... (42.5) (42.5)
Revaluation of foreign currency forward
exchange contracts ...................... 0.1 0.1
Currency translation adjustment .......... 11.1(b) 11.1
-------------
Total comprehensive loss ................... (185.0)
--------- -------- ---------- ----------- ------------------ -------------
Balance, December 31, 2001 ................... 54.6 0.5 (201.3) (1,075.4) (61.1) (1,282.7)
Comprehensive loss:
Net loss ................................. (286.5) (286.5)
Adjustment for minimum
pension liability ....................... (67.5) (67.5)
Revaluation of foreign currency forward
exchange contracts ...................... (0.1) (0.1)
Currency translation adjustment ............ (4.0) (4.0)
-------------
Total comprehensive loss ................... (358.1)
--------- -------- ---------- ----------- ------------------ -------------
Balance, December 31, 2002 ................... $ 54.6 $0.5 $ (201.3) $(1,361.9) $ (132.7) $ (1,640.8)
========= ======== ========== =========== ================== =============
- --------------
(a) Accumulated other comprehensive loss includes unrealized gains on
revaluations of foreign currency forward exchange contracts of $0.1 for
2001, cumulative net translation losses of $19.1, $15.1 and $26.2 for 2002,
2001 and 2000, respectively, and adjustments for the minimum pension
liability of $113.6, $46.1 and $3.6 for 2002, 2001 and 2000, respectively.
(b) The change in the currency translation adjustment as of December 31, 2001
and December 31, 2000 includes a reclassification adjustment of $7.1 and
$48.3, respectively, for realized losses on foreign currency adjustments
associated primarily with the sale of the Colorama brand in Brazil and the
sale of the Company's worldwide professional products line and for
marketable securities, respectively. Other comprehensive loss in 2000
includes $3.8 in realized losses on marketable securities.
(c) Represents net distributions in capital from the Charles of the Ritz
business (See Note 15).
See Accompanying Notes to Consolidated Financial Statements.
F-5
REVLON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31,
----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 2002 2001 2000
----------- ------------ -----------
Net loss .............................................................. $ (286.5) $ (153.7) $ (129.7)
Adjustments to reconcile net loss to net cash
(used for) provided by operating activities:
Depreciation and amortization ....................................... 118.9 115.1 126.9
Loss on early extinguishment of debt ................................ - 3.6 -
Gain on sale of marketable securities ............................... - (2.2) -
Loss (gain) on sale of product line, brand and certain assets, net .. 1.0 14.4 (13.2)
Change in assets and liabilities, net of acquisitions and dispositions:
(Increase) decrease in trade receivables .......................... (9.4) 5.9 29.1
Decrease in inventories ........................................... 30 3 10.2 32.8
Decrease (increase) in prepaid expenses and
other current assets ............................................ 3.7 (2.3) 18.8
Increase (decrease) in accounts payable ........................... 6.3 4.4 (21.0)
Increase (decrease) in accrued expenses and other
current liabilities ............................................. 98.4 (42.5) (80.7)
Purchase of permanent displays ...................................... (66.2) (44.0) (51.4)
Other, net .......................................................... (8.8) 4.6 4.4
----------- ------------ -----------
Net cash used for operating activities ................................ (112.3) (86.5) (84.0)
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................................. (16.0) (15.1) (19.0)
Sale of marketable securities ......................................... 1.8 - -
Proceeds from the sale of product line, brand and certain assets ...... - 102.3 344.1
Acquisition of technology rights ...................................... - - (3.0)
----------- ------------ -----------
Net cash (used for) provided by investing activities .................. (14.2) 87.2 322.1
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings - third parties ...... 8.0 (11.3) (2.7)
Proceeds from the issuance of long-term debt - third parties .......... 175.6 698.5 339.1
Repayment of long-term debt - third parties ........................... (73.0) (614.0) (538.7)
Net distribution from affiliate ....................................... - (1.0) (1.4)
Payment of debt issuance costs ........................................ (0.3) (25.9) -
----------- ------------ -----------
Net cash provided by (used for) financing activities .................. 110.3 46.3 (203.7)
----------- ------------ -----------
Effect of exchange rate changes on cash and cash equivalents .......... (1.3) - (3.5)
----------- ------------ -----------
Net (decrease) increase in cash and cash equivalents ................ (17.5) 47.0 30.9
Cash and cash equivalents at beginning of period .................... 103.3 56.3 25.4
----------- ------------ -----------
Cash and cash equivalents at end of period .......................... $ 85.8 $ 103.3 $ 56.3
=========== ============ ===========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest .......................................................... $ 155.2 $ 134.6 $ 141.3
Income taxes, net of refunds ...................................... 3.6 3.4 4.7
Supplemental schedule of noncash financing activities:
Noncash capital contribution from indirect parent pursuant to the
amended tax sharing agreement ..................................... $ - $ 10.0 $ -
Issuance of common stock............................................. - - 1.1
See Accompanying Notes to Consolidated Financial Statements.
F-6
REVLON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION:
Revlon, Inc. (and together with its subsidiaries, the "Company") conducts
its business exclusively through its direct subsidiary, Revlon Consumer Products
Corporation and its subsidiaries ("Products Corporation"). The Company
manufactures and sells an extensive array of cosmetics and skin care, fragrances
and personal care products. Prior to March 30, 2000, the Company sold
professional products for use in and resale by professional salons. On March 30,
2000, the Company sold its professional products line and on May 8, 2000 sold
the Plusbelle brand in Argentina. On July 16, 2001 the Company sold the Colorama
brand in Brazil. (See Note 3). The Company's principal customers include large
mass volume retailers and chain drug stores, as well as certain department
stores and other specialty stores, such as perfumeries. The Company also sells
consumer products to U.S. military exchanges and commissaries and has a
licensing group.
Unless the context otherwise requires, all references to the Company mean
Revlon, Inc. and its subsidiaries. Revlon, Inc., as a public holding company,
has no business operations of its own and its only material asset has been all
of the outstanding capital stock of Products Corporation. As such, its net
(loss) income has historically consisted predominantly of the net (loss) income
of Products Corporation and in 2002, 2001 and 2000 included approximately $5.9,
$2.6 and $1.7, respectively, in expenses incidental to being a public holding
company.
The Consolidated Financial Statements include the accounts of the Company
after elimination of all material intercompany balances and transactions.
Further, the Company has made a number of estimates and assumptions relating to
the reporting of assets and liabilities, the disclosure of liabilities and the
reporting of revenues and expenses to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
The Company is an indirect majority 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.
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 (Including 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. The impact on net sales, gross profit and
selling, general and administrative expenses ("SG&A") as a result of adopting
the second portion of these new Guidelines was a reduction to net sales and
gross profit of $43.9 and a reduction of SG&A expenses of $43.9 in 200l,
respectively, and a reduction to net sales and gross profit of $38.4 and a
reduction of SG&A expenses of $38.4 in 2000, respectively.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". Statement No. 145, among other things, rescinds Statement No. 4,
"Reporting Gains and Losses from Extinguishment of Debt", and an amendment of
that
F-7
Statement, Statement No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements". Statement No. 4 required that gains and losses from
extinguishment of debt be classified as extraordinary items, if material. Under
Statement No. 145, extinguishment of debt should usually not be considered
extraordinary under the criteria in APB Opinion No. 30, "Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions"
("APB No. 30"). The Company is required to adopt the provisions of Statement No.
145 effective January 1, 2003, although earlier adoption is permitted. The
Company reclassified the extraordinary item for early extinguishment of debt of
$3.6 incurred in the fourth quarter of 2001 to other expenses on the Company's
consolidated statements of operations as it is no longer considered to meet the
extraordinary item classification criteria in APB No. 30.
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year's presentation.
During 2002 the Company recorded expenses of $104.2 (of which $99.3 was
recorded in the fourth quarter of 2002) related to various aspects of the
stabilization and growth phase of the Company's plan, primarily stemming from
higher sales returns and inventory writedowns from a selective reduction of
SKUs, reduced distribution of the Ultima II brand, higher allowances stemming
from selective price adjustments on certain products, higher professional
expenses associated with the development of, research in relation to, and
execution of the stabilization and growth phase of the Company's plan, and
writedowns associated with reconfiguring existing wall displays at the Company's
retail customers.
CASH AND CASH EQUIVALENTS:
Cash equivalents (primarily investments in time deposits, which have
original maturities of three months or less) are carried at cost, which
approximates fair value. Approximately $22.9 and $15.3 was restricted and
supported short-term borrowings at December 31, 2002 and 2001, respectively.
(See Note 8).
INVENTORIES:
Inventories are stated at the lower of cost or market value. Cost is
principally determined by the first-in, first-out method.
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 as follows:
land improvements, 20 to 40 years; buildings and improvements, 5 to 45 years;
machinery and equipment, 3 to 17 years; and office furniture and fixtures and
capitalized software, 2 to 12 years. Leasehold improvements are amortized over
their estimated useful lives or the terms of the leases, whichever is shorter.
Repairs and maintenance are charged to operations as incurred, and expenditures
for additions and improvements are capitalized.
Long-lived assets, including fixed assets and intangibles other than
goodwill, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable, the Company estimates the
undiscounted future cash flows (excluding interest) resulting from the use of
the asset and its ultimate disposition. 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.
At the beginning of the fourth quarter in 2000, the Company decided to
consolidate its manufacturing facility in Phoenix, Arizona into its
manufacturing facility in Oxford, North Carolina, which was completed in late
2001. As a result, the Company depreciated the net book value of the facility in
excess of its estimated salvage value over its remaining useful life.
Included in other assets are net permanent wall displays amounting to
approximately $85.2 and $91.8 as of December 31, 2002 and 2001, respectively,
which are amortized over 3 to 5 years. Beginning in the first quarter of 2002,
the Company decided to roll out new permanent wall displays, replacing existing
permanent wall displays at an
F-8
accelerated rate. As a result, the useful lives of those permanent wall displays
to be replaced were shortened to their new estimated useful lives, resulting in
accelerated amortization of approximately $11 during 2002. The cost of the new
wall displays will be amortized over a 3-year life. The Company has included in
other assets net costs related to the issuance of its debt instruments amounting
to approximately $26.7 and $33.3 as of December 31, 2002 and 2001, respectively,
which are amortized over the terms of the related debt instruments. In addition,
the Company has included in other assets trademarks, net, of $7.4 and $6.8 as of
December 31, 2002 and 2001, respectively, and patents, net, of $4.7 and $5.8 as
of December 31, 2002 and 2001, respectively. Patents and trademarks are recorded
at cost and amortized ratably over approximately 10 to 17 years. Amortization
expense for patents and trademarks for 2002, 2001 and 2000 was $2.0, $1.5 and
$1.5, respectively. The Company's trademarks and patents continue to be subject
to amortization, which is anticipated to be approximately $1.6 annually through
December 31, 2007.
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 longlived assets.
Statement No. 144 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.
INTANGIBLE ASSETS RELATED TO BUSINESSES ACQUIRED:
Intangible assets related to businesses acquired principally represent
goodwill. 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 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 Statement 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 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. The amounts outstanding for these intangible assets at December 31,
2002 and December 31, 2001 were as follows: for trademarks, net, $7.4 and $6.8,
respectively; for patents, net, $4.7 and $5.8, respectively (both of which are
included in other assets); and for goodwill, net, $185.9 at both December 31,
2002 and December 31, 2001. Accumulated amortization aggregated $117.1 at both
December 31, 2002 and 2001. Goodwill represents excess purchase price over the
fair value of assets acquired. Amortization of goodwill ceased on January 1,
2002 upon adoption of Statement 142. Excluding amortization expense related to
goodwill of $7.7 and $9.0 recognized during 2001 and 2000, respectively, net
loss and basic and diluted loss per common share would have been $146.0 and
$2.80 and $120.7 and $2.31, respectively. Prior to January 1, 2002, the Company
amortized goodwill on a straight-line basis over 40 years.
F-9
REVENUE RECOGNITION:
The Company recognizes net sales upon shipment of merchandise. Net sales is
comprised of gross revenues less expected returns, trade discounts and customer
allowances, which include costs associated with off-invoice mark-downs and other
price reductions, as well as coupons. These incentive costs are recognized at
the later of the date on which the Company recognizes the related revenue or the
date on which the Company offers the incentive. 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 sales returns as a reduction to sales and cost of
sales, and an increase to accrued liabilities and to inventories. 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 the Company's estimates if factors such as
product discontinuances, customer inventory levels or competitive conditions
differ from the Company's estimates and expectations and, in the case of actual
returns, if economic conditions differ significantly from the Company's
estimates and expectations.
Cost of sales includes all of the costs to manufacture the Company's
products. For products manufactured in the Company's own facilities, such costs
include raw materials and supplies, direct labor and factory overhead. For
products manufactured for the Company by third-party contractors, such costs
represent the amounts invoiced by the contractors. Cost of sales also includes
the cost of refurbishing products returned by customers that will be offered for
resale and the cost of inventory write-downs associated with adjustments of held
inventories to net realizable value. These costs are reflected in the statement
of operations when the product is sold and net sales revenues are recognized or,
in the case of inventory write-downs, when circumstances indicate that the
carrying value of inventories is in excess of its recoverable value.
Additionally, cost of sales reflects the costs associated with free products.
These incentive costs are recognized on the later of the date that the Company
recognizes the related revenue or the date on which the Company offers the
incentive.
SG&A expenses include expenses to advertise the Company's products, such as
television advertising production costs and air-time costs, print advertising
costs, promotional displays and consumer promotions. SG&A also includes the
amortization of permanent wall displays and intangible assets, distribution
costs (such as freight and handling), non-manufacturing overhead, principally
personnel and related expenses, insurance and professional fees.
ACCOUNTS RECEIVABLE:
Accounts receivable represent payments due to the Company for previously
recognized net sales, reduced by an allowance for doubtful accounts for balances
which are estimated to be uncollectible at December 31, 2002 and 2001. Accounts
receivable balances are recorded against the allowance for doubtful accounts
when they are deemed uncollectible. Recoveries of accounts receivable previously
recorded against the allowance are recorded in the Consolidated Statements of
Operations when received.
INCOME TAXES:
Income taxes are calculated using the liability method in accordance with
the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes."
Revlon, Inc., for federal income tax purposes, is included in the
affiliated group of which Mafco Holdings is the common parent, and Revlon,
Inc.'s federal taxable income and loss is included in such group's consolidated
tax return filed by Mafco Holdings. Revlon, Inc. also may be included in certain
state and local tax returns of Mafco Holdings or its subsidiaries. For all
periods presented, federal, state and local income taxes are provided as if the
Company filed its own income tax returns. On June 24, 1992, Revlon Holdings Inc.
(a Delaware corporation which in 2002 converted into a Delaware limited
liability company known as Revlon Holdings LLC ("Holdings") and which is an
F-10
affiliate and an indirect wholly-owned subsidiary of Mafco Holdings), the
Company and certain of its subsidiaries and Mafco Holdings entered into a tax
sharing agreement, which is described in Notes 12 and 15.
PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS:
The Company sponsors pension and other retirement plans in various forms
covering substantially all employees who meet the respective plan's eligibility
requirements. For plans in the U.S., the minimum amount required pursuant to the
Employee Retirement Income Security Act, as amended, is contributed annually.
Various subsidiaries outside the U.S. have retirement plans under which funds
are deposited with trustees or reserves are provided.
The Company accounts for benefits such as severance, disability and health
insurance provided to former employees prior to their retirement when it is
probable that a liability has been incurred and the amount of such liability can
be reasonably estimated.
RESEARCH AND DEVELOPMENT:
Research and development expenditures are expensed as incurred. The amounts
charged against earnings in 2002, 2001 and 2000 were $23.3, $24.4 and $27.3,
respectively.
FOREIGN CURRENCY TRANSLATION:
Assets and liabilities of foreign operations are generally translated into
U.S. dollars at the rates of exchange in effect at the balance sheet date.
Income and expense items are generally translated at the weighted average
exchange rates prevailing during each period presented. Gains and losses
resulting from foreign currency transactions are included in the results of
operations. Gains and losses resulting from translation of financial statements
of foreign subsidiaries and branches operating in non-hyperinflationary
economies are recorded as a component of accumulated other comprehensive loss
until either sale or upon complete or substantially complete liquidation by the
Company of its investment in a foreign entity. Foreign subsidiaries and branches
operating in hyperinflationary economies translate non-monetary assets and
liabilities at historical rates and include translation adjustments in the
results of operations.
SALE OF SUBSIDIARY STOCK:
The Company recognizes gains and losses on sales of subsidiary stock in its
Consolidated Statements of Operations.
BASIC AND DILUTED (LOSS) INCOME PER COMMON SHARE AND CLASSES OF STOCK:
The basic (loss) income per common share has been computed based upon the
weighted average number of shares of common stock outstanding during each of the
periods presented. Diluted (loss) income per common share has been computed
based upon the weighted average number of shares of common stock outstanding.
The Company's outstanding stock options and restricted stock represent the only
potential dilutive common stock outstanding. The number of shares used in the
calculation of basic and diluted loss per common share was the same in each
period presented, as it does not include any incremental shares that would have
been outstanding assuming the exercise of stock options or the issuance of
restricted stock because the effect of those incremental shares would have been
antidilutive. For each period presented, the amount of loss used in the
calculation of diluted loss per common share was the same as the amount of loss
used in the calculation of basic loss per common share.
The Revlon, Inc. Class A common stock, par value $.01 per share (the "Class
A Common Stock") and the Revlon, Inc. Class B common stock, par value $.01 per
share (the "Class B Common Stock") (collectively with the Class A Common Stock,
the "Common Stock"), vote as a single class on all matters, except as otherwise
required by law, with each share of Class A Common Stock entitling its holder to
one vote and each share of the Class B Common Stock entitling its holder to ten
votes. All of the shares of Class B Common Stock are owned by REV Holdings LLC,
a Delaware limited liability company and an indirect wholly-owned subsidiary of
Mafco Holdings, which was formerly a Delaware corporation known as REV Holdings
Inc. ("REV Holdings"). Mafco Holdings beneficially owns shares of Common Stock
having approximately 97% of the combined voting power of the outstanding shares
of Common Stock. The holders of the Company's two classes of Common Stock are
entitled to
F-11
share equally in the earnings of the Company from dividends, when and if
declared by the Board. Each outstanding share of Class B Common Stock is
convertible into one share of Class A Common Stock.
The Company designated 1,000 shares of Preferred Stock as the Series A
Preferred Stock, of which 546 shares are outstanding and held by REV Holdings.
The holder of the Series A Preferred Stock is not entitled to receive any
dividends. The Series A Preferred Stock is entitled to a liquidation preference
of $100,000 per share before any distribution is made to the holders of Common
Stock. The holder of the Series A Preferred Stock does not have any voting
rights, except as required by law. The Series A Preferred Stock may be redeemed
at any time by the Company, at its option, for $100,000 per share. However, the
terms of Products Corporation's various debt agreements currently restrict
Revlon, Inc.'s ability to effect such redemption by generally restricting the
amount of dividends or distributions Products Corporation can pay to Revlon,
Inc.
