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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 333-23451
REV HOLDINGS LLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3933701
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
35 EAST 62ND STREET, NEW YORK, NEW YORK 10021
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 572-8600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OR 12(g) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
---
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT IS NOT APPLICABLE, AS THERE IS NO PUBLIC MARKET THEREFOR. AS
OF DECEMBER 31, 2002, THE REGISTRANT'S MEMBERSHIP INTEREST IS HELD BY AN
AFFILIATE OF MAFCO HOLDINGS INC.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
REV Holdings LLC (together with its subsidiaries, "REV Holdings" or the
"Company") is a Delaware limited liability company formed in December 2002 in
connection with the conversion of its predecessor, REV Holdings Inc., a Delaware
corporation formed in 1997, into a limited liability company. REV Holdings
conducts its business exclusively through its indirect 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 U.S. 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
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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.
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 owner, MacAndrews & Forbes,
proposed providing Revlon, Inc. 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. Revlon, Inc.'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 Revlon, Inc.'s Board of Directors by the special
committee of Revlon, Inc.'s Board of Directors and approved by Revlon, Inc.'s
full board.
In connection with MacAndrews & Forbes' enhanced proposal, in February
2003 Revlon, Inc. entered into an investment agreement with MacAndrews & Forbes
(the "Investment Agreement") pursuant to which Revlon, Inc. will undertake a $50
million equity rights offering (the "Rights Offering") that will allow its
stockholders to purchase additional shares of Revlon, Inc.'s Class A common
stock, with a par value of $0.01 per share ("Class A Common Stock"). Pursuant to
the Rights Offering, Revlon, Inc. 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 Revlon, Inc.'s Class A Common
Stock on the New York Stock Exchange (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
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, Inc. stockholder, MacAndrews & Forbes, through REV
Holdings, 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
Revlon, Inc.'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
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in the Rights Offering, or $41.5 million) in a private placement direct from
Revlon, Inc. 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 Revlon, Inc. would raise from the Rights Offering,
MacAndrews & Forbes has agreed to advance Revlon, Inc. these funds prior to
closing the Rights Offering by purchasing up to $50 million of newly-issued
shares of Revlon, Inc.'s Series C preferred stock which would be redeemed with
the proceeds Revlon, Inc. receives from the Rights Offering (this investment in
Revlon, Inc.'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. Revlon, Inc. 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 Revlon, Inc. filed with the Securities and Exchange Commission (the
"Commission") on February 5, 2003). Based on this expectation, Revlon, Inc.
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 Revlon, Inc. 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 Revlon, Inc.'s Series C preferred stock (or if Revlon, Inc. 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). Revlon, Inc. 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 Revlon, Inc.'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 Products Corporation'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, Products
Corporation 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, Products Corporation 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.
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The amendment to the Credit Agreement also included the substitution of
a minimum liquidity covenant requiring Products Corporation 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.
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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 Mitchum
Super Lustrous Hi & Dri
New Complexion Jean Nate
Skinlights Revlon Beauty
High Dimension 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 BRANDS Ultima II Ultima II Bozzano
Jeanne Gatineau Jeanne Gatineau Juvena
Cutex
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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.
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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.
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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.
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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
9
sales 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.
10
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 SPACE
LOCATION USE 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
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 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
REV Holdings' membership interest is owned by Revlon Holdings LLC
("Holdings"), whose membership interest in turn is owned indirectly by
MacAndrews & Forbes Holdings Inc. ("MacAndrews Holdings"), a corporation
wholly-owned through Mafco Holdings Inc. ("Mafco Holdings" and, together with
MacAndrews Holdings, "MacAndrews & Forbes") by Ronald O. Perelman. MacAndrews &
Forbes through REV Holdings beneficially owns (i) 11,650,000 shares of the Class
A common stock of Revlon, Inc, with a par value of $0.01 per share (the "Class A
Common Stock") (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., with a par value of $0.01 per
share (the "Class B Common Stock" and, together with the Class A Common Stock,
the "Common Stock"), which together with the shares referred to in clause (i)
above represent approximately 83% of the outstanding shares of Revlon, Inc.