The Company designated 4,333 shares of Preferred Stock as the Series B
Convertible Preferred Stock (the "Series B Preferred Stock"), all of which are
outstanding and held by REV Holdings. The Series B Preferred Stock is entitled
to receive dividends if the Company declares or pays any dividends on the
Company's Class A Common Stock in an amount per share of Series B Preferred
Stock as if the shares of Series B Preferred Stock had been converted into the
Company's Class A Common Stock entitled to such dividend (provided that in
February 2003 REV Holdings waived its rights to receive any subscription rights
in the Rights Offering (as defined in Note 20)). The Series B Preferred Stock is
entitled to a liquidation preference of $720.0554 per share plus the amount of
declared but unpaid dividends as of the date of any liquidation, dissolution or
winding up of the Company before any distributions are made to the holders of
Common Stock. Each of the outstanding 4,333 shares of Series B Preferred Stock
of Revlon, Inc. is entitled to 100 votes and is convertible into 100 shares of
Class A Common Stock. At its option, the Company may redeem the Series B
Preferred Stock at any time for $720.0554 per share. However, the terms of
Products Corporation's various debt agreements currently restrict Revlon, Inc.'s
ability to effect such redemption by generally restricting the amount of
dividends or distributions Products Corporation can pay to Revlon, Inc.
STOCK-BASED COMPENSATION:
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to account for
stock-based compensation plans using the intrinsic value method prescribed in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Accordingly, compensation cost for
stock options issued to employees is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock. The following table
illustrates the effect on net loss and net loss per basic and diluted common
share as if the Company had applied the fair value method to its stock-based
compensation, which is more fully described in Note 14 as required under the
disclosure provisions of Statement No. 123:
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2002 2001 2000
-------------- --------------- ---------------
Net loss as reported ............................................. $ (286.5) $ (153.7) $ (129.7)
Add: Stock-based employee compensation
included in reported net loss .................................... 1.7 0.6 -
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards .......... (6.9) (10.2) (11.0)
-------------- --------------- ---------------
Pro forma net loss ............................................... $ (291.7) $ (163.3) $ (140.7)
============== =============== ===============
Basic and diluted loss per common share:
As reported ...................................................... $ (5.49) $ (2.94) $ (2.49)
============== =============== ===============
Pro forma ........................................................ $ (5.59) $ (3.13) $ (2.70)
============== =============== ===============
The effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of future amounts.
F-12
DERIVATIVE FINANCIAL INSTRUMENTS:
On January 1, 2001, the Company adopted SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended. The standard
requires the recognition of all derivative instruments on the balance sheet as
either assets or liabilities measured at fair value. Changes in fair value are
recognized immediately in earnings unless the derivatives qualify as hedges of
future cash flows. For derivatives qualifying as hedges of future cash flows,
the effective portion of changes in fair value is recorded as a component of
Other Comprehensive Income and recognized in earnings when the hedged
transaction is recognized in earnings. Any ineffective portion (representing the
extent that the change in fair value of the hedges does not completely offset
the change in the anticipated net payments being hedged) is recognized in
earnings as it occurs. If a derivative instrument designated as a hedge is
terminated, the unrecognized fair value of the hedge previously recorded in
accumulated other comprehensive income (loss) is recognized in earnings when the
hedged transaction is recognized in earnings. If the transaction being hedged is
terminated, the unrecognized fair value of the Company's related hedge
instrument is recognized in earnings at that time. There was no cumulative
effect recognized for adopting this accounting change.
The Company formally designates and documents each financial instrument as
a hedge of a specific underlying exposure as well as the risk management
objectives and strategies for entering into the hedge transaction upon
inception. The Company also formally assesses upon inception and quarterly
thereafter whether the financial instruments used in hedging transactions are
effective in offsetting changes in the fair value or cash flows of the hedged
items.
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 December 31, 2002 was $10.8.
The fair value of the foreign currency forward exchange contracts outstanding at
December 31, 2002 was nil.
The amount of the hedges' ineffectiveness for the year ended December 31,
2002 recorded in the Consolidated Statements of Operations was not significant.
F-13
ADVERTISING AND PROMOTION:
Costs associated with advertising and promotion are expensed when incurred.
Television advertising production costs are expensed the first time the
advertising takes place. Advertising and promotion expenses were $281.2, $272.9
and $268.7 for 2002, 2001 and 2000, respectively.
The Company has various arrangements with customers pursuant to its trade
terms to reimburse them for a portion of their advertising costs, which provide
advertising benefits to the Company. Additionally, from time to time the Company
may pay fees to customers in order to expand or maintain shelf space for its
products. The costs that the Company incurs for "cooperative" advertising
programs, end cap replacement, shelf replacement costs and slotting fees are
expensed as incurred and are netted against revenues on the Company's
Consolidated Statements of Operations.
DISTRIBUTION COSTS:
Costs, such as freight and handling costs, associated with distribution are
expensed within SG&A when incurred. Distribution costs were $56.5, $65.9 and
$78.4 for 2002, 2001 and 2000, respectively.
2. RESTRUCTURING COSTS AND OTHER, NET
In the fourth quarter of 1999, the Company continued to restructure its
organization and began a new program in line with its original restructuring
plan developed in late 1998, principally for additional employee severance and
other personnel benefits and to restructure certain operations outside the
U.S., including certain operations in Japan. In the first quarter of 2000, the
Company recorded a charge of $9.5 relating to the 1999 restructuring program
that began in the fourth quarter of 1999, principally for additional employee
severance and other personnel benefits and to restructure certain operations
outside the U.S. The Company continued to implement the 1999 restructuring
program during the second quarter of 2000 during which it recorded a charge of
$5.1, principally for exiting certain operations in Japan and for additional
employee severance and other personnel benefits.
During the third quarter of 2000, the Company continued to re-evaluate its
organizational structure. As part of this re-evaluation, 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 Company recorded a charge of $13.7
in the third quarter of 2000 for programs begun in such quarter, as well as for
the expanded scope of programs previously commenced. 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 fourth quarter of
2000, the Company recorded a charge of $25.8 related to the 2000 restructuring
program, principally for additional employee severance and other personnel
benefits and to consolidate the Company's worldwide operations.
During 2001, the Company recorded a charge of $38.1 related to the 2000
restructuring program, principally for additional employee severance and other
personnel benefits and relocation and other costs related to the consolidation
of the Company's worldwide operations. Included in the $38.1 charge for 2001 was
an adjustment in the fourth quarter to previous estimates of approximately $6.6.
During 2002, the Company continued to implement the 2000 restructuring
program, as well as other restructuring actions, and recorded a charge of $13.6,
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 the Company's
worldwide operations.
In connection with the 2000 restructuring program, termination benefits for
2,446 employees were included in the Company's restructuring charges,
substantially all of whom have been terminated as of December 31, 2002.
F-14
The remaining employees from the 2000 restructuring program, as well as other
restructuring actions, are expected to be terminated by December 31, 2003.
Details of the activity described above during 2002, 2001 and 2000 are as
follows:
BALANCE UTILIZED, NET BALANCE
BEGINNING ---------------------- END
OF YEAR EXPENSES, NET CASH NONCASH OF YEAR
------------- ----------------- --------- ---------- ----------
2002
- -----------------------------
Employee severance and other
personnel benefits .................. $ 15.1 $ 10.1 $ (18.2) $ - $ 7.0
Relocation ............................ - 0.6 (0.6) - -
Leases and equipment write-offs ....... 7.4 1.7 (4.9) (0.3) 3.9
Other obligations ..................... 0.3 1.2 (0.6) - 0.9
------------- ----------------- --------- ---------- ----------
$ 22.8 $ 13.6 $ (24.3) $ (0.3) $ 11.8
============= ================= ========= ========== ==========
2001
- -----------------------------
Employee severance and other
personnel benefits .................. $ 28.6 $ 27.5 $ (41.0) $ - $ 15.1
Relocation ............................ - 3.8 (3.8) - -
Leases and equipment write-offs ....... 5.9 5.6 (4.0) (0.1) 7.4
Other obligations ..................... 1.5 1.2 (2.4) - 0.3
------------- ----------------- --------- ---------- ----------
$ 36.0 $ 38.1 $ (51.2) $ (0.1) $ 22.8
============= ================= ========= ========== ==========
2000
- -----------------------------
Employee severance and other
personnel benefits ................. $ 24.6 $ 44.6 $ (39.5) $ (1.1) $ 28.6
Leases and equipment write-offs ...... 7.6 6.9 (3.4) (5.2) 5.9
Other obligations .................... 1.8 2.6 (2.9) - 1.5
------------- ----------------- --------- ---------- ----------
$ 34.0 $ 54.1 $ (45.8) $ (6.3) $ 36.0
============= ================= ========= ========== ==========
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
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 September 30, 2001 of $6.1, which is included in cost of
sales.
As of December 31, 2002, 2001 and 2000, the unpaid balance of the
restructuring costs are included in accrued expenses and other and other
long-term liabilities in the Company's Consolidated Balance Sheets. The
remaining balance at December 31, 2002 for employee severance and other
personnel benefits of $7.0 are expected to be paid by the end of 2004, lease and
equipment obligations of $3.9 are expected to be paid by the end of 2008 and
other obligations of $0.9 are expected to be paid by the end of 2003.
F-15
3. DISPOSITIONS
Described below are the principal sales of a product line, certain brands
and facilities entered into by Products Corporations during 2002, 2001 and 2000:
On March 30, 2000, Products Corporation completed the disposition of its
worldwide professional products line, including professional hair care for use
in and resale by professional salons, ethnic hair and personal care products,
Natural Honey skin care and certain regional toiletries brands, for $315 in
cash, before adjustments, plus $10 in purchase price payable in the future,
contingent upon the purchasers' achievement of certain rates of return on their
investment. The disposition involved the sale of certain of Products
Corporation's subsidiaries throughout the world devoted to the professional
products line, as well as assets dedicated exclusively or primarily to the lines
being disposed. The worldwide professional products line was purchased by a
company formed by CVC Capital Partners, the Colomer family and other investors,
led by Carlos Colomer, a former manager of the line that was sold, following
arms'-length negotiation of the terms of the purchase agreement, including the
determination of the amount of the consideration. In connection with the
disposition, the Company recognized a pre-tax and after-tax net gain of $13.4,
consisting of $14.8 of a gain which was recorded in 2000 and $1.4 of additional
costs which were recorded in the fourth quarter of 2001. Approximately $150.3 of
the Net Proceeds (as defined in the Credit Agreement (as hereinafter defined))
were used to reduce the aggregate commitment under the 1997 Credit Agreement (as
hereinafter defined).
On May 8, 2000, Products Corporation completed the disposition of the
Plusbelle brand in Argentina for $46.2 in cash. Approximately $20.7 of the Net
Proceeds were used to reduce the aggregate commitment under the 1997 Credit
Agreement. In connection with the disposition, the Company recognized a pre-tax
and after-tax net loss of $4.8.
In April 2001, Products Corporation sold land in Minami Aoyama near Tokyo,
Japan and related rights for the construction of a building on such land (the
"Aoyama Property") for approximately $28. In connection with such disposition,
the Company recognized a pre-tax and after-tax net loss of $0.8 during the
second quarter of 2001.
In May 2001, Products Corporation sold its Phoenix, Arizona facility for
approximately $7 and leased it back through the end of 2001. After recognition
of increased depreciation in the first quarter of 2001, the Company recorded a
pre-tax and after-tax net loss on the sale of $3.7 in the second quarter of
2001, which is included in SG&A expenses.
In July 2001, Products Corporation completed the disposition of its
Colorama brand of cosmetics and hair care products, as well as Products
Corporation's manufacturing facility located in Sao Paulo, Brazil, for
approximately $57. Products Corporation used $22 of the Net Proceeds, after
transaction costs and retained liabilities, to permanently reduce commitments
under the 1997 Credit Agreement. In connection with such disposition, the
Company recognized a pre-tax and after-tax net loss of $6.7.
In July 2001, Products Corporation completed the disposition of its
subsidiary that owned and operated its manufacturing facility in Maesteg, Wales
(UK), including all production equipment. As part of this sale, Products
Corporation entered into a long-term supply agreement with the purchaser
pursuant to which the purchaser manufactured and supplied to Products
Corporation cosmetics and personal care products for sale throughout Europe. In
connection with such disposition, the Company recognized a pre-tax and after-tax
net loss of $8.6.
In October 2002, Products Corporation and its principal third party
manufacturer for Europe and certain other international markets terminated the
long-term supply agreement they had entered into in connection with Products
Corporation's disposition of its Maesteg facility in July 2001, and they entered
into a new, more flexible agreement. This new agreement has significantly
reduced volume commitments, and, among other things, Products Corporation agreed
to loan such supplier approximately $2.0 and the supplier can earn
performance-based payments of approximately $6.3 over a 4-year period,
contingent upon the supplier achieving specific production service level
objectives. During 2002, the Company accrued $1.6 as a result of such supplier
meeting the required production service level objectives. As part of terminating
the long-term supply agreement the supplier released Products Corporation from
its minimum purchase commitments under the old supply agreement, which were
approximately $145.5 over the 8-year term of such agreement. In exchange,
Products Corporation waived approximately $10.0 of
F-16
deferred purchase price which otherwise would have been payable by the supplier
to Products Corporation in connection with the July 2001 sale of the Maesteg
facility (a portion of which was contingent on future events). Such deferred
purchase price, absent such waiver, would have been payable by the supplier to
Products Corporation over a 6-year period.
In December 2001, Products Corporation sold a facility in Puerto Rico for
approximately $4. In connection with such disposition, the Company recorded a
pre-tax and after-tax net gain on the sale of $3.1 in the fourth quarter of
2001.
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 net loss of $1.0 in
the first quarter of 2002.
4. INVENTORIES
DECEMBER 31,
------------------------------
2002 2001
------------------------------
Raw materials and supplies ......... $ 36.7 $ 44.9
Work-in-process .................... 11.1 10.1
Finished goods ..................... 80.3 102.9
------------- --------------
$ 128.1 $ 157.9
============= ==============
In the fourth quarter of 2002, the Company recorded a charge of $17.7 to
write-down inventories related to the implementation of the stabilization and
growth phase of its plan and reduced distribution of its Ultima II brand.
5. PREPAID EXPENSES AND OTHER
DECEMBER 31,
------------------------------
2002 2001
------------- --------------
Prepaid expenses .................... $ 21.1 $ 22.4
Asset held for sale ................. 3.4 3.4
Other ............................... 15.1 19.8
------------- --------------
$ 39.6 $ 45.6
============= ==============
The asset held for sale represents a building in Canada, which the Company
decided to sell in 2001 as a result of the closing of its manufacturing facility
in Canada. It is anticipated that such building will be sold in 2003.
6. PROPERTY, PLANT AND EQUIPMENT, NET
DECEMBER 31,
------------------------------
2002 2001
-------------- ------------
Land and improvements .................................. $ 2.2 $ 2.4
Buildings and improvements ............................. 80.5 79.8
Machinery and equipment and capitalized leases ......... 124.1 112.5
Office furniture and fixtures and capitalized software . 99.9 108.8
Leasehold improvements ................................. 18.1 18.3
Construction-in-progress ............................... 13.6 10.5
-------------- ------------
338.4 332.3
Accumulated depreciation ............................... (205.0) (189.5)
-------------- ------------
$ 133.4 $ 142.8
============== ============
Depreciation expense for the years ended December 31, 2002, 2001 and 2000
was $34.5, $36.8 and $42.4, respectively. The Company has evaluated its
management information systems and determined, among other things, to
F-17
upgrade its systems. As a result of this decision, certain existing information
systems are being amortized on an accelerated basis. The additional amortization
recorded in 2002 was $4.
7. ACCRUED EXPENSES AND OTHER
DECEMBER 31,
------------------------------
2002 2001
-------------- ------------
Sales returns and allowances ............. $ 174.1 $ 69.3
Advertising and promotional costs ........ 59.2 60.5
Compensation and related benefits ........ 63.2 61.6
Interest ................................. 39.5 40.2
Taxes, other than federal income taxes ... 12.2 5.5
Restructuring costs ...................... 8.3 18.9
Other .................................... 35.8 25.3
-------------- ------------
$ 392.3 $ 281.3
============== ============
8. SHORT-TERM BORROWINGS
Products Corporation had outstanding short-term bank borrowings (excluding
borrowings under the Credit Agreement) aggregating $25.0 and $17.5 at December
31, 2002 and 2001, respectively. Interest rates on amounts borrowed under such
short-term lines at December 31, 2002 and 2001 ranged from 2.5% to 6.5% and from
3.0% to 5.6%, respectively, excluding Latin American countries in which the
Company had outstanding borrowings of approximately $1.7 and $1.2 at December
31, 2002 and 2001, respectively. Compensating balances at December 31, 2002 and
2001 were approximately $22.9 and $15.3, respectively. Interest rates on
compensating balances at December 31, 2002 and 2001 ranged from 1.5% to 5.6% and
2.1% to 4.0%, respectively.
9. LONG-TERM DEBT
DECEMBER 31,
------------------------------
2002 2001
-------------- ------------
Credit facilities (a) ............................... $ 223 1 $ 119 2
8 1/8% Senior Notes due 2006 (b) .................... 249.7 249.6
9% Senior Notes due 2006 (c) ........................ 250.0 250.0
8 5/8% Senior Subordinated Notes due 2008 (d) ....... 649.9 649.9
12% Senior Secured Notes due 2005 (e) ............... 353.3 350.8
Advances from Holdings (f) .......................... 24.1 24.1
-------------- ------------
1,750.1 1,643.6
Less current portion ................................ - -
-------------- ------------
$ 1,750.1 $ 1,643.6
============== ============
(a) On November 30, 2001, Products Corporation entered into the Second
Amended and Restated Credit Agreement (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 (the "1997 Credit Agreement"; the 2001 Credit Agreement
and the 1997 Credit Agreement are sometimes referred to as the "Credit
Agreement"). On November 26, 2001, prior to closing on the 2001 Credit
Agreement, Products Corporation issued and sold in a private placement $363 in
aggregate principal amount of 12% Senior Secured Notes due 2005 (the "Original
12% Notes"), receiving gross proceeds of $350.5 (see footnote (e) below) (the
issuance of the Original 12% Notes and the 2001 Credit Agreement are referred to
herein as the "2001 Refinancing Transactions"). Products Corporation used the
proceeds from 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 the
2001 Refinancing Transactions, and the balance was available for general
corporate purposes. On June 21, 2002, the Original 12% Notes were exchanged for
new 12% Senior Secured Notes due 2005 which have substantially identical terms
as the Original 12% Notes (the "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, the "Securities Act") and the transfer
restrictions and
F-18
registration rights applicable to the Original 12% Notes do not apply to the 12%
Notes. (See Note 19 for discussion of recent amendments to the Credit
Agreement).
The 2001 Credit Agreement, as of December 31, 2002, provides up to $248.7
and consists of a $116.6 term loan facility (the "Term Loan Facility") and a
$132.1 multi-currency revolving credit facility (the "Multi-Currency Facility")
(the Term Loan Facility and the Multi-Currency Facility being referred as the
"Credit Facilities"). The Multi-Currency Facility is available (i) to Products
Corporation in revolving credit loans denominated in U.S. dollars, (ii) to
Products Corporation in standby and commercial letters of credit denominated in
U.S. dollars up to $50.0, $25.3 of which was issued but undrawn at December 31,
2002 and (iii) to Products Corporation and certain of its international
subsidiaries designated from time to time in revolving credit loans and bankers'
acceptances denominated in U.S. dollars and other currencies (the "Local
Loans"). At December 31, 2002 and 2001, the Company had $116.6 and $117.9,
respectively, outstanding under the Term Loan Facility, and $131.8 ($25.3 of
which was issued but undrawn letters of credit) and $28.6 ($27.3 of which was
issued but undrawn letters of credit), respectively, outstanding under the
Multi-Currency Facility.