Common Stock, and (iii) all of the outstanding 4,333 shares of Series B
Convertible Preferred Stock of Revlon, Inc. (the "Series B Preferred Stock")
(each of which is entitled to 100 votes and each of which is convertible into
100 shares of Class A Common Stock).
No dividends were declared or paid during 2001 or 2000. The terms of
the 2001 Credit Agreement, the Mafco Loans, the 8 5/8% Notes, the 8 1/8% Notes,
the 9% Notes (each as hereinafter defined) and the 12% Notes currently restrict
the ability of Products Corporation to pay dividends or make distributions to
Revlon, Inc. The terms of the 12% Senior Secured Notes due 2004 (the "New REV
Holdings Notes") currently restrict the ability of REV Holdings to pay dividends
or make distributions. See the Consolidated Financial Statements of the Company
and the Notes thereto and 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."
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(DOLLARS IN MILLIONS)
STATEMENTS OF OPERATIONS DATA (a)(b)(c)(l):
Net sales.................................. $ 1,119.4 $ 1,277.6 $ 1,409.4 $ 1,629.8 $ 2,064.1
Operating (loss) income.................... (114.9)(d)(k) 16.1 (e) 15.9 (f) (212.0)(g) 124.7 (h)
Loss from continuing operations............ (292.0) (184.8)(i) (209.7) (441.9) (145.2)(j)
DECEMBER 31,
---------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(IN MILLIONS)
BALANCE SHEET DATA (b) (c):
Total assets............................... $ 939.8 $ 998.1 $ 1,102.7 $ 1,563.2 $ 1,839.0
Long-term debt, including current portion.. 1,844.8 1,728.6 2,316.7 2,450.8 2,271.2
Total member's deficiency.................. (1,744.3) (1,381.5) (1,863.9) (1,691.1) (1,252.7)
(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
12
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.
(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.
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.
13
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 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 Company-established criteria as outlined in the Company's trade
terms. The Company regularly reviews and revises, when deemed necessary, its
estimates of sales returns based primarily upon actual returns, planned product
discontinuances, and promotional sales, which would permit customers to return
items based upon the Company's trade terms. The Company records estimated sales
returns as a reduction to sales 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.
14
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 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.
15
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.
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).
16
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 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.
17
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 $168.9 for 2002, compared with $165.0 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), higher overall outstanding borrowings and higher interest
expense on the New REV Holdings Notes, partially offset by lower interest
expense due to the cancellation of the Senior Secured Discount Notes due 2001
(the "Old REV Holdings Notes").
Sale of assets and brand, net
In February 2002, Products Corporation completed the disposition of its
Benelux business. As part of this sale, Products Corporation entered into a
long-term distribution agreement with the purchaser pursuant to which the
purchaser distributes the Company's products in Benelux. The purchase price
consisted principally of the assumption of certain liabilities and a deferred
purchase price contingent upon future results of up to approximately $4.7, which
could be received over approximately a seven-year period. In connection with the
disposition, the Company recognized a pre-tax and after-tax net loss of $1.0 in
the first quarter of 2002.
In July 2001, Products Corporation completed the disposition of the
Colorama brand in Brazil. In connection with the disposition the Company
recognized a pre-tax and after-tax loss of $6.5, $6.3 of which was recorded in
the second quarter of 2001. Additionally, the Company recognized a pre-tax and
after-tax 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 $0.4 for 2002, compared with $9.3
for 2001. The decrease in the provision for income taxes for 2002, as compared
to 2001, was attributable to the recognition of tax benefits of approximately
$4.4 relating to the carryback of alternative minimum tax losses resulting from
tax legislation enacted in the first quarter of 2002, which offset the
alternative minimum tax liability of $5.2 recorded in 2001 in connection
18
with the retirement of the Old REV Holdings Notes, partially offset by higher
taxable income in certain markets outside the U.S.
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 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
19
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 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 $165.0 for 2001, compared with $219.4 for 2000.
The decrease in interest expense for 2001, as compared to 2000, is primarily due
to the cancellation of the Old REV Holdings Notes, 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 New REV Holdings Notes and the
12% Notes, which were issued in February 2001 and November 2001, respectively.