The Credit Facilities (other than loans in foreign currencies) bear
interest as of December 31, 2002 at a rate equal to, at Products Corporation's
option, either (A) the Alternate Base Rate plus 3.75%; or (B) the Eurodollar
Rate plus 4.75% (which interest rate changed as a result of the amendment to the
Credit Agreement discussed in Note19). Loans in foreign currencies bear interest
in certain limited circumstances or if mutually acceptable to Products
Corporation and the relevant foreign lenders at the Local Rate and otherwise at
the Eurocurrency Rate, in each case plus 4.75%. Products Corporation pays to
those lenders having multi-currency commitments a commitment fee of 0.75% of the
average daily unused portion of the Multi-Currency Facility, which fee is
payable quarterly in arrears. Under the Multi-Currency Facility, Products
Corporation pays (i) to foreign lenders a fronting fee of 0.25% per annum on the
aggregate principal amount of specified Local Loans (which fee is retained by
the foreign lenders out of the portion of the Applicable Margin payable to such
foreign lender), (ii) to foreign lenders an administrative fee of 0.25% per
annum on the aggregate principal amount of specified Local Loans, (iii) to the
multi-currency lenders a letter of credit commission equal to (a) the Applicable
Margin for Eurodollar Rate loans (adjusted for the term that the letter of
credit is outstanding) times (b) the aggregate undrawn face amount of letters of
credit and (c) to the issuing lender a letter of credit fronting fee of 0.25%
per annum of the aggregate undrawn face amount of letters of credit (which fee
is a portion of the Applicable Margin). Products Corporation also paid certain
facility and other fees to the lenders and agents upon closing of the 2001
Credit Agreement. Prior to the termination date of the Credit Facilities, on
each November 30 (commencing November 30, 2002) Products Corporation shall repay
$1.25 in aggregate principal amount of the Term Loan Facility. Products
Corporation made its applicable installment payment on November 30, 2002. In
addition, prior to its termination, the commitments under the Credit Facilities
will be reduced by: (i) the net proceeds in excess of $10.0 each year received
during such year from sales of assets by Products Corporation or any of its
subsidiaries (and in excess of an additional $15.0 in the aggregate during the
term with respect to certain specified dispositions), subject to certain limited
exceptions, (ii) certain proceeds from the sales of collateral security granted
to the lenders, and (iii) the net proceeds from the issuance by Products
Corporation or any of its subsidiaries of certain additional debt. The 2001
Credit Agreement will terminate on May 30, 2005. The weighted average interest
rates on the Term Loan Facility and the Multi-Currency Facility were 7.75% and
7.81% at December 31, 2002, respectively, 7.75% and 8.49% at December 31, 2001,
respectively, and 10.2% and 9.7% at December 31, 2000, respectively.
The Credit Facilities are supported by, among other things, guarantees from
Revlon, Inc. and, subject to certain limited exceptions, the domestic
subsidiaries of Products Corporation. The obligations of Products Corporation
under the Credit Facilities and the obligations under the aforementioned
guarantees are secured, on a first-priority basis (and therefore entitled to
payment out of the proceeds on any sale of the following collateral before the
12% Notes, which are secured on a second-priority basis), subject to certain
limited exceptions, primarily by (i) a mortgage on Products Corporation's
facility in Oxford, North Carolina; (ii) the capital stock of Products
Corporation and its domestic subsidiaries and 66% of the capital stock of
Products Corporation's and its domestic subsidiaries' first-tier foreign
subsidiaries; (iii) domestic intellectual property and certain other domestic
intangibles of Products Corporation and its domestic subsidiaries; (iv) domestic
inventory, accounts receivable, equipment and certain investment property of
Products Corporation and its domestic subsidiaries; and (v) the assets of
certain foreign subsidiary borrowers under the Multi-Currency Facility (to
support their borrowings only). The Credit Agreement provides that the liens on
the stock and property referred to above may be shared from time to time,
subject to certain limitations, on a first-priority basis, with specified types
of other obligations incurred or guaranteed
F-19
by Products Corporation, such as interest rate hedging obligations and working
capital lines, and on a second-priority basis with Products Corporation's
obligations under the 12% Notes.
The Credit Agreement contains various material restrictive covenants
prohibiting Products Corporation from (i) incurring additional indebtedness or
guarantees, with certain exceptions, (ii) making dividend, tax sharing and other
payments or loans to Revlon, Inc. or other affiliates, with certain exceptions,
including among others, permitting Products Corporation 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 fees, 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 common stock to grantees under the Revlon, Inc. Amended and Restated 1996
Stock Plan (as may be amended and restated from time to time, the "Amended Stock
Plan"), (iii) creating liens or other encumbrances on Products Corporation's or
its domestic subsidiaries' assets or revenues, granting negative pledges or
selling or transferring any of Products Corporation's or its domestic
subsidiaries' assets except in the ordinary course of business, all subject to
certain limited exceptions, including among others, permitting Products
Corporation to create liens to secure Products Corporations' obligations under
the 12% Notes, (iv) with certain exceptions, engaging in merger or acquisition
transactions, (v) prepaying indebtedness and modifying the terms of certain
indebtedness and specified material contractual obligations, subject to certain
limited exceptions, (vi) making investments, subject to certain limited
exceptions, and (vii) entering into transactions with affiliates of Products
Corporation other than upon terms no less favorable to Products Corporation or
its subsidiaries than it would obtain in an arms'-length transaction. In
addition to the foregoing, the Credit Agreement contains financial covenants
requiring Products Corporation to maintain specified cumulative EBITDA levels
and limiting the leverage ratio of Products Corporation, which financial
covenants, among the other amendments referred to in Note 19, the bank lenders
under the Credit Agreement waived for the four quarters ended December 31, 2002,
deleted for the first three quarters of 2003 and waived until January 31, 2004
for the fourth quarter of 2003. In addition, the amendment increased the maximum
limit on capital expenditures (as defined in the Credit Agreement) to $115 for
2003 and includes a minimum liquidity covenant requiring Products Corporation to
maintain a minimum of $20 in liquidity from all available sources at all times.
The events of default under the Credit Agreement include a Change of
Control (as defined in the Credit Agreement) of Products Corporation and other
customary events of default for such types of agreements. Among such customary
events of default under the Credit Agreement is a cross-default provision which
provides that it is an event of default under the Credit Agreement if Products
Corporation or any of its subsidiaries (as defined under the Credit Agreement)
(i) defaults in the payment of certain indebtedness when due (whether at
maturity or by acceleration) in excess of $5.0 in aggregate principal amount or
(ii) defaults in the observance or performance of any other agreement or
condition relating to such debt, provided that the amount of debt involved is in
excess of $5.0 in aggregate principal amount, or any other event occurs, the
effect of such default or other event would cause or permit the holders of such
debt to accelerate payment.
Upon entering into the 2001 Credit Agreement, the Company recorded a charge
of $3.6 ($.07 basic and diluted loss per common share) for associated costs.
(b) The 8 1/8% Notes due 2006 (the "8 1/8% Notes") are senior unsecured
obligations of Products Corporation and rank pari passu in right of payment with
all existing and future Senior Debt (as defined in the indenture relating to the
8 1/8% Notes (the "8 1/8% Notes Indenture")) of Products Corporation, including
the 12% Notes, 9% Notes and the indebtedness under the Credit Agreement and the
Mafco Loans (as hereinafter defined), and are senior to the 8 5/8% Notes and to
all future subordinated indebtedness of Products Corporation. The 8 1/8% Notes
are effectively subordinated to the outstanding indebtedness and other
liabilities of Products Corporation's subsidiaries. Interest is payable on
February 1 and August 1.
The 8 1/8% Notes may be redeemed at the option of Products Corporation in
whole or from time to time in part at any time on or after February 1, 2002 at
the redemption prices set forth in the 8 1/8% Notes Indenture, plus, accrued and
unpaid interest, if any, to the date of redemption.
F-20
Upon a Change of Control (as defined in the 8 1/8% Notes Indenture),
Products Corporation will have the option to redeem the 8 1/8% Notes in whole at
a redemption price equal to the principal amount thereof, plus accrued and
unpaid interest, if any, thereon to the date of redemption, plus the Applicable
Premium (as defined in the 8 1/8% Notes Indenture) and, subject to certain
conditions, each holder of the 8 1/8% Notes will have the right to require
Products Corporation to repurchase all or a portion of such holder's 8 1/8%
Notes at a price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest, if any, thereon to the date of repurchase.
The 8 1/8% Notes Indenture contains covenants that, among other things,
limit (i) the issuance of additional debt and redeemable stock by Products
Corporation, (ii) the incurrence of liens, (iii) the issuance of debt and
preferred stock by Products Corporation's subsidiaries, (iv) the payment of
dividends on capital stock of Products Corporation and its subsidiaries and the
redemption of capital stock of Products Corporation and certain subordinated
obligations, (v) the sale of assets and subsidiary stock, (vi) transactions with
affiliates and (vii) consolidations, mergers and transfers of all or
substantially all Products Corporation's assets. The 8 1/8% Notes Indenture also
prohibits certain restrictions on distributions from subsidiaries. All of these
limitations and prohibitions, however, are subject to a number of important
qualifications.
(c) The 9% Senior Notes due 2006 (the "9% Notes") are senior unsecured
obligations of Products Corporation and rank pari passu in right of payment with
all existing and future Senior Debt (as defined in the indenture relating to the
9% Notes (the "9% Notes Indenture")) of Products Corporation, including the 12%
Notes, 8 1/8% Notes and the indebtedness under the Credit Agreement and the
Mafco Loans, and are senior to the 8 5/8% Notes and to all future subordinated
indebtedness of Products Corporation. The 9% Notes are effectively subordinated
to outstanding indebtedness and other liabilities of Products Corporation's
subsidiaries. Interest is payable on May 1 and November 1.
The 9% Notes may be redeemed at the option of Products Corporation in whole
or from time to time in part at any time on or after November 1, 2002 at the
redemption prices set forth in the 9% Notes Indenture plus accrued and unpaid
interest, if any, to the date of redemption.
Upon a Change of Control (as defined in the 9% Notes Indenture), Products
Corporation will have the option to redeem the 9% Notes in whole at a redemption
price equal to the principal amount thereof, plus accrued and unpaid interest,
if any, thereon to the date of redemption, plus the Applicable Premium (as
defined in the 9% Notes Indenture) and, subject to certain conditions, each
holder of the 9% Notes will have the right to require Products Corporation to
repurchase all or a portion of such holder's 9% Notes at a price equal to 101%
of the principal amount thereof, plus accrued and unpaid interest, if any,
thereon to the date of repurchase.
The 9% Notes Indenture contains covenants that, among other things, limit
(i) the issuance of additional debt and redeemable stock by Products
Corporation, (ii) the incurrence of liens, (iii) the issuance of debt and
preferred stock by Products Corporation's subsidiaries, (iv) the payment of
dividends on capital stock of Products Corporation and its subsidiaries and the
redemption of capital stock of Products Corporation and certain subordinated
obligations, (v) the sale of assets and subsidiary stock, (vi) transactions with
affiliates and (vii) consolidations, mergers and transfers of all or
substantially all Products Corporation's assets. The 9% Notes Indenture also
prohibits certain restrictions on distributions from subsidiaries. All of these
limitations and prohibitions, however, are subject to a number of important
qualifications.
(d) The 8 5/8% Notes due 2008 (the "8 5/8% Notes") are general unsecured
obligations of Products Corporation and are (i) subordinate in right of payment
to all existing and future Senior Debt (as defined in the indenture relating to
the 8 5/8% Notes (the "8 5/8% Notes Indenture")) of Products Corporation,
including the 12% Notes, 9% Notes, the 8 1/8% Notes and the indebtedness under
the Credit Agreement and the Mafco Loans, (ii) pari passu in right of payment
with all future senior subordinated debt, if any, of Products Corporation and
(iii) senior in right of payment to all future subordinated debt, if any, of
Products Corporation. The 8 5/8% Notes are effectively subordinated to the
outstanding indebtedness and other liabilities of Products Corporation's
subsidiaries. Interest is payable on February 1 and August 1.
The 8 5/8% Notes may be redeemed at the option of Products Corporation in
whole or from time to time in part at any time on or after February 1, 2003 at
the redemption prices set forth in the 8 5/8% Notes Indenture, plus accrued and
unpaid interest, if any, to the date of redemption.
F-21
Upon a Change of Control (as defined in the 8 5/8% Notes Indenture),
Products Corporation will have the option to redeem the 8 5/8% Notes in whole at
a redemption price equal to the principal amount thereof, plus accrued and
unpaid interest, if any, thereon to the date of redemption, plus the Applicable
Premium (as defined in the 8 5/8% Notes Indenture) and, subject to certain
conditions, each holder of the 8 5/8% Notes will have the right to require
Products Corporation to repurchase all or a portion of such holder's 8 5/8%
Notes at a price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest, if any, thereon to the date of repurchase.
The 8 5/8% Notes Indenture contains covenants that, among other things,
limit (i) the issuance of additional debt and redeemable stock by Products
Corporation, (ii) the incurrence of liens, (iii) the issuance of debt and
preferred stock by Products Corporation's subsidiaries, (iv) the payment of
dividends on capital stock of Products Corporation and its subsidiaries and the
redemption of capital stock of Products Corporation, (v) the sale of assets and
subsidiary stock, (vi) transactions with affiliates, (vii) consolidations,
mergers and transfers of all or substantially all of Products Corporation's
assets and (viii) the issuance of additional subordinated debt that is senior in
right of payment to the 8 5/8% Notes. The 8 5/8% Notes Indenture also prohibits
certain restrictions on distributions from subsidiaries. All of these
limitations and prohibitions, however, are subject to a number of important
qualifications.
(e) On November 26, 2001, prior to closing on the 2001 Credit Agreement,
Products Corporation issued and sold $363.0 in aggregate principal amount of
Original 12% Notes in a private placement receiving gross proceeds of $350.5.
The effective interest rate on the 12% Notes is 13.125%. Products Corporation
used the proceeds from 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
the 2001 Refinancing Transactions, and the balance was available for general
corporate purposes. On June 21, 2002, the Original 12% Notes were exchanged for
the new 12% Notes which have substantially identical terms as the Original 12%
Notes, except that the 12% Notes are registered with the Commission under the
Securities Act and the transfer restrictions and registration rights applicable
to the Original 12% Notes do not apply to the 12% Notes.
The 12% Notes were issued pursuant to an Indenture, dated as of November
26, 2001 (the "12% Notes Indenture"), among Products Corporation, the guarantors
party thereto, including Revlon, Inc. as parent guarantor, and Wilmington Trust
Company, as trustee. The 12% Notes are supported by guarantees from Revlon, Inc.
and, subject to certain limited exceptions, Products Corporation's domestic
subsidiaries. The obligations of Products Corporation under the 12% Notes and
the obligations under the aforementioned guarantees are secured, on a
secondpriority basis, subject to certain limited exceptions, primarily by (i) a
mortgage on Products Corporation's facility in Oxford, North Carolina; (ii) the
capital stock of Products Corporation and its domestic subsidiaries and 66% of
the capital stock of Products Corporation's and its domestic subsidiaries'
first-tier foreign subsidiaries; (iii) domestic intellectual property and
certain other domestic intangibles of Products Corporation and its domestic
subsidiaries; and (iv) domestic inventory, accounts receivable, equipment and
certain investment property of Products Corporation and its domestic
subsidiaries. Such liens are subject to certain limitations, which among other
things, limit the ability of holders of second-priority liens from exercising
any remedies against the collateral while the Credit Agreement or any other
first-priority lien remains in effect.
The 12% Notes are senior secured obligations of Products Corporation and
rank pari passu in right of payment with all existing and future Senior Debt (as
defined in 12% Notes Indenture) including the 8 1/8% Notes, the 9% Notes and the
indebtedness under the Credit Agreement and the Mafco Loans, and are senior to
the 8 5/8% Notes and all future subordinated indebtedness of Products
Corporation.
The 12% Notes are effectively subordinated to the outstanding indebtedness
and other liabilities of Products Corporation's subsidiaries. The 12% Notes
mature on December 1, 2005. Interest is payable on June 1 and December 1,
beginning June 1, 2002. The 12% Notes may be redeemed at the option of Products
Corporation in whole or in part at any time at a redemption price equal to the
principal amount thereof, plus accrued and unpaid interest, if any to the date
of redemption, plus the Applicable Premium (as defined in the 12% Notes
Indenture).
Upon a Change of Control (as defined in the 12% Notes Indenture), subject
to certain conditions, each holder of the 12% Notes will have the right to
require Products Corporation to repurchase all or a portion of such holder's 12%
Notes at a price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest, if any, thereon to the date of repurchase.
F-22
The 12% Notes Indenture contains covenants that, among other things, limit
(i) the issuance of additional debt and redeemable stock by Products
Corporation, (ii) the incurrence of liens, (iii) the issuance of debt and
preferred stock by Products Corporation's subsidiaries, (iv) the payment of
dividends on capital stock of Products Corporation and its subsidiaries and the
redemption of capital stock of Products Corporation and certain subordinated
obligations, (v) the sale of assets and subsidiary stock, (vi) transactions with
affiliates and (vii) consolidations, mergers and transfers of all or
substantially all Products Corporation's assets. The 12% Notes Indenture also
prohibits certain restrictions on distributions from subsidiaries. All of these
limitations and prohibitions, however, are subject to a number of important
qualifications.
The 12% Notes Indenture, 8 1/8% Notes Indenture, the 8 5/8% Notes Indenture
and the 9% Notes Indenture contain customary events of default for debt
instruments of such type.
The 8 1/8% Notes Indenture, the 9% Notes Indenture, the 8 5/8% Notes
Indenture and the 12% Notes Indenture each include a cross acceleration
provision which provides that it shall be an event of default under each such
indenture if any debt (as defined in each such indenture) of Products
Corporation or any of its significant subsidiaries (as defined in each such
indenture), and in the case of the 12% Notes Indenture, Revlon, Inc., is not
paid within any applicable grace period after final maturity or is accelerated
by the holders of such debt because of a default and the total principal amount
of the portion of such debt that is unpaid or accelerated exceeds $25.0 and such
default continues for 10 days after notice from the trustee under each such
indenture. If any such event of default occurs, the trustee under each such
indenture or the holders of at least 25% in principal amount of the outstanding
notes under each such indenture may declare all such notes to be due and payable
immediately, provided that the holders of a majority in aggregate principal
amount of the outstanding notes under each such indenture may, by notice to the
trustee, waive any such default or event of default and its consequences under
each such indenture.
(f) During 1992, Holdings made an advance of $25.0 to Products Corporation,
evidenced by subordinated noninterest-bearing demand notes. The notes were
subsequently adjusted by offsets and additional amounts loaned by Holdings to
Products Corporation. In 1998, approximately $6.8 due to Products Corporation
from Holdings was offset against the notes payable to Holdings. At December 31,
2002, the balance of $24.1 is evidenced by noninterest-bearing promissory notes
payable to Holdings that are subordinated to Products Corporation's obligations
under the Credit Agreement.
The aggregate amounts of long-term debt maturities (at December 31, 2002),
in the years 2003 through 2007 are nil, nil, $600.5, $499.7 and nil,
respectively, and $649.9 thereafter.
The Company expects that operating revenue, cash on hand, proceeds from the
Rights Offering (as hereinafter defined in Note 19) (which may be advanced to
the Company as a result of the $50 million Series C preferred stock investment
(as hereinafter defined in Note 19) prior to the consummation of the Rights
Offering if Products Corporation has fully drawn the MacAndrews & Forbes $100
million term loan (as hereinafter defined in Note 19)) and funds available for
borrowing under the Credit Agreement and the Mafco Loans (as hereinafter defined
in Note 19) will be sufficient to enable the Company to cover its operating
expenses, including cash requirements in connection with the Company's
operations, the stabilization and growth phase of the Company's plan, cash
requirements in connection with the Company's restructuring programs referred to
in Note 2 above and the Company's debt service requirements for 2003. The Mafco
Loans and the proceeds from the Rights Offering are intended to help fund the
stabilization and growth phase of the Company's plan and to decrease the risk
that would otherwise exist if the Company were to fail to meet its debt and
ongoing obligations as they became due in 2003. However, there can be no
assurance that such funds will be sufficient to meet the Company's cash
requirements on a consolidated basis. If the Company's anticipated level of
revenue growth is not achieved because, for example, of decreased consumer
spending in response to weak economic conditions or weakness in the cosmetics
category, increased competition from the Company's competitors or the Company's
marketing plans are not as successful as anticipated, or if the Company's
expenses associated with implementation of the stabilization and growth phase of
the Company's plan exceed the anticipated level of expenses, the Company's
current sources of funds may be insufficient to meet the Company's cash
requirements. Additionally, in the event of a decrease in demand for Products
Corporation's products or reduced sales or lack of increases in demand and sales
as a result of the Company's plan, such development, if significant, could
reduce Products Corporation's operating revenues and could adversely affect
Products Corporation's ability to achieve certain financial covenants under the
Credit Agreement 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
F-23
could be required to adopt one or more alternatives, such as delaying the
implementation of or revising aspects of the stabilization and growth phase of
its plan, reducing or delaying purchases of wall displays or advertising or
promotional expenses, reducing or delaying capital spending, delaying, reducing
or revising restructuring programs, restructuring indebtedness, selling assets
or operations, seeking additional capital contributions or loans from MacAndrews
& Forbes, the Company's other affiliates and/or third parties, selling
additional equity securities of Revlon, Inc. or reducing other discretionary
spending. The Company has substantial debt maturing in 2005 which will require
refinancing, consisting of $246.3 (assuming the maximum amount is borrowed)
under the Credit Agreement and $363.0 of 12% Notes, as well as amounts, if any,
borrowed under the MacAndrews & Forbes $100 million term loan and the MacAndrews
& Forbes $40-65 million line of credit.
As discussed in Note 19, the amendment to and waiver of various provisions
of Products Corporation's Credit Agreement provide for, among other things, a
waiver through January 31, 2004 of compliance with its EBITDA and leverage ratio
covenants through the fourth quarter of 2003. The Company expects that Products
Corporation will need to seek a further amendment to the Credit Agreement or a
waiver of the EBITDA and leverage ratio covenants under the Credit Agreement
prior to the expiration of the existing waiver on January 31, 2004 because the
Company does not expect that its operating results, including after giving
effect to various actions under the stabilization and growth phase of the
Company's plan, will allow Products Corporation to satisfy those covenants for
the four consecutive fiscal quarters ending December 31, 2003. The minimum
EBITDA required to be maintained by Products Corporation under the Credit
Agreement is $230 for each of the four consecutive fiscal quarters ending on
December 31, 2003 (which covenant was waived through January 31, 2004), March
31, 2004, June 30, 2004 and September 30, 2004 and $250 for any four consecutive
fiscal quarters ending December 31, 2004 and thereafter and the leverage ratio
covenant under the Credit Agreement will permit a maximum ratio of 1.10:1.00 for
any four consecutive fiscal quarters ending on or after December 31, 2003 (which
limit was waived through January 31, 2004 for the four fiscal quarters ending
December 31, 2003). In addition, after giving effect to the amendment, the
Credit Agreement also contains a $20 minimum liquidity covenant. While the
Company expects that Products Corporation's bank lenders will consent to such
amendment or waiver request, there can be no assurance that they will or that
they will do so on terms that are favorable to the Company. If the Company is
unable to secure such amendment or waiver, it could be required to refinance the
Credit Agreement or repay it with proceeds from sale of assets or operations, or
additional capital contributions or loans from MacAndrews & Forbes or the
Company's other affiliates or third parties, or the sale of additional equity
securities of Revlon, Inc. In the event that Products Corporation were unable to
secure such a waiver or amendment and Products Corporation were not able to
refinance or repay the Credit Agreement, Products Corporation's inability to
meet the financial covenants for the four consecutive fiscal quarters ending
December 31, 2003 would constitute an event of default under Products
Corporation's Credit Agreement, which would permit the bank lenders to
accelerate the Credit Agreement, which in turn would constitute an event of
default under the indentures governing Products Corporation's debt if the amount
accelerated exceeds $25.0 and such default remains uncured within 10 days of
notice from the trustee under the applicable indenture.
There can be no assurance that the Company would be able to take any of the
actions referred to in the preceding two paragraphs because of a variety of
commercial or market factors or constraints in the Company's debt instruments,
including, for example, Products Corporation's inability to reach agreement with
its bank lenders on refinancing terms that are acceptable to the Company before
the waiver of its financial covenants expires on January 31, 2004, market
conditions being unfavorable for an equity or debt offering, or that the
transactions may not be permitted under the terms of the Company's various debt
instruments then in effect, because of restrictions on the incurrence of debt,
incurrence of liens, asset dispositions and related party transactions. In
addition, such actions, if taken, may not enable the Company to satisfy its cash
requirements if the actions do not generate a sufficient amount of additional
capital.
Revlon, Inc., as a holding company, will be dependent on the earnings and
cash flow of, and dividends and distributions from, Products Corporation to pay
its expenses and to pay any cash dividend or distribution on Revlon, Inc.'s
Class A Common Stock that may be authorized by the Board of Directors of Revlon,
Inc. The terms of the Credit Agreement, the Mafco Loans, 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 fees, 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 Amended Stock Plan.
F-24
10. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL DATA
On June 21, 2002, the Original 12% Notes were exchanged for the new 12%
Notes which have substantially identical terms as the Original 12% Notes, except
that the 12% Notes are registered with the Commission under the Securities Act,
and the transfer restrictions and registration rights applicable to the Original
12% Notes do not apply to the 12% Notes. The 12% Notes are jointly and
severally, fully and unconditionally guaranteed by the domestic subsidiaries of
Products Corporation that guarantee Products Corporation's 2001 Credit Agreement
(the "Guarantor Subsidiaries") (Subsidiaries of Products Corporation that do not
guarantee the 12% Notes are referred to as the "Non-Guarantor Subsidiaries").
The Supplemental Guarantor Condensed Consolidating Financial Data presented
below presents the balance sheets, statements of operations and statements of
cash flow data (i) for Products Corporation and the Guarantor Subsidiaries and
the Non-Guarantor Subsidiaries on a consolidated basis (which is derived from
Products Corporation's historical reported financial information); (ii) for
Products Corporation as the "Parent Company", alone (accounting for its
Guarantor Subsidiaries and the Non-Guarantor Subsidiaries on an equity basis
under which the investments are recorded by each entity owning a portion of
another entity at cost, adjusted for the applicable share of the subsidiary's
cumulative results of operations, capital contributions and distributions, and
other equity changes); (iii) for the Guarantor Subsidiaries alone; and (iv) for
the Non-Guarantor Subsidiaries alone. Additionally, Products Corporation's 12%
Notes are fully and unconditionally guaranteed by Revlon, Inc. The consolidating
condensed balance sheets, consolidating condensed statements of operations and
consolidating condensed statements of cash flow for Revlon, Inc. have not been
included in the accompanying Supplemental Guarantor Condensed Consolidating
Financial Data as such information is not materially different than those of
Products Corporation.
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF DECEMBER 31, 2002
(DOLLARS IN MILLIONS)
NON-
PARENT GUARANTOR GUARANTOR
ASSETS CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
------------ ------------ ------- ------------ ------------
Current assets .................................... $ 476.7 $ - $ 256.5 $ 35.8 $ 184.4
Intercompany receivables .......................... - (1,526.4) 850.7 471.5 204.2
Investment in subsidiaries ........................ - 277.6 (228.1) (107.8) 58.3
Property, plant and equipment, net ................ 133.4 - 118.1 2.9 12.4
Other assets ...................................... 129.7 - 110.0 3.3 16.4
Intangible assets ................................. 198.0 - 160.8 3.3 33.9
----------- ------------ -------- ------------ ------------
Total assets .................................. $ 937.8 $ (1,248.8) $ 1,268.0 $ 409.0 $ 509.6
=========== ============ ======== ============ ============
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current liabilities ............................... $ 509.9 $ - $ 360.7 $ 30.9 $ 118.3
Intercompany payables ............................. - (1,526.4) 501.0 645.9 379.5
Long-term debt .................................... 1,750.1 - 1,742.9 6.5 0.7
Other long-term liabilities ....................... 320.0 - 305.6 15.5 (1.1)
----------- ------------ -------- ------------ ------------
Total liabilities ................................. 2,580.0 (1,526.4) 2,910.2 698.8 497.4
Stockholder's deficiency .......................... (1,642.2) 277.6 (1,642.2) (289.8) 12.2
----------- ------------ -------- ------------ ------------
Total liabilities and stockholder's deficiency .... $ 937.8 $ (1,248.8) $ 1,268.0 $ 409.0 $ 509.6
=========== ============ ======== ============ ============
F-25
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
(DOLLARS IN MILLIONS)
NON-
PARENT GUARANTOR GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
------------ ------------ ------- ------------ ------------
Net sales ......................................... $ 1,119.4 $ (134.4) $ 697.4 $ 187.9 $ 368.5
Cost of sales ..................................... 503.7 (134.4) 297.3 156.7 184.1
------------ ------------ ------- ------------ ------------
Gross profit .................................... 615.7 - 400.1 31.2 184.4
Selling, general and administrative expenses ...... 711.1 - 483.3 37.3 190.5
Restructuring costs and other, net ................ 13.6 - 8.0 0.3 5.3
------------ ------------ ------- ------------ ------------
Operating loss .................................. (109.0) - (91.2) (6.4) (11.4)
------------ ------------ ------- ------------ ------------
Other expenses (income):
Interest expense, net ........................... 156.9 - 155.7 0.5 0.7
Loss on sale of product line, brands and
facilities, net................................. 1.0 - - - 1.0
Miscellaneous, net .............................. 10.3 - (23.5) (5.4) 39.2
Equity in earnings of subsidiaries - (139.4) 61.7 78.7 (1.0)
------------ ------------ ------- ------------ ------------
Other expenses, net ........................... 168.2 (139.4) 193.9 73.8 39.9
------------ ------------ ------- ------------ ------------
Loss before income taxes .......................... (277.2) 139.4 (285.1) (80.2) (51.3)
Provision (benefit) for income taxes .............. 4.6 - (3.3) 3.3 4.6
------------ ------------ ------- ------------ ------------
Net loss .......................................... $ (281.8) $ 139.4 $ (281.8) $ (83.5) $ (55.9)
============ ============ ======== ============ ============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
FOR THE YEAR ENDED DECEMBER 31, 2002
(DOLLARS IN MILLIONS)
NON-
PARENT GUARANTOR GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
------------ ------------ ------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash (used for) provided by operating activities .. $ (112.3) $ - $ (113.3) $ (11.0) $ 12.0
----------- ------------ ------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................. (16 0) - (13.6) - (2.4)
Proceeds from the sale of certain assets .............. 1.8 - 1.8 - -
----------- ------------ ------- ------------ ------------
Net cash used for investing activities ................ (14.2) - (11.8) - (2.4)
----------- ------------ ------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings - third parties . 8.0 - 0.1 2.8 5.1
Proceeds from the issuance of long-term debt -
third parties......................................... 175.6 - 155.2 14.2 6.2
Repayment of long-term debt - third parties ........... (73.0) - (57.2) (8.4) (7.4)
Payment of debt issuance costs ........................ (0.3) - (0.3) - -
----------- ------------ ------- ------------ ------------
Net cash provided by financing activities ............. 110.3 - 97.8 8.6 3.9
----------- ------------ ------- ------------ ------------
Effect of exchange rate changes on cash and cash
equivalents........................................... (1.3) - 0.3 0.1 (1.7)
----------- ------------ ------- ------------ ------------
Net (decrease) increase in cash and cash equivalents (17.5) - (27.0) (2.3) 11.8
Cash and cash equivalents at beginning of period .... 103.3 - 55.0 10.1 38.2
----------- ------------ ------- ------------ ------------
Cash and cash equivalents at end of period .......... $ 85.8 $ - $ 28.0 $ 7.8 $ 50.0
=========== ============ ======= ============ ============
F-26
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF DECEMBER 31, 2001
(DOLLARS IN MILLIONS)
NON-
PARENT GUARANTOR GUARANTOR
ASSETS CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
------------ ------------ ------- ------------ ------------
Current assets ............................................ $ 517.9 $ - $ 294.9 $ 28.2 $ 194.8
Intercompany receivables .................................. - (1,337.0) 737.5 409.4 190.1
Investment in subsidiaries ................................ - 179.2 (150.1) (61.2) 32.1
Property, plant and equipment, net ........................ 142.8 - 131.1 3.3 8.4
Other assets .............................................. 132.2 - 115.5 6.7 10.0
Intangible assets ......................................... 198.5 - 161.9 3.4 33.2
----------- ------------ ------- ------------ -----------
Total assets ........................................... $ 991.4 $(1,157.8) $ 1,290.8 $ 389.8 $ 468.6
=========== ============ ======= ============ ===========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current liabilities ....................................... $ 385.7 $ - $ 258.7 $ 21.0 $ 106.0
Intercompany payables ..................................... - (1,337.0) 436.9 540.0 360.1
Long-term debt ............................................ 1,643.6 - 1,642.2 - 1.4
Other long-term liabilities ............................... 250.9 - 241.8 9.1 -
----------- ------------ ------- ------------ -----------
Total liabilities ......................................... 2,280.2 (1,337.0) 2,579.6 570.1 467.5
Stockholder's deficiency .................................. (1,288.8) 179.2 (1,288.8) (180.3) 1.1
----------- ------------ ------- ------------ -----------
Total liabilities and stockholder's deficiency ............ $ 991.4 $(1,157.8) $ 1,290.8 $ 389.8 $ 468.6
=========== ============ ======= ============ ===========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
(DOLLARS IN MILLIONS)
NON-
PARENT GUARANTOR GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
------------ ------------ ------- ------------ ------------
Net sales .............................................. $ 1,277.6 $ (132.9) $ 800.6 $ 155.6 $ 454.3
Cost of sales .......................................... 544.2 (132.9) 323.8 121.5 231.8
------------ ------------ ------- ------------ ------------
Gross profit .......................................... 733.4 - 476.8 34.1 222.5
Selling, general and administrative expenses ........... 676.6 - 432.6 36.0 208.0
Restructuring costs and other, net ..................... 38.1 - 25.4 1.4 11.3
------------ ------------ ------- ------------ ------------
Operating income (loss) ............................... 18.7 - 18.8 (3.3) 3.2
------------ ------------ ------- ------------ ------------
Other expenses (income):
Interest expense, net .................................. 137.8 - 132.4 1.6 3.8
Loss (gain) on sale of product line, brands and
facilities, net........................................ 14.4 - - (0.4) 14.8
Miscellaneous, net ..................................... 11.1 - (17.0) (12.7) 40.8
Loss on early extinguishment of debt ................... 3.6 - 3.6 - -
Equity in earnings of subsidiaries ..................... - (102.4) 51.9 49.0 1.5
------------ ------------ ------- ------------ ------------
Other expenses, net ................................. 166.9 (102.4) 170.9 37.5 60.9
------------ ------------ ------- ------------ ------------
Loss before income taxes ............................... (148.2) 102.4 (152.1) (40.8) (57.7)
Provision for income taxes ............................. 4.0 - 0.1 2.6 1.3
------------ ------------ ------- ------------ ------------
Net loss ............................................... $ (152.2) $ 102.4 $ (152.2) $ (43.4) $ (59.0)
============ ============ ======= ============ ============
F-27
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
FOR THE YEAR ENDED DECEMBER 31, 2001
(DOLLARS IN MILLIONS)
NON-
PARENT GUARANTOR GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
------------ ------------ ------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash (used for) provided by operating activities ...... $ (86.5) $ (1.0) $ (42.0) $ 11.5 $ (55.0)
----------- ------------ ------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ...................................... (15 1) - (13.0) (1.7) (0.4)
Proceeds from the sale of certain assets .................. 102.3 - 6.7 56.8 38.8
----------- ------------ ------- ------------ ------------
Net cash provided by (used for) investing activities ...... 87.2 - (6.3) 55.1 38.4
----------- ------------ ------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in short-term borrowings -
third parties............................................. (11.3) - - 1.6 (12.9)
Proceeds from the issuance of long-term debt -
third parties ............................................ 698.5 - 657.5 22.9 18.1
Repayment of long-term debt - third parties ............... (614.0) - (520.3) (31.3) (62.4)
Intercompany dividends and net change in intercompany
obligations .............................................. - 1.0 (17.6) (52.6) 69.2
Net distribution from affiliate ........................... (1.0) - (1.0) - -
Payment of debt issuance costs ............................ (25.9) - (25.9) - -
----------- ------------ ------- ------------ ------------
Net cash provided by (used for) financing activities ...... 46.3 1.0 92.7 (59.4) 12.0
----------- ------------ ------- ------------ ------------
Effect of exchange rate changes on cash and cash
equivalents .............................................. - - - - -
----------- ------------ ------- ------------ ------------
Net increase (decrease) in cash and cash equivalents ... 47.0 - 44.4 7.2 (4.6)
Cash and cash equivalents at beginning of period ....... 56.3 - 10.7 2.9 42.7
----------- ------------ ------- ------------ ------------
Cash and cash equivalents at end of period ............. $ 103.3 $ - $ 55.1 $ 10.1 $ 38.1
=========== ============ ======= ============ ============
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(DOLLARS IN MILLIONS)
NON-
PARENT GUARANTOR GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
------------ ------------ ------- ------------ ------------
Net sales ........................................... $ 1,409.4 $ - $ 768.3 $ 148.7 $ 492.4
Cost of sales ....................................... 574.3 - 288.8 116.3 169.2
------------ ------------ ------- ------------ ------------
Gross profit ...................................... 835.1 - 479.5 32.4 323.2
Selling, general and administrative expenses ........ 763.4 - 388.9 67.2 307.3
Restructuring costs and other, net .................. 54.1 - 19.8 1.4 32.9
------------ ------------ ------- ------------ ------------
Operating income (loss) ........................... 17.6 - 70.8 (36.2) (17.0)
------------ ------------ ------- ------------ ------------
Other expenses (income):
Interest expense, net ............................. 142.4 - 119.6 12.3 10.5
(Gain) loss on sale of product line, brands and
facilities, net ................................ (10.8) - (121.1) (0.6) 110.9
Miscellaneous, net ................................ 5.4 - (0.5) (36.0) 41.9
Equity in earnings of subsidiaries ................ - (413.0) 225.2 186.5 1.3
------------ ------------ ------- ------------ ------------
Other expenses, net ............................. 137.0 (413.0) 223.2 162.2 164.6
------------ ------------ ------- ------------ ------------
Loss before income taxes ............................ (119.4) 413.0 (152.4) (198.4) (181.6)
Provision for income taxes .......................... 8.6 - (24.4) 26.8 6.2
------------ ------------ ------- ------------ ------------
Net loss ............................................ $ (128.0) $ 413.0 $ (128.0) $ (225.2) $(187.8)
============ ============ ======= ============ ============
F-28
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
FOR THE YEAR ENDED DECEMBER 31, 2000
(DOLLARS IN MILLIONS)
NON-
PARENT GUARANTOR GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
------------ ------------ ------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash (used for) provided by operating activities .... $ (84.0) $ - $ 34.8 $ (40.6) $ (78.2)
----------- ------------ -------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................... (19.0) - (12.9) (1.1) (5.0)
Proceeds from the sale of certain assets ................ 344.1 - 180.9 64.9 98.3
Acquisition of technology rights ........................ (3.0) - (3.0) - -
----------- ------------ -------- ------------ ------------
Net cash provided by investing activities ............... 322.1 - 165.0 63.8 93.3
----------- ------------ -------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in short-term borrowings -
third parties........................................... (2.7) - - 0.1 (2.8)
Proceeds from the issuance of long-term debt -
third parties........................................... 339.1 - 286.7 16.1 36.3
Repayment of long-term debt - third parties ............. (538.7) - (428.6) (15.8) (94.3)
Intercompany dividends and net change in intercompany
obligations............................................. - - (32.9) (26.3) 59.2
Net distribution from affiliate ......................... (1.4) - (1.4) - -
----------- ------------ -------- ------------ ------------
Net cash used for financing activities .................. (203.7) - (176.2) (25.9) (1.6)
----------- ------------ -------- ------------ ------------
Effect of exchange rate changes on cash and cash
equivalents............................................. (3.5) - - (0.1) (3.4)
----------- ------------ -------- ------------ ------------
Net increase (decrease) in cash and cash equivalents .... 30.9 - 23.6 (2.8) 10.1
Cash and cash equivalents at beginning of period ........ 25.4 - (12.8) 5.7 32.5
----------- ------------ -------- ------------ ------------
Cash and cash equivalents at end of period .............. $ 56.3 $ - $ 10.8 $ 2.9 42.6
=========== ============ ======== ============ ============
11. FINANCIAL INSTRUMENTS
The fair value of the Company's long-term debt is based on the quoted
market prices for the same issues or on the current rates offered to the Company
for debt of the same remaining maturities. The estimated fair value of long-term
debt (excluding amounts due to affiliates of $24.1) at December 31, 2002 and
2001, respectively, was approximately $513.9 and $524.1 less than the carrying
values of $1,726.0 and $1,619.5, respectively.