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.
20
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.
Provision for income taxes
The provision for income taxes was $9.3 for 2001, compared with $8.6
for 2000. The increase in the provision for income taxes for 2001, as compared
2000, was attributable to the alternative minimum tax liability recorded in 2001
in connection with the retirement of the Old REV Holdings Notes, partially
offset by 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 $122.0, $91.0 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.
21
Net cash provided by (used for) financing activities was $120.0, $50.8
and $(203.7) for 2002, 2001 and 2000, respectively. Net cash provided by
financing activities for 2002 included cash drawn under the Credit Agreement and
advances under the Keepwell Agreement (as hereinafter defined), 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, proceeds from the issuance of
the 12% Notes, a capital contribution from an indirect parent to retire the
remaining portion of the Old REV Holdings Notes and advances under the Keepwell
Agreement, 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, payment of debt issuance costs in
connection with the issuance of the 12% Notes and the 2001 Credit Agreement and
repayment of the remaining portion of the Old REV Holdings Notes. 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 Loan Facility was
fully drawn and $0.3 was available under the Multi-Currency Facility, including
the letters of credit.
On February 12, 2001, REV Holdings issued $80.5 principal amount of its
New REV Holdings Notes, which were issued in exchange for a like principal
amount of Old REV Holdings Notes. The New REV Holdings Notes bear interest at
12% per year, payable semi-annually, and mature on February 1, 2004. 4.2 million
shares of Revlon, Inc. Class A Common Stock owned by REV Holdings were pledged
to secure the New REV Holdings Notes. On March 15, 2001, an affiliate
contributed $667.5 principal amount of Old REV Holdings Notes to REV Holdings,
which were delivered to the trustee for cancellation and contributed $22.0 in
cash to REV Holdings to retire the remaining Old REV Holdings Notes at maturity.
Upon cancellation, the indenture governing the Old REV Holdings Notes was
discharged.
In connection with the transactions with MacAndrews & Forbes described
in "Recent Developments," and as a result of Product Corporation'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 Products Corporation'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, Products Corporation 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
22
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, Products Corporation 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 Products Corporation 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 shares
of Revlon, Inc.'s Class A Common Stock in a private placement equivalent in
number to that represented by its pro rata share, through REV Holdings, of the
rights that would otherwise be 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 Revlon, Inc.
would raise from the Rights Offering, MacAndrews & Forbes would advance Revlon,
Inc. 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
Revlon, Inc. 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 Revlon, Inc. 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 Revlon, Inc. and contributed to Products Corporation 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), funds available for borrowing under the Credit
Agreement and the Mafco Loans and advances under the Keepwell Agreement. Revlon,
Inc. expects that the Rights Offering will be consummated in the second quarter
of 2003, subject to the effectiveness of the registration statement, which
Revlon, Inc. filed with the Commission on February 5, 2003. Based on this
expectation, Revlon, Inc. 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. However,
Revlon, Inc. 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 New REV Holdings Notes contain certain provisions that by
their terms limit REV Holdings' ability to, among other things, incur additional
debt.
The Company's principal uses of funds are expected to be the payment of
operating expenses, 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
23
defined), payments in connection with the Company's restructuring programs
referred to below, debt service payments of the Company and its subsidiaries,
including payments required under Products Corporation's debt instruments and
interest payments under the New REV Holdings Notes.
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 Revlon, Inc. and contributed
to Products Corporation 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),
funds available for borrowing under the Credit Agreement and the Mafco Loans and
advances under the Keepwell Agreement will be sufficient to enable the Company
to cover its operating expenses for 2003, including cash requirements in
connection with the Company's operations, the stabilization and growth phase of
Revlon, Inc.'s plan, cash requirements in connection with the Company's
restructuring programs referred to above and the Company's debt service
requirements of its subsidiaries and interest on the New REV Holdings Notes. 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 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 subsidiary 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 selling its equity securities or reducing
other discretionary spending. The Company has substantial
24
debt maturing in 2004 and 2005, which will require refinancing, consisting of
$80.5 of the New REV Holdings Notes due in 2004 and the following due in 2005:
$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 Products Corporation is unable to
secure such amendment or waiver, it could be required to refinance the Credit
Agreement or repay it with proceeds from the 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, that Products Corporation would not 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.