Products Corporation also maintains standby and trade letters of credit
with certain banks for various corporate purposes under which Products
Corporation is obligated, of which approximately $25.3 and $27.3 (including
amounts available under credit agreements in effect at that time) were
maintained at December 31, 2002 and 2001, respectively. Included in these
amounts are $10.5 and $10.1, respectively, in standby letters of credit, which
support Products Corporation's self-insurance programs. The estimated liability
under such programs is accrued by Products Corporation.
The carrying amounts of cash and cash equivalents, marketable securities,
trade receivables, notes receivable, accounts payable and short-term borrowings
approximate their fair values.
12. INCOME TAXES
In June 1992, Holdings, Revlon, Inc. and certain of its subsidiaries, and
Mafco Holdings entered into a tax sharing agreement (as subsequently amended,
the "Tax Sharing Agreement"), pursuant to which Mafco Holdings has agreed to
indemnify Revlon, Inc. against federal, state or local income tax liabilities of
the consolidated or combined group of which Mafco Holdings (or a subsidiary of
Mafco Holdings other than Revlon, Inc. or its subsidiaries) is the common parent
for taxable periods beginning on or after January 1, 1992 during which Revlon,
Inc. or a subsidiary of Revlon, Inc. is a member of such group. Pursuant to the
Tax Sharing Agreement, for all taxable periods beginning on or after January 1,
1992, Revlon, Inc. will pay to Holdings, amounts equal to the taxes that Revlon,
Inc. would otherwise have to pay if it were to file separate federal, state or
local income tax returns (including any amounts determined to be due as a result
of a redetermination arising from an audit or otherwise of the consolidated or
combined tax liability relating to any such period which is attributable to
Revlon, Inc.), except that Revlon, Inc. will not be entitled to carry back any
losses to taxable periods ending prior to January 1, 1992. No payments are
required by Revlon, Inc. if and to
F-29
the extent Products Corporation is prohibited under the Credit Agreement from
making tax sharing payments to Revlon, Inc. The Credit Agreement prohibits
Products Corporation from making such tax sharing payments other than in respect
of state and local income taxes. Since the payments to be made under the Tax
Sharing Agreement will be determined by the amount of taxes that Revlon, Inc.
would otherwise have to pay if it were to file separate federal, state or local
income tax returns, the Tax Sharing Agreement will benefit Mafco Holdings to the
extent Mafco Holdings can offset the taxable income generated by Revlon, Inc.
against losses and tax credits generated by Mafco Holdings and its other
subsidiaries. The Tax Sharing Agreement was amended, effective as of January 1,
2001, to eliminate a contingent payment to Revlon, Inc. under certain
circumstances in return for a $10 note with interest at 12% and interest and
principal payable by Mafco Holdings on December 31, 2005. As a result of net
operating tax losses and prohibitions under the Credit Agreement there were no
federal tax payments or payments in lieu of taxes pursuant to the Tax Sharing
Agreement for 2002, 2001 or 2000. The Company had a liability of $0.9 to
Holdings in respect of alternative minimum taxes for 1997 under the Tax Sharing
Agreement. However, as a result of tax legislation enacted in the first quarter
of 2002, the Company was able to recognize tax benefits of $0.9 in 2002, which
completely offset this liability.
Pursuant to the asset transfer agreement referred to in Note 15,
Products Corporation assumed all tax liabilities of Holdings other than (i)
certain income tax liabilities arising prior to January 1, 1992 to the extent
such liabilities exceeded reserves on Holdings' books as of January 1, 1992 or
were not of the nature reserved for and (ii) other tax liabilities to the extent
such liabilities are related to the business and assets retained by Holdings.
F-30
The Company's loss before income taxes and the applicable provision (benefit)
for income taxes are as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2002 2001 2000
------------ ---------------- -------------
LOSS BEFORE INCOME TAXES:
Domestic ..................................................... $ (213.0) $ (83.2) $ (47.4)
Foreign ...................................................... (68.7) (66.4) (73.7)
------------ ---------------- -------------
$ (281.7) $ (149.6) $ (121.1)
============ ================ =============
Provision (benefit) for income taxes:
Federal ...................................................... $ (0.9) $ - $ -
State and local .............................................. 0.4 0.4 0.4
Foreign ...................................................... 5.3 3.7 8.2
------------ ---------------- -------------
$ 4.8 $ 4.1 $ 8.6
============ ================ =============
Current ...................................................... $ 8.0 $ 7.8 $ 8.5
Deferred ..................................................... (1.2) (0.1) 0.8
Benefits of operating loss carryforwards ..................... (2.0) (3.6) (1.9)
Carryforward utilization applied to goodwill ................. - - 0.7
Effect of enacted change of tax rates ........................ - - 0.5
------------ ---------------- -------------
$ 4.8 $ 4.1 $ 8.6
============ ================ =============
The effective tax rate on loss before income taxes is reconciled to the
applicable statutory federal income tax rate as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2002 2001 2000
------------ ---------------- -------------
Statutory federal income tax rate .................................. (35.0)% (35.0)% (35.0)%
State and local taxes, net of federal income tax benefit ........... 0.1 0.2 0.2
Foreign and U.S. tax effects attributable to
operations outside the U.S ...................................... (4.1) 0.5 1.9
Nondeductible amortization expense ................................. - 1.4 2.0
Change in valuation allowance ...................................... 44.1 29.2 10.7
Sale of businesses ................................................. (3.1) 9.7 26.8
Other .............................................................. (0.3) (3.2) 0.5
------------ ---------------- -------------
Effective rate ..................................................... 1.7% 2.8% 7.1%
============ ================ =============
F-31
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2002 and 2001 are presented below:
DECEMBER 31,
----------------------------
2002 2001
------------- ------------
Deferred tax assets:
Accounts receivable, principally due to doubtful accounts ......... $ 5.0 $ 2.9
Inventories ....................................................... 18.9 9.9
Net operating loss carryforwards - domestic ....................... 266.1 237.4
Net operating loss carryforwards - foreign ........................ 122.6 128.2
Accruals and related reserves ..................................... 5.9 10.1
Employee benefits ................................................. 67.3 36.7
State and local taxes ............................................. 12.2 12.2
Advertising, sales discounts and returns and coupon redemptions ... 53.5 27.6
Capital loss carryover ............................................ 7.8 -
Deferred interest expense ......................................... 9.7 -
Other ............................................................. 34.2 24.9
------------- ------------
Total gross deferred tax assets ................................. 603.2 489.9
Less valuation allowance ........................................ (569.2) (451.8)
------------- ------------
Net deferred tax assets ......................................... 34.0 38.1
Deferred tax liabilities:
Plant, equipment and other assets ................................. (25.8) (31.3)
Other ............................................................. (3.2) (3.5)
------------- ------------
Total gross deferred tax liabilities ............................ (29.0) (34.8)
------------- ------------
Net deferred tax assets ......................................... $ 5.0 $ 3.3
============= ============
In assessing the recoverability of its deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based
upon the level of historical taxable income for certain international markets
and projections for future taxable income over the periods in which the deferred
tax assets are deductible, management believes it is more likely than not that
the Company will realize the benefits of certain deductible differences existing
at December 31, 2002.
The valuation allowance increased by $117.4 during 2002, increased by $14.3
during 2001 and decreased by $6.3 during 2000.
During 2002, 2001 and 2000, certain of the Company's foreign subsidiaries
used operating loss carryforwards to credit the current provision for income
taxes by $2.0, $3.6, and $1.9, respectively. Certain other foreign operations
generated losses during 2002, 2001 and 2000 for which the potential tax benefit
was reduced by a valuation allowance. At December 31, 2002, the Company had tax
loss carryforwards of approximately $1,138.4, of which $760.4 are domestic and
$378.0 are foreign, and which expire in future years as follows: 2003-$22.6;
2004-$26.5; 2005-$61.5; 2006-$41.8; 2007 and beyond-$830.1; and
unlimited-$155.9. The Company could receive the benefit of such tax loss
carryforwards only to the extent it has taxable income during the carryforward
periods in the applicable tax jurisdictions. In addition, based upon certain
factors, including the amount and nature of gains or losses recognized by Mafco
Holdings and its other subsidiaries included in Mafco Holdings' consolidated
federal income tax return, the amount of net operating loss carryforwards
attributable to Mafco Holdings and such other subsidiaries and the amounts of
alternative minimum tax liability of Mafco Holdings and such other subsidiaries,
pursuant to the terms of the Tax Sharing Agreement, all or a portion of the
domestic operating loss carryforwards would not be available to the Company
should the Company cease being a member of Mafco Holdings' consolidated federal
income tax return at any time in the future.
Appropriate U.S. and foreign income taxes have been accrued on foreign
earnings that have been or are
F-32
expected to be remitted in the near future. Unremitted earnings of foreign
subsidiaries which have been, or are currently intended to be, permanently
reinvested in the future growth of the business are nil at December 31, 2002,
excluding those amounts which, if remitted in the near future, would not result
in significant additional taxes under tax statutes currently in effect.
13. POSTRETIREMENT BENEFITS
Pension:
A substantial portion of the Company's employees in the U.S. are covered by
defined benefit pension plans. The Company uses September 30 as its measurement
date for plan obligations and assets.
Other Postretirement Benefits:
The Company also has sponsored an unfunded retiree benefit plan, which
provides death benefits payable to beneficiaries of a limited number of
employees and former employees. Participation in this plan is limited to
participants enrolled as of December 31, 1993. The Company also administers a
medical insurance plan on behalf of Holdings, the cost of which has been
apportioned to Holdings. The Company uses September 30 as its measurement date
for plan obligations and assets.
Information regarding the Company's significant pension and other
postretirement plans at the dates indicated is as follows:
F-33
OTHER POSTRETIREMENT
PENSION PLANS BENEFITS
------------------- -------------------
DECEMBER 31,
-----------------------------------------
Change in Benefit Obligation: 2002 2001 2002 2001
-------- -------- -------- ---------
Benefit obligation - September 30 of prior year ...... $ (422.8) $ (420.6) $ (10.8) $ (9.7)
Service cost ......................................... (8.5) (10.2) - -
Interest cost ........................................ (28.5) (28.0) (0.8) (0.8)
Plan amendments ...................................... - 11.1 - -
Actuarial loss ....................................... (23.1) (11.1) (0.7) (1.0)
Curtailments ......................................... - 7.1 - -
Benefits paid ........................................ 23.6 22.3 0.7 0.7
Foreign exchange ..................................... (3.5) 1.6 - -
Plan participant contributions ....................... (0.3) (0.4) - -
Disposition .......................................... - 3.3 - -
Settlements .......................................... - 2.1 - -
-------- -------- -------- ---------
Benefit obligation - September 30 of current year .... (463.1) (422.8) (11.6) (10.8)
-------- -------- -------- ---------
Change in Plan Assets:
Fair value of plan assets - September 30 of prior year 282.7 343.4 - -
Actual return on plan assets ......................... (20.8) (38.3) - -
Employer contributions ............................... 12.5 8.1 0.7 0.7
Assets sold .......................................... - (3.6) - -
Plan participant contributions ....................... 0.3 0.4 - -
Benefits paid ........................................ (23.6) (22.3) (0.7) (0.7)
Foreign exchange ..................................... 2.0 (1.1) - -
Settlements .......................................... - (3.9) - -
-------- -------- -------- ---------
Fair value of plan assets - September 30 of current year 253.1 282.7 - -
-------- -------- -------- ---------
Funded status of plans ................................. (210.0) (140.1) (11.6) (10.8)
Amounts contributed to plans during fourth quarter ..... 1.5 1.4 0.2 0.1
Unrecognized net loss .................................. 137.1 69.7 0.8 -
Unrecognized prior service cost ........................ (5.5) (6.6) - -
Unrecognized net transition asset ...................... (0.2) (0.3) - -
-------- -------- -------- ---------
Accrued benefit cost ................................. $ (77.1) $ (75.9) $ (10.6) $ (10.7)
======== ======== ======== =========
Amounts recognized in the Consolidated Balance Sheets
consist of:
Prepaid expenses ..................................... $ 4.9 $ 4.4 $ - $ -
Accrued expenses ..................................... (16.6) (15.0) - -
Other long-term liabilities .......................... (179.8) (112.3) (10.6) (10.7)
Intangible asset ..................................... 0.5 0.5 - -
Accumulated other comprehensive loss ................. 113.6 46.1 - -
Other long-term assets ............................... 0.3 0.4 - -
-------- -------- -------- ---------
$ (77.1) $ (75.9) $ (10.6) $ (10.7)
======== ======== ======== =========
With respect to the above accrued benefit costs, the Company has recorded a
receivable from affiliates of $1.3 and $1.2 at December 31, 2002 and 2001,
respectively, relating to Holdings' participation in the Company's pension plans
and $1.2 and $1.3 at December 31, 2002 and 2001, respectively, for other
postretirement benefits costs attributable to Holdings.
F-34
The following weighted-average assumptions were used in accounting for the
plans:
U.S. PLANS INTERNATIONAL PLANS
--------------------------------- ----------------------------------
2002 2001 2000 2002 2001 2000
---------- ----------- --------- ----------- ---------- ---------
Discount rate ................................... 6.5% 7.0% 7.5% 5.6% 5.8% 6.5%
Expected return on plan assets .................. 9.0 9.5 9.5 7.5 8.5 9.0
Rate of future compensation increases ........... 4.3 5.0 5.3 3.5 3.7 4.5
The components of net periodic benefit cost for the plans are as follows:
PENSION PLANS OTHER POSTRETIREMENT BENEFITS
--------------------------------- -----------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
2002 2001 2000 2002 2001 2000
---------- ----------- --------- ----------- ---------- ---------
Service cost ............................... $ 8.5 $ 10.2 $ 12.0 $ - $ - $ -
Interest cost .............................. 28.5 28.0 29.2 0.8 0.8 0.7
Expected return on plan assets ............. (24.7) (30.8) (30.1) - - -
Amortization of prior service cost ......... (1.1) (0.9) 1.7 - - -
Amortization of net transition asset ....... (0.1) (0.2) (0.2) - - -
Amortization of actuarial loss (gain) ...... 2.8 0.7 1.0 (0.1) (0.1) (0.1)
Settlement loss (gain) ..................... - 0.8 (0.1) - - -
Curtailment loss (gain) .................... - 1.5 (0.4) - - -
--------- --------- -------- ------- ------- -------
13.9 9.3 13.1 0.7 0.7 0.6
Portion allocated to Holdings .............. (0.3) (0.3) (0.3) - - -
--------- --------- -------- ------- ------- -------
$ 13.6 $ 9.0 $ 12.8 $ 0.7 $ 0.7 $ 0.6
========= ========= ======== ======= ======= =======
Where the accumulated benefit obligation exceeded the related fair value of
plan assets, the projected benefit obligation, accumulated benefit obligation,
and fair value of plan assets for the Company's pension plans are as follows:
DECEMBER 31,
--------------------------------------
2002 2001 2000
----------- ---------- -------------
Projected benefit obligation ......... $ 463.1 $ 419.6 $ 60.5
Accumulated benefit obligation ....... 445.6 402.9 53.9
Fair value of plan assets ............ 253.1 280.0 5.0
14. STOCK COMPENSATION PLAN
Since March 5, 1996, Revlon, Inc. has had the Amended Stock Plan, which is
a stock-based compensation plan and is described below. Revlon, Inc. applies APB
Opinion No. 25 and its related interpretations in accounting for the Amended
Stock Plan. Under APB Opinion No. 25, because the exercise price of Revlon,
Inc.'s employee stock options under the Amended Stock Plan equals the market
price of the underlying stock on the date of grant, no compensation cost has
been recognized. The fair value of each option grant is estimated on the date of
the grant using the Black- Scholes option-pricing model assuming no dividend
yield, expected volatility of approximately 71% in 2002, 68% in 2001 and 69% in
2000; weighted average risk-free interest rate of 3.86% in 2002, 5.07% in 2001,
and 6.53% in 2000; and a seven-year expected average life for the Amended Stock
Plan's options issued in 2002, 2001 and 2000.
Under the Amended Stock Plan, awards may be granted to employees and
directors of Revlon, Inc., and its subsidiaries for up to an aggregate of 10.5
million shares of Class A Common Stock. Non-qualified options granted under the
Amended Stock Plan have a term of 10 years during which the holder can purchase
shares of Class A Common Stock at an exercise price, which must be not less than
the market price on the date of the grant. Option grants vest over service
periods that range from one to five years, subject to limited exceptions and
except as disclosed below. Options granted in February 1999 with an original
four-year vesting term were modified in May
F-35
1999 to allow the options to become fully vested on the first anniversary date
of the grant. Options granted in May 2000 under the Amended Stock Plan vest 25%
on each anniversary of the grant date and will become 100% vested on the fourth
anniversary of the grant date; provided that an additional 25% of such options
would vest on each subsequent anniversary date of the grant if the Company
achieved certain performance objectives relating to the Company's operating
income for the fiscal year preceding such anniversary date, which objectives
were not achieved in 2002, 2001 or 2000. The option grant of 400,000 shares in
February 2002 to Mr. Jack L. Stahl, the Company's President and Chief Executive
Officer, vests in full on the fifth anniversary of such grant, provided that
one-half of such options vest on the day after which the 20-day average closing
price of Class A Common Stock on the New York Stock Exchange ("NYSE") equals or
exceeds $30.00 per share and the balance will vest on the day after which such
20-day average closing price equals or exceeds $40.00 per share. Additionally,
various option grants made by the Company to its employees vest upon a "change
in control" as defined in the respective stock option agreements. During each of
2002, 2001 and 2000, the Company granted to Mr. Perelman, the Company's Chairman
of the Board and Chairman of the Executive Committee of the Board, options to
purchase 100,000, 225,000 and 300,000, respectively, shares of Revlon, Inc.