REV Holdings, as a holding company, will be dependent on distributions
with respect to its approximately 83% ownership interest in Revlon, Inc. from
the earnings generated by Products Corporation and advances under the Keepwell
Agreement (as defined herein) to pay its expenses and to pay interest and the
principal amount at maturity of the New REV Holdings Notes. The terms of the
Credit Agreement, the 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 Revlon, Inc. Amended and Restated 1996 Stock Plan (as may be amended
and restated from time to time, the "Amended Stock Plan").
REV Holdings currently anticipates that it will be dependent upon
advances under the Keepwell Agreement to pay interest when due under the New REV
Holdings Notes. However, the Company currently anticipates that it
25
will be required to adopt one or more alternatives to pay the principal amount
at maturity of the New REV Holdings Notes, such as refinancing its indebtedness,
repaying its indebtedness with the proceeds from the sale of assets or
operations of Revlon, Inc., selling its equity securities or equity securities
of Revlon, Inc. or seeking additional capital contributions or loans from
MacAndrews & Forbes or the Company's other affiliates or third parties. There
can be no assurance that any of the foregoing actions could be effected on
satisfactory terms, that any of the foregoing actions would enable the Company
to pay the principal amount at maturity of the New REV Holdings Notes or that
any of such actions would be permitted by the terms of the indenture governing
the New REV Holdings Notes (the "New Indenture") or any other debt instruments
of the Company and the Company's subsidiaries then in effect, because, among
other reasons, market conditions may be unfavorable for an equity or debt
offering or 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.
REV Holdings has entered into a Keepwell Agreement with GSB Investments
Corp., one of its affiliates (the "Keepwell Agreement"), pursuant to which GSB
Investments Corp. agreed to provide REV Holdings with funds in an amount equal
to any interest payments due on the New REV Holdings Notes, to the extent that
REV Holdings does not have sufficient funds on hand to make such payments on the
applicable due dates. However, the Keepwell Agreement is not a guarantee of the
payment of interest on the New REV Holdings Notes. The obligations of GSB
Investments Corp. under the Keepwell Agreement are only enforceable by REV
Holdings, and may not be enforced by the holders of the New REV Holdings Notes
or the trustee under the New Indenture. The failure of GSB Investments Corp. to
make a payment to REV Holdings under the Keepwell Agreement will not be an event
of default under the New Indenture. Further, the New Indenture has no
requirement that REV Holdings maintain the Keepwell Agreement. In addition,
although REV Holdings has the right to enforce the Keepwell Agreement, there can
be no assurance that GSB Investments Corp. will have sufficient funds to make
any payment to REV Holdings under the Keepwell Agreement or that it will comply
with its obligations under the Keepwell Agreement.
At December 31, 2002, GSB Investments Corp. owned 19.0 million shares
of common stock of Citigroup, Inc. ("Citigroup Common Stock" and "Citigroup",
respectively). At December 31, 2002, the last reported sale price of Citigroup
Common Stock on the NYSE was $35.19 per share. At December 31, 2002, 13.1
million shares of Citigroup Common Stock owned by GSB Investments Corp. were
pledged to secure forward contracts and 0.9 million shares were held in escrow
pursuant to the terms of a stockholders agreement between GSB Investments Corp.
and Citigroup. In February 2003, GSB Investments Corp. settled certain forward
contracts by delivering 1.2 million shares of Citigroup Common Stock to the
counterparty and 0.2 million shares were released from pledge. As of February
28, 2003, GSB Investments Corp. owned 17.8 million shares of Citigroup Common
Stock. At February 28, 2003, 11.7 million shares of Citigroup Common Stock owned
by GSB Investments Corp. were pledged to secure forward contracts and 0.9
million shares of Citigroup Common Stock continue to be held in escrow pursuant
to such stockholders agreement.