Class A Common Stock, which grants will vest 33% on each anniversary date of the
grant and will become 100% vested on the third anniversary date of the grant
date as to the 2002 grant, will vest 25% on each anniversary date of the grant
and will become 100% vested on the fourth anniversary date of the grant date as
to the 2001 grant, and will vest in full on the fifth anniversary of the grant
date as to the 2000 grant. At December 31, 2002, 2001 and 2000 there were
2,847,972, 3,296,133 and 3,009,908 options exercisable under the Amended Stock
Plan, respectively.
A summary of the status of the Amended Stock Plan as of December 31, 2002,
2001 and 2000 and changes during the years then ended is presented below:
SHARES WEIGHTED AVERAGE
(000) EXERCISE PRICE
----------- ----------------
Outstanding at January 1, 2000 ..... 5,771.2 $26.42
Granted ............................ 1,769.1 7.15
Exercised .......................... - -
Forfeited .......................... (936.8) 24.06
-----------
Outstanding at December 31, 2000 ... 6,603.5 21.59
Granted ............................ 1,087.6 5.69
Exercised .......................... (0.2) 7.06
Forfeited .......................... (788.8) 19.16
-----------
Outstanding at December 31, 2001 ... 6,902.1 19.37
Granted ............................ 3,306.8 3.94
Exercised .......................... -
Forfeited .......................... (2,322.8) 19.54
-----------
Outstanding at December 31, 2002 ... 7,886.1 12.83
===========
The weighted average grant date fair value of options granted during 2002,
2001 and 2000 approximated $2.65, $3.82 and $4.58, respectively.
F-36
The following table summarizes information about the Amended Stock Plan's
options outstanding, at December 31, 2002:
OUTSTANDING EXERCISABLE
---------------------------------------------------- ---------------------------------------
WEIGHTED
RANGE NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OF OF OPTIONS YEARS AVERAGE OF OPTIONS AVERAGE
EXERCISE PRICES (000'S) REMAINING EXERCISE PRICE (000'S) EXERCISE PRICE
- --------------- ------- --------- -------------- ------- --------------
$2.78 to $3.78 2,178.1 9.73 $ 3.72 - $ -
3.82 to 6.88 1,914.9 8.91 4.92 231.9 5.65
7.06 to 15.00 1,798.7 6.97 9.93 1,033.5 11.44
17.13 to 53.56 1,994.4 4.99 32.97 1,582.6 30.37
------- -------
2.78 to 53.56 7,886.1 2,848.0
======= =======
The Amended Stock Plan also provides that restricted stock may be awarded
to employees and directors of Revlon, Inc. and its subsidiaries. On September
17, 2002 and June 18, 2001 (the "Grant Dates"), the Compensation Committee
awarded 50,000 shares and 120,000 shares, respectively, of restricted stock to
Mr. Perelman as a director of the Company. The 2002 and 2001 restricted stock
awards are subject to execution of a Restricted Stock Agreement by each grantee.
Provided the grantee remains continuously employed by the Company (or, in the
case of Mr. Perelman, he continuously provides services as a director to the
Company), the 2002 and 2001 restricted stock awards, subject to limited
exceptions, will vest as to one-third of the restricted shares on the day after
which the 20-day average of the closing price of Revlon, Inc.'s Class A Common
Stock on the NYSE equals or exceeds $20.00 per share, an additional one-third of
such restricted shares will vest on the day after which the 20-day average of
the closing price of Revlon, Inc.'s Class A Common Stock on the NYSE equals or
exceeds $25.00 per share and the balance will vest on the day after which the
20-day average of the closing price of the Company's Class A Common Stock on the
NYSE equals or exceeds $30.00 per share, provided that (i) subject to clause
(ii) below, no portion of the restricted stock awards will vest until the second
anniversary following the Grant Dates (except that the restrictions will lapse
on the February 2002 grant of 470,000 restricted shares to Mr. Stahl under the
Amended Stock Plan prior to the second anniversary if the 20-day average closing
price of Class A Common Stock on the NYSE has equaled or exceeded $25.00 per
share), (ii) all of the shares of restricted stock will vest immediately in the
event of a "change in control" of Revlon, Inc., and (iii) all of the shares of
restricted stock which have not previously vested will fully vest on the third
anniversary of the Grant Dates. The restrictions lapse on the February 2002
grant of restricted stock to Mr. Stahl as to 25% of such grant on June 18, 2004,
an additional 25% on February 17, 2006 and in full on February 17, 2007. No
dividends will be paid on unvested restricted stock, provided however, that in
connection with the 2002 grant of restricted stock to Mr. Stahl, in the event
any cash or in-kind distributions are made in respect of Common Stock prior to
the lapse of the restrictions relating to any of Mr. Stahl's restricted stock as
to which the restrictions have not lapsed (other than as to the subscription
rights to be issued in the Rights Offering, which Mr. Stahl waived), such
dividends will be held by the Company and paid to Mr. Stahl when and if such
restrictions lapse. At December 31, 2002, there were 1,475,000 shares of
restricted stock outstanding and unvested under the Amended Stock Plan. The
Company recorded compensation expense of $1.7 and $0.6 during 2002 and 2001,
respectively, and deferred compensation of $6.4 and $3.2 at December 31, 2002
and 2001, respectively, for the restricted stock awards.
F-37
On February 17, 2002, Revlon, Inc. adopted the Revlon, Inc. 2002
Supplemental Stock Plan (the "Supplemental Stock Plan"), the purpose of which is
to provide Mr. Stahl, the sole eligible participant, with inducement awards to
entice him to join the Company to enhance the Company's long-term performance
and profitability. The Supplemental Stock Plan covers 530,000 shares of the
Class A Common Stock. Awards may be made under the Supplemental Stock Plan in
the form of stock options, stock appreciation rights and restricted or
unrestricted stock. On February 17, 2002, the Compensation Committee granted Mr.
Stahl an Award of 530,000 restricted shares of Class A Common Stock, the full
amount of the shares of Revlon, Inc.'s Class A Common Stock issuable under the
Supplemental Stock Plan. The terms of the Supplemental Stock Plan and the
foregoing grant of restricted shares to Mr. Stahl are substantially the same as
the Amended Stock Plan and the grant of restricted shares to Mr. Stahl under
such plan. Pursuant to the terms of the Supplemental Stock Plan, such grant was
made conditioned upon Mr. Stahl's execution of the Company's standard Employee
Agreement as to Confidentiality and Non-Competition.
15. RELATED PARTY TRANSACTIONS
TRANSFER AGREEMENTS
In June 1992, Revlon, Inc. and Products Corporation entered into an asset
transfer agreement with Holdings and certain of its wholly-owned subsidiaries
(the "Asset Transfer Agreement"), and Revlon, Inc. and Products Corporation
entered into a real property asset transfer agreement with Holdings (the "Real
Property Transfer Agreement" and, together with the Asset Transfer Agreement,
the "Transfer Agreements"), and pursuant to such agreements, on June 24, 1992
Holdings transferred assets to Products Corporation and Products Corporation
assumed all the liabilities of Holdings, other than certain specifically
excluded assets and liabilities (the liabilities excluded are referred to as the
"Excluded Liabilities"). Certain consumer products lines sold in
demonstrator-assisted distribution channels considered not integral to Revlon,
Inc.'s business and which historically had not been profitable (the "Retained
Brands") and certain other assets and liabilities were retained by Holdings.
Holdings agreed to indemnify Revlon, Inc. and Products Corporation against
losses arising from the Excluded Liabilities, and Revlon, Inc. and Products
Corporation agreed to indemnify Holdings against losses arising from the
liabilities assumed by Products Corporation. The amounts reimbursed by Holdings
to Products Corporation for the Excluded Liabilities for 2002, 2001 and 2000
were $0.5, $0.2 and $0.4, respectively.
Certain assets and liabilities relating to divested businesses were
transferred to Products Corporation on the transfer date and any remaining
balances as of December 31 of the applicable year have been reflected in the
Company's Consolidated Balance Sheets as of such dates. At December 31, 2002 and
2001, the amounts reflected in the Company's Consolidated Balance Sheets
aggregated a net liability of $21.4 as of both dates, of which nil and $3.0,
respectively, are included in accrued expenses and other and $21.4 and $18.4,
respectively, are included in other long-term liabilities.
REIMBURSEMENT AGREEMENTS
Revlon, Inc., Products Corporation and MacAndrews Holdings have entered
into reimbursement agreements (the "Reimbursement Agreements") pursuant to which
(i) MacAndrews Holdings is obligated to provide (directly or through affiliates)
certain professional and administrative services, including employees, to
Revlon, Inc. and its subsidiaries, including Products Corporation, and purchase
services from third party providers, such as insurance, legal and accounting
services and air transportation services, on behalf of Revlon, Inc. and its
subsidiaries, including Products Corporation, to the extent requested by
Products Corporation, and (ii) Products Corporation is obligated to provide
certain professional and administrative services, including employees, to
MacAndrews Holdings (and its affiliates) and purchase services from third party
providers, such as insurance and legal and accounting services, on behalf of
MacAndrews Holdings (and its affiliates) to the extent requested by MacAndrews
Holdings, provided that in each case the performance of such services does not
cause an unreasonable burden to MacAndrews Holdings or Products Corporation, as
the case may be. Products Corporation reimburses MacAndrews Holdings for the
allocable costs of the services purchased for or provided to Products
Corporation and its subsidiaries and for reasonable out-of-pocket expenses
incurred in connection with the provision of such services. MacAndrews Holdings
(or such affiliates) reimburses Products Corporation for the allocable costs of
the services purchased for or provided to MacAndrews Holdings (or such
affiliates) and for the reasonable out-of-pocket expenses incurred in connection
with the purchase or
F-38
provision of such services. The net amounts reimbursed by (paid to) MacAndrews
Holdings to Products Corporation for the services provided under the
Reimbursement Agreements for 2002, 2001 and 2000, were $0.8, $(0.2) and $0.9,
respectively. Each of Revlon, Inc. and Products Corporation, on the one hand,
and MacAndrews Holdings, on the other, has agreed to indemnify the other party
for losses arising out of the provision of services by it under the
Reimbursement Agreements other than losses resulting from its willful misconduct
or gross negligence. The Reimbursement Agreements may be terminated by either
party on 90 days' notice. Products Corporation does not intend to request
services under the Reimbursement Agreements unless their costs would be at least
as favorable to Products Corporation as could be obtained from unaffiliated
third parties. The Company participates in MacAndrews & Forbes' directors and
officers insurance program, which covers the Company as well as MacAndrews &
Forbes and its other affiliates. The limits of coverage are available on
aggregate losses to any or all of the participating companies and their
respective directors and officers. The Company reimburses MacAndrews & Forbes
for its allocable portion of the premiums for such coverage, which the Company
believes, is more favorable than the premiums the Company could secure were it
to secure stand-alone coverage. The amount paid by the Company to MacAndrews &
Forbes for premiums is included in the amounts paid under the Reimbursement
Agreement.
TAX SHARING AGREEMENT
Holdings, Revlon, Inc., Products Corporation and certain of its
subsidiaries and Mafco Holdings are parties to the Tax Sharing Agreement, which
is described in Note 12. Since payments to be made under the Tax Sharing
Agreement will be determined by the amount of taxes that Revlon, Inc. would
otherwise have to pay if it were to file separate federal, state or local income
tax returns, the Tax Sharing Agreement will benefit Mafco Holdings to the extent
Mafco Holdings can offset the taxable income generated by Revlon, Inc. against
losses and tax credits generated by Mafco Holdings and its other subsidiaries.
There were no cash payments in respect of federal taxes made by Revlon, Inc.
pursuant to the Tax Sharing Agreement for 2002, 2001 and 2000.
REGISTRATION RIGHTS AGREEMENT
Prior to the consummation of Revlon, Inc.'s initial public equity offering,
Revlon, Inc. and Revlon Worldwide Corporation (subsequently merged into REV
Holdings), the then direct parent of Revlon, Inc., entered into the Registration
Rights Agreement and in February 2003 Revlon, Inc. and MacAndrews Holdings
entered into a joinder agreement to the Registration Rights Agreement pursuant
to which REV Holdings and certain transferees of Revlon, Inc.'s Common Stock
held by REV Holdings (the "Holders") have the right to require Revlon, Inc. to
register all or part of Revlon, Inc.'s Class A Common Stock owned by such
Holders, including shares of Class A Common Stock purchased in connection with
the Rights Offering and shares of Class A Common Stock issuable upon conversion
of Revlon, Inc.'s Class B Common Stock and Series B Preferred Stock owned by
such Holders under the Securities Act (a "Demand Registration"); provided that
Revlon, Inc. may postpone giving effect to a Demand Registration up to a period
of 30 days if Revlon, Inc. believes such registration might have a material
adverse effect on any plan or proposal by Revlon, Inc. with respect to any
financing, acquisition, recapitalization, reorganization or other material
transaction, or if Revlon, Inc. is in possession of material non-public
information that, if publicly disclosed, could result in a material disruption
of a major corporate development or transaction then pending or in progress or
in other material adverse consequences to Revlon, Inc. In addition, the Holders
have the right to participate in registrations by Revlon, Inc. of its Class A
Common Stock (a "Piggyback Registration"). The Holders will pay all
out-of-pocket expenses incurred in connection with any Demand Registration.
Revlon, Inc. will pay any expenses incurred in connection with a Piggyback
Registration, except for underwriting discounts, commissions and expenses
attributable to the shares of Revlon, Inc.'s Class A Common Stock sold by such
Holders.
INVESTMENT AGREEMENT AND MAFCO LOAN AGREEMENTS
See Note 19 - "Subsequent Event."
OTHER
Pursuant to a lease dated April 2, 1993 (the "Edison Lease"), Holdings
leased to Products Corporation the Edison research and development facility for
a term of up to 10 years with an annual rent of $1.4 and certain shared
operating expenses payable by Products Corporation, which, together with the
annual rent, were not to exceed $2.0 per
F-39
year. In August 1998, Holdings sold the Edison facility to an unrelated third
party, which assumed substantially all liability for environmental claims and
compliance costs relating to the Edison facility, and in connection with the
sale Products Corporation terminated the Edison Lease and entered into a new
lease with the new owner. Holdings agreed to indemnify Products Corporation
through September 1, 2013 to the extent rent under the new lease exceeds rent
that would have been payable under the terminated Edison Lease had it not been
terminated. The net amounts reimbursed by Holdings to Products Corporation with
respect to the Edison facility for 2002, 2001 and 2000 were $0.2, $0.2 and $0.2,
respectively.
Effective September 2001, Revlon, Inc. acquired from Holdings all the
assets and liabilities of the Charles of the Ritz business (which Revlon, Inc.
contributed to Products Corporation in the form of a capital contribution), in
consideration for 400,000 newly issued shares of Revlon, Inc.'s Class A Common
Stock and 4,333 shares of newly issued voting (with 433,333 votes in the
aggregate) Series B Preferred Stock which are convertible into 433,333 shares in
the aggregate of Revlon, Inc.'s Class A Common Stock, which conversion rights
were approved by the stockholders of Revlon, Inc. at its 2002 Annual Meeting of
Stockholders. As Holdings and Products Corporation are under common control, the
transaction has been accounted for at historical cost in a manner similar to
that of a pooling of interests and, accordingly, all prior period financial
statements presented have been restated as if the acquisition took place at the
beginning of such periods. An investment banking firm rendered its written
opinion that the terms of the transaction were fair from a financial standpoint
to Revlon, Inc. The effect of the acquisition was to increase both operating
income and net income by $2.3 and $0.9 for 2001 and 2000, respectively. The net
equity of the Charles of the Ritz business is included in total stockholders'
deficiency at December 31, 2002.
During 2002, 2001 and 2000 Products Corporation leased certain facilities
to MacAndrews & Forbes or its affiliates pursuant to occupancy agreements and
leases. These included space at Products Corporation's New York headquarters and
through January 31, 2001 at Products Corporation's offices in London. The rent
paid to Products Corporation for 2002, 2001 and 2000 was $0.3, $0.5 and $0.9,
respectively.
The Credit Agreement and Products Corporation's 12% Notes are supported by,
among other things, guarantees from Revlon, Inc., and, subject to certain
limited exceptions, all of the domestic subsidiaries of Products Corporation.
The obligations under such guarantees are secured by, among other things, the
capital stock of Products Corporation and, subject to certain limited
exceptions, the capital stock of all of Products Corporation's domestic
subsidiaries and 66% of the capital stock of Products Corporation's and its
domestic subsidiaries' first-tier foreign subsidiaries.
In March 2002, prior to the passage of the Sarbanes-Oxley Act of 2002,
Products Corporation made an advance of $1.8 to Mr. Jack L. Stahl, the Company's
President and CEO, pursuant to his employment agreement which was entered into
in February 2002 for tax assistance related to a grant of restricted stock
provided to Mr. Stahl pursuant to such agreement, which loan bears interest at
the applicable federal rate. In May 2002, prior to the passage of the
Sarbanes-Oxley Act of 2002, Products Corporation made an advance of $2.0 to Mr.
Stahl pursuant to his employment agreement in connection with the purchase of
his principal residence in the New York City metropolitan area, which loan bears
interest at the applicable federal rate, $0.1 of which was repaid during 2002.
Pursuant to his employment agreement, Mr. Stahl receives from Products
Corporation additional compensation payable on a monthly basis equal to the
amount actually paid by him in respect of interest and principal on such $2.0
advance, plus a gross up for any taxes payable by Mr. Stahl as a result of such
additional compensation.
During 2000, Products Corporation made an advance of $0.8 to Mr. Douglas
Greeff, Executive Vice President and CFO, pursuant to his employment agreement,
which loan bears interest at the applicable federal rate. Mr. Greeff repaid $0.2
and $0.2 during 2002 and 2001, respectively. Pursuant to his employment
agreement, Mr. Greeff is entitled to receive bonuses from Products Corporation,
payable on each May 9th commencing on May 9, 2001 and ending on May 9, 2005, in
each case equal to the sum of the principal and interest on the advance repaid
in respect of such year by Mr. Greeff, provided that he is employed by Products
Corporation on each such May 9th, which bonus installments were paid to Mr.
Greeff in each of May 2001 and 2002.
In February 2002, Products Corporation entered into a separation agreement
with Mr. Jeffrey M. Nugent, the Company's former President and CEO, pursuant to
which the parties agreed to an offset of obligations whereby Products
Corporation canceled Mr. Nugent's obligation to repay principal and interest on
a loan in the amount of $0.5 that was
F-40
made in installments of $0.4 in 1999 and $0.1 in 2000 pursuant to Mr. Nugent's
employment agreement, in exchange for the cancellation of Products Corporation's
obligation to pay Mr. Nugent a special bonus on January 15, 2003 pursuant to his
employment agreement.
Mr. Nugent's spouse provided consulting services in 2000 and 2001 for
product and concept development, for which Products Corporation paid her $0.1 in
2001.
During 2002, 2001 and 2000, Products Corporation made payments of nil, $0.1
and $0.1, respectively, to a fitness center, in which an interest is owned by
members of the immediate family of Mr. Donald Drapkin, who is a member of
Revlon, Inc.'s Board of Directors, for discounted health club dues for an
executive health program of Products Corporation.
During 2002, 2001 and 2000, Products Corporation made payments of $0.3,
$0.3 and $0.2, respectively, to Ms. Ellen Barkin (spouse of Mr. Perelman) under
a written agreement pursuant to which she provides voiceover services for
certain of the Company's advertisements.