Citigroup has paid quarterly dividends, which have increased from $0.12
per share in the first quarter of 2000 to $0.20 per share in the first quarter
of 2003. Pursuant to the forward contracts, GSB Investments Corp. is entitled to
a maximum dividend of $0.18 per share with respect to 3.3 million shares of its
pledged Citigroup Common Stock, while all other pledged shares are not limited
as to dividends. If Citigroup were to continue to pay quarterly dividends at the
current rate of $0.20 per share and GSB Investments Corp. were to continue to
own 17.8 million shares of Citigroup Common Stock, GSB Investments Corp. would
have sufficient income from dividends paid on its Citigroup Common Stock to make
the payments to REV Holdings that it might be required to make under the
Keepwell Agreement. However, there can be no assurance that Citigroup, which the
Company does not control, will continue to pay dividends at this rate, if at
all, or that GSB Investments Corp. will continue to own shares of Citigroup
Common Stock in an amount sufficient to cover advances under the Keepwell
Agreement.
If GSB Investments Corp. fails to comply with its obligations under the
forward contracts that are secured by the pledge of its 11.7 million shares of
Citigroup Common Stock, the beneficiary of such pledge could enforce its rights
with respect to such collateral and could deprive GSB Investments Corp. of its
rights to receive dividends on such pledged shares. GSB Investments Corp. has
advised REV Holdings that, if GSB Investments Corp. does not
26
receive sufficient dividend income from its Citigroup Common Stock to satisfy
its obligations under the Keepwell Agreement, GSB Investments Corp. expects to
obtain capital contributions or loans from affiliates to satisfy such
obligations. There can be no assurance that GSB Investments Corp. could obtain
any such funds because its affiliates are under no obligation to provide them to
GSB Investments Corp.
From August 2001 through December 31, 2002, GSB Investments Corp. made
non-interest bearing advances of $14.2 to REV Holdings under the Keepwell
Agreement, which were used to make the August 1, 2001, February 1, 2002 and
August 1, 2002 interest payments on the New REV Holdings Notes. On February 1,
2003, GSB Investments Corp. made a non-interest bearing advance of $4.8, which
was used to make the February 1, 2003 interest payment on the New REV Holdings
Notes. The Keepwell Agreement will terminate at such time as there are no New
REV Holdings Notes outstanding, at which time GSB Investments Corp. may require
repayment of advances under the Keepwell Agreement.
Pursuant to tax sharing agreements, REV Holdings and Revlon, Inc. may
be required to make tax sharing payments to Mafco Holdings as if REV Holdings or
Revlon, Inc., as the case may be, were filing separate corporate 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 payment other than in respect
of state and local income taxes. REV Holdings currently anticipates that, with
respect to Revlon, Inc., as a result of net operating tax losses and
prohibitions under the Credit Agreement, and, with respect to REV Holdings, as a
result of the absence of business operations or a source of income of its own,
no cash federal tax payment or cash payment in lieu of federal taxes pursuant to
the tax sharing agreements 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 $1,844.8 Nil $1,194.9 $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 $2,058.4 $97.6 $1,293.0 $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
27
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 effect on
the Company's financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources.
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.
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
28
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 EVENTS
See "Recent Developments."
On February 1, 2003, GSB Investments Corp. made a non-interest bearing
advance of $4.8 to the Company which it used to make its February 1, 2003
interest payment on the New REV Holdings Notes.
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.
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:
29
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
RATE NOTIONAL DEC. 31, DEC. 31,
FORWARD CONTRACTS $/FC AMOUNT 2002 2002
---------- --------- --------- -----------
Buy Euros/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.
** The New REV Holdings Notes are excluded from the table above since there is
no active trading market for the New REV Holdings Notes and therefore the
Company is unable to assess the fair market value at this time. The New REV
Holdings Notes mature on February 1, 2004 and have a face value of $80.5.
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.
30
PART III
ITEM 10. MANAGERS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the
Managers (who perform functions with respect to the Company similar to the
functions performed by directors of a corporation) and executive officers of the
Company. Each Manager holds office until his successor is duly appointed and
qualified or until his resignation or removal, if earlier.