The law firm from of which Mr. Edward Landau was Of Counsel to and from
which he retired in January 2003, Wolf, Block, Schorr and Solis-Cohen LLP,
provided legal services to Products Corporation during 2002, 2001 and 2000 and
it is anticipated that such firm may continue to provide such services in 2003.
An investment bank of which Mr. Vernon Jordan became a Managing Director in
January 2000, Lazard Freres & Co. LLC, provided investment banking services to
Revlon, Inc. and its subsidiaries during 2001.
During 2002, 2001 and 2000 Products Corporation placed advertisements in
magazines and other media operated by Martha Stewart Living Omnimedia, Inc.
("MSLO"), which is controlled by Ms. Stewart, who also serves as MSLO's Chairman
and Chief Executive Officer. Products Corporation paid MSLO $2.5, $2.1 and $1.5
for such services in 2002, 2001 and 2000, respectively, which fees were less
than 1% of the Company's estimate of MSLO's consolidated gross revenues for
2002, 2001 and 2000, respectively. Products Corporation's decision to place
advertisements for its products in MSLO's magazines and other media was based
upon their popular appeal to women.
During 2002, Products Corporation obtained advertising, media buying and
direct marketing services, and during 2001 and 2000 obtained public relations,
advertising and media buying services, from various subsidiaries of WPP Group
plc ("WPP"). Ms. Robinson is employed by one of WPP's subsidiaries, however, Ms.
Robinson is neither an executive officer of, nor does she hold any material
equity interest in, WPP. Products Corporation paid WPP $1.1, $2.0 and $3.2 for
such services in 2002, 2001 and 2000, respectively, which fees were less than 1%
of the Company's estimate of WPP's consolidated gross revenues for 2002, 2001
and 2000, respectively. Products Corporation's decision to engage WPP was based
upon its professional expertise in understanding the advertising and public
relations needs of the consumer packaged goods industry, as well as its global
presence in many of the international markets in which Products Corporation
operates.
During 2002 and 2001, Products Corporation employed Mr. Perelman's daughter
in a marketing position, with compensation paid in each of 2002 and 2001 of less
than $0.1.
During 2002 and 2001, Products Corporation employed Mr. Drapkin's daughter
in a marketing position, with compensation paid in each of 2002 and 2001 of less
than $0.1.
16. COMMITMENTS AND CONTINGENCIES
The Company currently leases manufacturing, executive, including research
and development, and sales facilities and various types of equipment under
operating and capital lease agreements. Rental expense was $27.5, $29.0 and
$33.0 for the years ended December 31, 2002, 2001 and 2000, respectively.
Minimum rental commitments under all noncancelable leases, including those
pertaining to idled facilities, with remaining lease terms in excess of one year
from December 31, 2002 aggregated $46.9; such commitments for each of the five
years subsequent to December 31, 2002 are $9.3, $7.6, $7.0, $5.2 and $4.2,
respectively. Such amounts exclude the minimum rentals to be received by the
Company in the future under noncancelable subleases of $2.8.
F-41
The Company has minimum purchase commitments with suppliers of finished
goods, raw materials and components. The minimum purchase commitments under
these agreements aggregated $103.8; such commitments for each of the five years
subsequent to December 31, 2002 are $48.9 $21.9, $21.8, $11.2 and nil,
respectively. The amount the Company purchased under minimum purchase
commitments during 2002, 2001 and 2000 was $63.7, $32.0 and $14.9, respectively.
The Company and its subsidiaries are defendants in litigation and
proceedings involving various matters. In the opinion of the Company's
management, based upon advice of its counsel handling such litigation and
proceedings, adverse outcomes, if any, will not result in a material effect on
the Company's consolidated financial condition or results of operations.
On April 17, 2000, the plaintiffs in the six purported class actions filed
in October and November 1999 by each of Thomas Comport, Boaz Spitz, Felix Ezeir
and Amy Hoffman, Ted Parris, Jerry Krim and Dan Gavish individually and
allegedly on behalf of others similarly situated to them against Revlon, Inc.,
certain of its present and former officers and directors and the parent of
Revlon, Inc., REV Holdings, alleging among other things, violations of Rule
10b-5 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
filed an amended complaint, which consolidated all of the actions under the
caption "In Re Revlon, Inc. Securities Litigation" and limited the alleged class
to security purchasers during the period from October 29, 1997 through October
1, 1998. In December 2002, the defendants, including the Company, entered into
an agreement in principle to settle the litigation. The final written agreement
reflecting this agreement in principle, which was executed in January 2003 and
which remains subject to the approval by the court, provides that the defendants
will obtain complete releases from the participating members of the alleged
class. In connection with this tentative settlement and a related settlement of
the defendants' insurance claim for this matter and the Gavish matter described
below (the "Insurance Settlement"), the Company recorded the settlement in the
fourth quarter of 2002.
A purported class action lawsuit was filed on September 27, 2000, in the
United States District Court for the Southern District of New York on behalf of
Dan Gavish, Tricia Fontan and Walter Fontan individually and allegedly on behalf
of all others similarly situated who purchased the securities of Revlon, Inc.
and REV Holdings between October 2, 1998 and September 30, 1999 (the "Second
Gavish Action"). In November 2001, plaintiffs amended their complaint. The
amended complaint alleges, among other things, that Revlon, Inc., certain of its
present and former officers and directors and REV Holdings violated, among other
things, Rule 10b-5 under the Exchange Act. In December 2001, the defendants
moved to dismiss the amended complaint. The Company believes the allegations in
the amended complaint are without merit and, if its motion to dismiss is not
granted, intends to vigorously defend against them. In light of the Insurance
Settlement, the Company does not expect to incur any further expense in this
matter.
F-42
17. Quarterly Results of Operations (unaudited)
The following is a summary of the unaudited quarterly results of
operations:
YEAR ENDED DECEMBER 31, 2002
-----------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER (c)
---------------- --------------- ------------- ---------------
Net sales ................................. $ 275.4 $ 308.2 $ 323.2 $ 212.6
Gross profit .............................. 166.4 188.4 201.6 59.3
Net loss (a) .............................. (46.1) (38.9) (22.1) (179.4)
Basic loss per common share:
Net loss per common share ................ $ (0.88) $ (0.75) $ (0.42) $ (3.44)
=========== ============= =========== =============
Diluted loss per common share:
Net loss per common share ................ $ (0.88) $ (0.75) $ (0.42) $ (3.44)
=========== ============= =========== =============
YEAR ENDED DECEMBER 31, 2001
-----------------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER (d)
---------------- --------------- ------------- ---------------
Net sales ................................. $ 313.6 $ 322.1 $ 320.2 $ 321.7
Gross profit .............................. 182.0 179.1 190.4 181.9
Net loss (b) .............................. (46.5) (56.0) (22.9) (28.3)
Basic loss per common share:
Net loss per common share ................ $ (0.89) $ (1.07) $ (0.44) $ (0.54)
=========== ============= =========== =============
Diluted loss per common share:
Net loss per common share ................ $ (0.89) $ (1.07) $ (0.44) $ (0.54)
=========== ============= =========== =============
(a) Includes restructuring costs of $4.0, $3.2, $2.1 and $4.3 in the first,
second, third and fourth quarters, respectively. (See Note 2).
(b) Includes restructuring costs of $14.6, $7.9, $3.0 and $12.6 in the
first, second, third and fourth quarters, respectively. (See Note 2).
(c) During 2002 the Company recorded expenses of $104.2 (of which $99.3 was
recorded in the fourth quarter of 2002) related to the implementation of the
stabilization and growth phase of the Company's plan.
(d) In the fourth quarter of 2001, the Company recorded a charge of $6.9
related to increased sales returns, trade spending and inventory adjustments in
the Company's Argentine operations. Additionally, the Company recorded a loss of
$3.6 from an early extinguishment of debt.
18. GEOGRAPHIC, FINANCIAL AND OTHER INFORMATION
The Company manages its business on the basis of one reportable operating
segment. See Note 1 for a brief description of the Company's business. As of
December 31, 2002, the Company had operations established in 17 countries
outside of the U.S. and its products are sold throughout the world. The Company
is exposed to the
F-43
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 are affected by fluctuations in foreign currency exchange rates. Net
sales by geographic area are presented by attributing revenues from external
customers on the basis of where the products are sold. During 2002, 2001 and
2000, Wal-Mart and its affiliates worldwide accounted for approximately 22.5%,
19.7% and 16.5%, respectively, of the Company's consolidated net sales. The
Company expects that Wal-Mart and a small number of other customers will, in the
aggregate, continue to account for a large portion of the Company's net sales.
Although the loss of Wal-Mart or one or more of the Company's other customers
that may account for a significant portion of the Company's sales, or any
significant decrease in sales to these customers or any significant decrease in
retail display space in any of these customers' stores, could have a material
adverse effect on the Company's business, financial condition or results of
operations, the Company has no reason to believe that any such loss of customer
or decrease in sales will occur. In January 2002, Kmart Corporation filed a
petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. On
January 24, 2003, Kmart announced that it had filed its proposed plan of
reorganization with the U.S. Bankruptcy Court and that it was positioned to
emerge from bankruptcy on or about April 30, 2003. Throughout 2002 and
continuing into 2003 Kmart continued to close underperforming stores. Kmart
accounted for less than 5% of the Company's net sales in 2002. Although the
Company plans to continue doing business with Kmart for the foreseeable future
and, based upon the information currently available, believe that Kmart's
bankruptcy proceedings and store closings will not have a material adverse
effect on the Company's business, financial condition or results of operations,
there can be no assurances that further deterioration, if any, in Kmart's
financial condition will not have such an effect on the Company. In January
2003, J.C. Penney Corp. announced that it will be discontinuing color cosmetics
in most of its stores. J.C. Penney carries the Company's Ultima II brand,
however the Company's sales to J.C. Penney accounted for less than 1% of the
Company's total sales during 2002. Accordingly, the Company does not believe
that this discontinuance will have a material adverse effect on the Company's
future business, financial condition or results of operations.
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 U.S. operations. During the third quarter of
2002, the Company reclassified its South African operations from the European
region to the Far East region to reflect the management organization
responsibility for that country. Accordingly, the following information reflects
these changes for all periods presented.
YEAR ENDED DECEMBER 31,
----------------------------------------
2002 2001 2000
---------- ------------- ------------
GEOGRAPHIC AREAS:
Net sales:
United States ........................... $ 716.1 $ 825.1 $ 824.5
Canada .................................. 44.0 45.2 49.5
---------- ----------- ----------
United States and Canada ................ 760.1 870.3 874.0
International ........................... 359.3 407.3 535.4
---------- ----------- ----------
$ 1,119.4 $1,277.6 $1,409.4
========== =========== ==========
DECEMBER 31,
--------------------------
2002 2001
------------ -----------
Long-lived assets:
United States ........................... $ 395.6 $ 410.6
Canada .................................. 3.5 2.5
------------ -----------
United States and Canada ................ 399.1 413.1
International ........................... 74.6 71.6
------------ -----------
$ 473.7 $ 484.7
============ ===========
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2002 2001 2000
------------ ------------- ----------------
CLASSES OF SIMILAR PRODUCTS:
Net sales:
Cosmetics, skin care and fragrances ..... $ 723.9 $ 831.0 $ 879.8
Personal care and professional .......... 395.5 446.6 529.6
------------ ------------- ----------------
$ 1,119.4 $ 1,277.6 $ 1,409.4
============ ============= ================
F-44
19. SUBSEQUENT EVENT
In December 2002, the Company's principal stockholder, MacAndrews & Forbes
proposed providing the Company with up to $150 in cash in order to help fund a
portion of the costs and expenses associated with implementing the stabilization
and growth phase of the Company's plan and for general corporate purposes. The
Company's Board of Directors appointed a special committee of independent
directors to evaluate the proposal made by MacAndrews & Forbes. The special
committee reviewed and considered the proposal and negotiated enhancements to
the terms of the proposal. In February 2003, the enhanced proposal was
recommended to the Company's Board of Directors by the special committee of the
Company's Board of Directors and approved by the Company's full board.
In connection with MacAndrews & Forbes' enhanced proposal, in February
2003 the Company entered into an investment agreement with MacAndrews & Forbes
(the "Investment Agreement") pursuant to which the Company will undertake a $50
equity rights offering (the "Rights Offering") that will allow its stockholders
to purchase additional shares of the Company's Class A Common Stock. Pursuant to
the Rights Offering, the Company will distribute to each stockholder of record
of its Common Stock, as of the close of business on a record date to be set by
the Board of Directors, at no charge, a pro rata number of transferable
subscription rights for each share of Common Stock owned. The subscription
rights will enable the holders to purchase their pro rata portion of such number
of shares of Class A Common Stock equal to (a) $50 divided by (b) the
subscription price, which will be equal to the greater of (1) $2.30,
representing 80% of the closing price per share of the Company's Class A Common
Stock on the NYSE on January 30, 2003, and (2) 80% of the closing price per
share of its Class A Common Stock on the NYSE on the record date of the Rights
Offering. Such number may be adjusted in an equitable manner to avoid fractional
rights and/or shares of Class A Common Stock and to ensure that the gross
proceeds from the Rights Offering equals $50.
Pursuant to the over-subscription privilege, each rights holder that
exercises its basic subscription privilege in full may also subscribe for
additional shares of Class A Common Stock at the same subscription price per
share, to the extent that other stockholders do not exercise their subscription
rights in full. If an insufficient number of shares is available to fully
satisfy the over-subscription privilege requests, the available shares will be
sold pro rata among subscription rights holders who exercised their
over-subscription privilege based on the number of shares each subscription
rights holder subscribed for under the basic subscription privilege.
As a Revlon, Inc. stockholder, MacAndrews & Forbes will receive its pro
rata subscription rights and would also be entitled to exercise an
over-subscription privilege. However, MacAndrews & Forbes has agreed not to
exercise either its basic or over-subscription privileges. Instead, MacAndrews &
Forbes has agreed to purchase the shares of the Company's Class A Common Stock
that it would otherwise have been entitled to receive pursuant to its basic
subscription privilege (equal to approximately 83% of the rights distributed in
the Rights Offering, or $41.5) in a private placement direct from the Company.
In addition, if any shares remain following the exercise of the basic
subscription privileges and the over-subscription privileges by other right
holders, MacAndrews & Forbes will backstop the Rights Offering by purchasing the
remaining shares of Class A Common Stock offered but not purchased by other
stockholders (approximately 17% or an additional $8.5), also in a private
placement.
In addition, in accordance with the enhanced proposal, MacAndrews & Forbes
has also provided a $100 million term loan to Products Corporation (the
"MacAndrews & Forbes $100 million term loan"). If, prior to the consummation of
the Rights Offering, Products Corporation has fully drawn the MacAndrews &
Forbes $100 million term loan and the implementation of the stabilization and
growth phase of the Company's plan causes the Company to require some or all of
the $50 of funds that the Company would raise from the Rights Offering,
MacAndrews & Forbes has agreed to advance the Company these funds prior to
closing the Rights Offering by purchasing up to $50 of newly-issued shares of
the Company's Series C preferred stock which would be redeemed with the proceeds
the Company receives from the Rights Offering (this investment in the Company's
Series C preferred stock (which is non-voting, non-dividend paying and
non-convertible) is referred to as the "$50 million Series C preferred stock
investment"). The MacAndrews & Forbes $100 million term loan has a final
maturity date of December 1, 2005 and interest on such loan of 12.0% is not
payable in cash, but will accrue and be added to the principal amount each
quarter and be paid in full at final maturity. The Company expects that it will
issue the subscription rights and consummate the Rights Offering in the second
quarter of 2003, subject to the effectiveness of the registration statement
(which the Company filed with the Commission on February 5, 2003). Based on this
expectation, the Company anticipates that Products
F-45
Corporation will be required to draw on the MacAndrews & Forbes $100 million
term loan before the Rights Offering is consummated in order to continue the
implementation of the stabilization and growth phase of the Company's plan and
for general corporate purposes. However, the Company does not currently
anticipate that it will require that MacAndrews & Forbes make the $50 million
Series C preferred stock investment.
Additionally, MacAndrews & Forbes has also agreed to provide Products
Corporation with an additional $40 line of credit during 2003, which amount will
increase to $65 on January 1, 2004 (the "MacAndrews & Forbes $40-65 million line
of credit") (the MacAndrews & Forbes $100 million term loan and the MacAndrews &
Forbes $40-65 million line of credit are referred to as the "Mafco Loans" and
the Rights Offering and the Mafco Loans are referred to as the "M&F
Investments") and which will be available to Products Corporation through
December 31, 2004, provided that the MacAndrews & Forbes $100 million term loan
is fully drawn and MacAndrews & Forbes has purchased an aggregate of $50 of the
Company's Series C preferred stock (or if the Company has consummated the Rights
Offering and redeemed any outstanding shares of Series C preferred stock). The
MacAndrews & Forbes $40-65 million line of credit will bear interest payable in
cash at a rate of the lesser of (i) 12.0% and (ii) 0.25% less than the rate
payable from time to time on Eurodollar loans under Products Corporation's
Credit Agreement (which rate, after giving effect to the amendment in February
2003 to Products Corporation's Credit Agreement, is 8.25% as of March 1, 2003).
The Company does not expect that Products Corporation will draw on the
MacAndrews & Forbes $40-65 million line of credit during 2003.
In connection with the transactions with MacAndrews & Forbes described
above, and as a result of the Company's operating results for the fourth quarter
of 2002 and the effect of the acceleration of the Company's implementation of
the stabilization and growth phase of its plan, Products Corporation entered
into an amendment in February 2003 of its Credit Agreement with its bank lenders
and secured waivers of compliance with certain covenants under the Credit
Agreement. In particular, EBITDA (as defined in the Credit Agreement) was $35.2
for the four consecutive fiscal quarters ended December 31, 2002, which was less
than the minimum of $210.0 required under the EBITDA covenant of the Credit
Agreement for that period and the Company's leverage ratio was 5.09:1.00, which
was in excess of the maximum ratio of 1.4:1.00 permitted under the leverage
ratio covenant of the Credit Agreement for that period. Accordingly, the Company
sought and secured waivers of compliance with these covenants for the fourth
quarter of 2002 and, in light of the Company's expectation that the continued
implementation of the stabilization and growth phase of the Company's plan would
affect the ability of Products Corporation to comply with these covenants during
2003, the Company also secured an amendment to eliminate the EBITDA and leverage
ratio covenants for the first three quarters of 2003 and a waiver of compliance
with such covenants for the fourth quarter of 2003 expiring on January 31, 2004.
The amendment to the Credit Agreement also included the substitution of a
minimum liquidity covenant requiring the Company to maintain a minimum of $20 of
liquidity from all available sources at all times through January 31, 2004 and
certain other amendments to allow for the M&F Investments and the implementation
of the stabilization and growth phase of the Company's plan, including specific
exceptions from the limitations under the indebtedness covenant to permit the
MacAndrews & Forbes $100 million term loan and the MacAndrews & Forbes $40-65
million line of credit and to exclude the proceeds from the M&F Investments from
the mandatory prepayment provisions of the Credit Agreement, and to increase the
maximum limit on capital expenditures (as defined in the Credit Agreement) from
$100 to $115 for 2003. The amendment also increased the applicable margin on
loans under the existing credit agreement by 0.5%, the incremental cost of which
to the Company, assuming the Credit Agreement is fully drawn, would be $1.1 from
February 5, 2003 through the end of 2003.
F-46
SCHEDULE II
REVLON, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(DOLLARS IN MILLIONS)
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND OTHER AT END
OF YEAR EXPENSES DEDUCTIONS OF YEAR
---------- ---------- ------------ ---------
YEAR ENDED DECEMBER 31, 2002:
Applied against asset accounts:
Allowance for doubtful accounts ............... $ 8.3 $ 9.5 $ (2.0)(1) $ 15.8
Allowance for volume and early payment
discounts ................................... $ 7.1 $ 31.7 $ (30.6)(2) $ 8.2
YEAR ENDED DECEMBER 31, 2001:
Applied against asset accounts:
Allowance for doubtful accounts ............... $ 7.6 $ 3.5 $ (2.8)(1) $ 8.3
Allowance for volume and early payment
discounts .................................... $ 8.5 $ 30.0 $ (31.4)(2) $ 7.1
YEAR ENDED DECEMBER 31, 2000:
Applied against asset accounts:
Allowance for doubtful accounts ............... $ 14.6 $ (0.9) $ (6.1)(1) $ 7.6
Allowance for volume and early payment
discounts ................................... $ 12.6 $ 34.2 $ (38.3)(2) $ 8.5
- -----------------
Notes:
(1) Doubtful accounts written off, less recoveries, reclassifications and
foreign currency translation adjustments.
(2) Discounts taken, reclassifications and foreign currency translation
adjustments.
F-47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Revlon, Inc.
(Registrant)
By: /s/ Jack L. Stahl By: /s/ Douglas H. Greeff By: /s/ Laurence Winoker
- ------------------------- ---------------------------------- ---------------------------------------
Jack L. Stahl Douglas H. Greeff Laurence Winoker
President, Chief Executive Executive Vice Senior Vice President,
Officer and Director President and Corporate Controller and
Chief Financial Officer Treasurer
Dated: March 21, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant on
March 21, 2003 and in the capacities indicated.
Signature Title
* Chairman of the Board and Director
- -----------------------------------
(Ronald O. Perelman)
* Director
- -----------------------------------
(Howard Gittis)
* Director
- -----------------------------------
(Donald G. Drapkin)
/s/ Jack L. Stahl President, Chief Executive Officer and Director
- -----------------------------------
(Jack L. Stahl)
* Director
- -----------------------------------
(Meyer Feldberg)
* Director
- -----------------------------------
(Vernon E. Jordan, Jr.)
* Director
- -----------------------------------
(Edward J. Landau)
* Director
- ----------------------------------
(Linda Gosden Robinson)
* Director
- ----------------------------------
(Terry Semel)
* Director
- ----------------------------------
(Martha Stewart)
* Robert K. Kretzman, by signing his name hereto, does hereby sign this
report on behalf of the directors of the registrant after whose typed names
asterisks appear, pursuant to powers of attorney duly executed by such directors
and filed with the Securities and Exchange Commission.
By: /s/ Robert K. Kretzman
Robert K. Kretzman
Attorney-in-fact
CERTIFICATIONS
I, Jack L. Stahl, certify that:
1. I have reviewed this annual report on Form 10-K of Revlon, Inc. (the
"Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Jack L. Stahl
----------------------------
Jack L. Stahl
President and Chief Executive
Officer of Revlon, Inc.
Date: March 21, 2003
CERTIFICATIONS
I, Douglas H. Greeff, certify that:
1. I have reviewed this annual report on Form 10-K of Revlon, Inc. (the
"Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Douglas H. Greeff
---------------------------------
Douglas H. Greeff
Executive Vice President and Chief Financial Officer
of Revlon, Inc.
Date: March 21, 2003
EXHIBIT INDEX
2. PLAN OF ACQUISITION ETC.
2.1 Investment Agreement, dated as of February 5, 2003 among Revlon,
Inc., Products Corporation and MacAndrews & Forbes (incorporated by
reference to Exhibit 2.1 to the Current Report on Form 8-K of
Products Corporation filed with the Commission on February 5, 2003
(the "Products Corporation February 2003 Form 8-K"))
3. CERTIFICATE OF INCORPORATION AND BY-LAWS.
3.1 Amended and Restated Certificate of Incorporation of Revlon, Inc.
dated March 4, 1996 (incorporated by reference to Exhibit 3.4 to the
Quarterly Report on Form 10-Q of Revlon, Inc. for the quarterly
period ended March 31, 1996).
3.2 Amended and Restated By-laws of Revlon, Inc., dated as of June 30,
2001 (incorporated by reference to Exhibit 3.2 to the Quarterly
Report on Form 10-Q of Revlon, Inc. for the quarterly period ended
June 30, 2001 (the "Revlon 2001 Second Quarter Form 10-Q")).
3.3 Certificate of Designations, Powers, Preferences and Rights of
Series B Convertible Preferred Stock of Revlon, Inc. (incorporated
by reference to Exhibit 3.2 to the Registration Statement on Form
S-8 of Revlon, Inc. filed with the Commission on October 11, 2001,
File No. 333- 71378).
4. INSTRUMENTS DEFINING THE RIGHT OF SECURITY HOLDERS, INCLUDING
INDENTURES.
4.1 Indenture, dated as of November 26, 2001, among Products
Corporation, the Guarantors party thereto, including Revlon, Inc.,
as parent guarantor, and Wilmington Trust Company, as trustee,
relating to the 12% Senior Secured Notes due 2005 (incorporated by
reference to Exhibit 4.2 to the Current Report on Form 8-K of
Products Corporation filed with the Commission on November 30, 2001
(the "Products Corporation November 2001 Form 8-K")).
4.2 Revlon Pledge Agreement, dated as of November 30, 2001, between
Revlon, Inc., as pledgor, in favor of Wilmington Trust Company, as
note collateral agent (the "Note Collateral Agent") (incorporated by
reference to Exhibit 4.2 to the Annual Report on Form 10-K of
Products Corporation for the year ended December 31, 2001 (the
"Products Corporation 2001 Form 10- K")).
4.3 Company Pledge Agreement (Domestic), dated as of November 30, 2001,
between Products Corporation, as pledgor, in favor of Wilmington
Trust Company, as Note Collateral Agent (incorporated by reference
to Exhibit 4.3 to the Products Corporation 2001 Form 10-K).
4.4 Subsidiary Pledge Agreement (Domestic), dated as of November 30,
2001, between RIROS Corporation, as pledgor, in favor of Wilmington
Trust Company, as Note Collateral Agent (incorporated by reference
to Exhibit 4.4 to the Products Corporation 2001 Form 10-K).
4.5 Subsidiary Pledge Agreement (Domestic), dated as of November 30,
2001, between Revlon International Corporation, as pledgor, in favor
of Wilmington Trust Company, as Note Collateral Agent (incorporated
by reference to Exhibit 4.5 to the Products Corporation 2001 Form
10-K).
4.6 Subsidiary Pledge Agreement (Domestic), dated as of November 30,
2001, between PPI Two Corporation, as pledgor, in favor of
Wilmington Trust Company, as Note Collateral Agent (incorporated by
reference to Exhibit 4.6 to the Products Corporation 2001 Form
10-K).
4.7 Company Pledge Agreement (International), dated as of November 30,
2001, between Products Corporation, as pledgor, in favor of
Wilmington Trust Company, as Note Collateral Agent (incorporated by
reference to Exhibit 4.7 to the Products Corporation 2001 Form
10-K).
4.8 Subsidiary Pledge Agreement (International), dated as of November
30, 2001, between RIROS Corporation, as pledgor, in favor of
Wilmington Trust Company, as Note Collateral Agent (incorporated by
reference to Exhibit 4.8 to the Products Corporation 2001 Form
10-K).
4.9 Subsidiary Pledge Agreement (International), dated as of November
30, 2001, between Revlon International Corporation, as pledgor, in
favor of Wilmington Trust Company, as Note Collateral Agent
(incorporated by reference to Exhibit 4.9 to the Products
Corporation 2001 Form 10-K).
4.10 Subsidiary Pledge Agreement (International), dated as of November
30, 2001, between PPI Two Corporation, as pledgor, in favor of
Wilmington Trust Company, as Note Collateral Agent (incorporated by
reference to Exhibit 4.10 to the Products Corporation 2001 Form
10-K).
4.11 Company Security Agreement, dated as of November 30, 2001, between
Products Corporation, as grantor, in favor of Wilmington Trust
Company, as Note Collateral Agent (incorporated by reference to
Exhibit 4.11 to the Products Corporation 2001 Form 10-K).
4.12 Subsidiary Security Agreement, dated as of November 30, 2001, among
Almay, Inc., Carrington Parfums Ltd., Charles of the Ritz Group
Ltd., Charles Revson Inc., Cosmetics & More, Inc., North America
Revsale Inc., Pacific Finance & Development Corp., PPI Two
Corporation, Prestige Fragrances, Ltd., Revlon Consumer Corp.,
Revlon Government Sales, Inc., Revlon International Corporation,
Revlon Products Corp., Revlon Real Estate Corporation, RIROS
Corporation, RIROS Group Inc. and RIT Inc., each as grantor, in
favor of Wilmington Trust Company, as Note Collateral Agent
(incorporated by reference to Exhibit 4.12 to the Products
Corporation 2001 Form 10-K).
4.13 Company Copyright Security Agreement, dated as of November 30, 2001,
between Products Corporation, as grantor, in favor of Wilmington
Trust Company, as Note Collateral Agent (incorporated by reference
to Exhibit 4.13 to the Products Corporation 2001 Form 10-K).
4.14 Company Patent Security Agreement, dated as of November 30, 2001,
between Products Corporation, as grantor, in favor of Wilmington
Trust Company, as Note Collateral Agent (incorporated by reference
to Exhibit 4.14 to the Products Corporation 2001 Form 10-K).
4.15 Company Trademark Security Agreement, dated as of November 30, 2001,
between Products Corporation, as grantor, in favor of Wilmington
Trust Company, as Note Collateral Agent (incorporated by reference
to Exhibit 4.15 to the Products Corporation 2001 Form 10-K).
4.16 Subsidiary Trademark Security Agreement, dated as of November 30,
2001, between Charles Revson Inc., as grantor, in favor of
Wilmington Trust Company, as Note Collateral Agent (incorporated by
reference to Exhibit 4.16 to the Products Corporation 2001 Form
10-K).
4.17 Subsidiary Trademark Security Agreement, dated as of November 30,
2001, between Charles of the Ritz Group, Ltd., as grantor, in favor
of Wilmington Trust Company, as Note Collateral Agent (incorporated
by reference to Exhibit 4.17 to the Products Corporation 2001 Form
10- K).
4.18 Deed of Trust, Assignment of Rents and Leases and Security
Agreement, dated as of November 30, 2001, between Products
Corporation and First American Title Insurance Company for the use
and benefit of Wilmington Trust Company, as Note Collateral Agent
(incorporated by reference to Exhibit 4.18 to the Products
Corporation 2001 Form 10-K).
4.19 Amended and Restated Collateral Agency Agreement, dated as of May
30, 1997, and further amended and restated as of November 30, 2001,
between Products Corporation, JPMorgan Chase Bank, as bank agent and
as administrative agent, and Wilmington Trust Company, as trustee
and as Note Collateral Agent (incorporated by reference to Exhibit
4.19 to the Products Corporation 2001 Form 10-K).
4.20 Indenture, dated as of February 1, 1998, between Revlon Escrow Corp.
("Revlon Escrow") and U.S. Bank Trust National Association (formerly
known as First Trust National Association), as Trustee, relating to
the 8 1/8% Senior Notes due 2006 (the "8 1/8% Senior Notes
Indenture") (incorporated by reference to Exhibit 4.1 to the
Registration Statement on Form S-1 of Products Corporation filed
with the Commission on March 12, 1998, File No. 333-47875 (the
"Products Corporation March 1998 Form S-1")).
4.21 Indenture, dated as of February 1, 1998, between Revlon Escrow and
U.S. Bank Trust National Association (formerly known as First Trust
National Association), as Trustee, relating to the 8 5/8% Senior
Subordinated Notes Due 2008 (the "8 5/8% Senior Subordinated Notes
Indenture") (incorporated by reference to Exhibit 4.3 to the
Products Corporation March 1998 Form S-1).
4.22 First Supplemental Indenture, dated April 1, 1998, among Products
Corporation, Revlon Escrow, and the Trustee, amending the 8 1/8%
Senior Notes Indenture (incorporated by reference to Exhibit 4.2 to
the Products Corporation March 1998 Form S-1).
4.23 First Supplemental Indenture, dated March 4, 1998, among Products
Corporation, Revlon Escrow, and the Trustee, amending the 8 5/8%
Senior Subordinated Notes Indenture (incorporated by reference to
Exhibit 4.4 to the Products Corporation March 1998 Form S-1).
4.24 Indenture, dated as of November 6, 1998, between Products
Corporation and U.S. Bank Trust National Association, as Trustee,
relating to Products Corporation's 9% Senior Notes due 2006
(incorporated by reference to Exhibit 4.13 to the Quarterly Report
on Form 10-Q of Revlon, Inc. for the quarterly period ended
September 30, 1998).
4.25 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,
J.P. Morgan Securities Inc., as sole arranger and bookrunner, and
JPMorgan Chase Bank, as administrative agent (the "Second Amended
and Restated Credit Agreement") (incorporated by reference to
Exhibit 4.1 to the Products Corporation November 2001 Form 8-K).
4.26 First Amendment dated May 31, 2002 to the Second Amended and
Restated Credit Agreement (incorporated by reference to Exhibit
10.18 to the Quarterly Report on Form 10-Q of Revlon, Inc. for the
quarterly period ended June 30, 2002).
4.27 Second Amendment and First Waiver Agreement dated as of February 5,
2003 to the Second Amended and Restated Credit Agreement
(incorporated by reference to 10.19 to the Products Corporation
February 2003 Form 8-K).
10. MATERIAL CONTRACTS.
10.1 Asset Transfer Agreement, dated as of June 24, 1992, among Holdings,
National Health Care Group, Inc., Charles of the Ritz Group Ltd.,
Products Corporation and Revlon, Inc. (incorporated by reference to
Exhibit 10.1 to Amendment No. 1 to the Revlon, Inc. Registration
Statement on Form S-1 filed with the Commission on June 29, 1992,
File No. 33- 47100).
10.2 Tax Sharing Agreement, entered into as of June 24, 1992, among Mafco
Holdings, Revlon, Inc., Products Corporation and certain
subsidiaries of Products Corporation as amended and restated as of
January 1, 2001 (incorporated by reference to Exhibit 10.2 to the
Products Corporation 2001 Form 10-K).
10.3 Employment Agreement, dated as of February 17, 2002, between
Products Corporation and Jack L. Stahl (incorporated by reference to
Exhibit 10.17 to the Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2002 of Revlon, Inc.).
10.4 Revlon, Inc. 2002 Supplemental Stock Plan (incorporated by reference
to Exhibit 4.1 to the Registration Statement on Form S-8 of Revlon,
Inc. filed with the Commission on June 24, 2002, File No.
333-91040).
10.5 Employment Agreement, amended and restated as of May 9, 2000,
between Products Corporation and Douglas H. Greeff (the "Greeff
Employment Agreement")(incorporated by reference to Exhibit 10.22 to
the Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2000 of Revlon, Inc.).
10.6 Amendment dated June 18, 2001 to the Greeff Employment Agreement
(incorporated by reference to Exhibit 10.6 to the Products
Corporation 2001 Form 10-K).
10.7 Employment Agreement, effective as of August 1, 2001, between
Products Corporation and Paul E. Shapiro (incorporated by reference
to Exhibit 10.7 to the Products Corporation 2001 Form 10-K).
*10.8 Revlon Executive Bonus Plan (Amended and Restated as of September 1,
2002).
10.9 Amended and Restated Revlon Pension Equalization Plan, amended and
restated as of December 14, 1998 (incorporated by reference to
Exhibit 10.15 to the Annual Report on Form 10-K for year ended
December 31, 1998 of Revlon, Inc.).
*10.10 Executive Supplemental Medical Expense Plan Summary dated July 2000.
10.11 Benefit Plans Assumption Agreement, dated as of July 1, 1992, by and
among Holdings, Revlon, Inc. and Products Corporation (incorporated
by reference to Exhibit 10.25 to the Annual Report on Form 10-K for
the year ended December 31, 1992 of Products Corporation).
10.12 Revlon Amended and Restated Executive Deferred Compensation Plan
dated as of August 6, 1999 (incorporated by reference to Exhibit
10.27 to the Quarterly Report on Form 10-Q of Revlon, Inc. for the
quarterly period ended September 30, 1999).
*10.13 Revlon Executive Severance Policy as amended July 1, 2002.
10.14 Revlon, Inc. Fourth Amended and Restated 1996 Stock Plan
(incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-8 of Revlon, Inc. filed with the Commission on
June 24, 2002, File No. 333-91038).
10.15 Purchase Agreement, dated as of February 18, 2000, by and among
Revlon, Inc., Products Corporation, REMEA 2 B.V., Revlon Europe,
Middle East and Africa, Ltd., Revlon International Corporation,
Europeenne de Produits de Beaute S.A., Deutsche Revlon GmbH & Co.
K.G., Revlon Canada, Inc., Revlon de Argentina, S.A.I.C., Revlon
South Africa (Proprietary) Limited, Revlon (Suisse) S.A., Revlon
Overseas Corporation C.A., CEIL Comercial, Exportadora, Industrial
Ltda., Revlon Manufacturing Ltd., Revlon Belgium N.V., Revlon
(Chile) S.A., Revlon (Hong Kong) Limited, Revlon, S.A., Revlon
Nederland B.V., Revlon New Zealand Limited, European Beauty Products
S.p.A. and Beauty Care Professional Products Luxembourg, S.a.r.l.
(incorporated by reference to Exhibit 10.19 to the Annual Report on
Form 10-K for the year ended December 31, 1999 of Revlon, Inc.).
10.16 Purchase and Sale Agreement dated as of July 31, 2001 by and between
Holdings and Revlon, Inc. relating to the Charles of the Ritz
business (incorporated by reference to Exhibit 10.6 to the Products
Corporation 2001 Form 10-K).
10.17 Senior Unsecured Multiple-Draw Term Loan dated as of February 5,
2003, between MacAndrews & Forbes and Products Corporation
(incorporated by reference to Exhibit 10.17 to the Products
Corporation February 2003 Form 8-K).
10.18 Senior Unsecured Supplemental Line of Credit Agreement, dated as of
February 5, 2003, between MacAndrews & Forbes and Products
Corporation (incorporated by reference to Exhibit 10.18 of the
Products Corporation February 2003 Form 8-K).
21. SUBSIDIARIES.
*21.1 Subsidiaries of Revlon, Inc.
23. CONSENTS OF EXPERTS AND COUNSEL.
*23.1 Consent of KPMG LLP.
24. POWERS OF ATTORNEY.
*24.1 Power of Attorney executed by Ronald O. Perelman.
*24.2 Power of Attorney executed by Howard Gittis.
*24.3 Power of Attorney executed by Donald G. Drapkin.
*24.4 Power of Attorney executed by Meyer Feldberg.
*24.5 Power of Attorney executed by Vernon E. Jordan, Jr.
*24.6 Power of Attorney executed by Edward J. Landau
*24.7 Power of Attorney executed by Linda Gosden Robinson.
*24.8 Power of Attorney executed by Terry Semel.
*24.9 Power of Attorney executed by Martha Stewart.
99. ADDITIONAL EXHIBITS.
*99.1 Certification of Jack L. Stahl, Chief Executive Officer, dated March
21, 2003 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002.
*99.2 Certification of Douglas H. Greeff, Chief Financial Officer, dated
March 21, 2003 pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
* Filed herewith.