NAME POSITION
---- --------
Ronald O. Perelman Chairman of the Board of Managers, Chief
Executive Officer and Manager
Howard Gittis Vice Chairman of the Board of Managers and
Manager
Todd J. Slotkin Executive Vice President, Chief Financial
Officer, Chief
Barry F. Schwartz Executive Vice President and General Counsel
The name, age (as of December 31, 2002), principal occupation for the
last five years, and selected biographical information for each of the Managers
and executive officers of the Company are set forth below.
MR. PERELMAN (59) has been Chairman of the Board of Managers, Manager
and Chief Executive Officer of the Company since December 2002. He was Chief
Executive Officer of REV Holdings Inc. since 1997 and Chairman of the Board of
Directors from 1993 through December 2002. Mr. Perelman has been Chairman of the
Board of Directors of Revlon, Inc. and of Products Corporation since June 1998,
Chairman of the Executive Committees of the Boards of Revlon, Inc. and of
Products Corporation since November 1995, and a Director of Revlon, Inc. 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 corporations
which file reports pursuant to the Securities Exchange Act of 1934, as amended
(the "Exchange Act"): M&F Worldwide and Panavision.
MR. GITTIS (68) has been Vice Chairman of the Board of Managers and
Manager of the Company since December 2002. He was a Director of REV Holdings
Inc. from its formation in 1993 through December 2002 and Vice Chairman of the
Board of REV Holdings Inc. from March 1997 through December 2002. Mr. Gittis has
been a Director of Revlon, Inc. 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 corporations which file reports pursuant to the Exchange Act: Jones
Apparel Group, Inc., Loral Space & Communications Ltd. and M&F Worldwide.
MR. SLOTKIN (49) has been Executive Vice President, Chief Financial
Officer, Chief Accounting Officer and Manager of the Company since December
2002. Mr. Slotkin was Executive Vice President and Chief Financial Officer of
REV Holdings Inc. from March 1999 through December 2002 and was Chief Accounting
Officer from March 2000 through December 2002. He has been Executive Vice
President and Chief Financial Officer of MacAndrews & Forbes and various of its
affiliates since 1999 and was Senior Vice President from 1992 to 1999. Mr.
Slotkin served as an officer of Citicorp for approximately 17 years prior to
joining MacAndrews & Forbes, most recently as a Senior Managing Director.
MR. SCHWARTZ (52) has been Executive Vice President and General Counsel
of the Company since December 2002 and was Executive Vice President and General
Counsel of REV Holdings Inc. from March 1997 through December 2002. He has been
Executive Vice President and General Counsel of MacAndrews & Forbes and various
of its affiliates since 1993. Mr. Schwartz was Senior Vice President of
MacAndrews & Forbes and various of its affiliates from 1989 to 1993.
31
EXECUTIVE OFFICERS OF REVLON, INC.
The Company engages in its business through Revlon, Inc., Products
Corporation and Products Corporation's subsidiaries. The following table sets
forth certain information (ages as of December 31, 2002) concerning the
executive officers of Revlon, Inc. during the year ended December 31, 2002 who
do not also serve as executive officers of the Company.
NAME POSITION
---- --------
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
MR. STAHL (49) has been President and Chief Executive Officer of
Revlon, Inc. and Products Corporation since February 2002 and Director of
Revlon, Inc. and Products Corporation since March 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 Revlon, Inc. 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 Revlon, Inc. 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.
32
ITEM 11. EXECUTIVE COMPENSATION
The Company conducts its business through Revlon, Inc., Products
Corporation and Products Corporation's subsidiaries. For 2002, the Company's
executive officers did not receive compensation from the Company. 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 Revlon, Inc. 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 Revlon, Inc. during 2002 (collectively, the
"Named Executive Officers"), for services rendered in all capacities to Revlon,
Inc. and Products Corporation 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 2001 207,692 500,000 5,571 153,000 100,000 --
and 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 Revlon, Inc. and Products Corporation and its
subsidiaries. For the periods reported, Products Corporation had a bonus
plan (the "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 Revlon, Inc.'s Compensation and
Stock Plan Committee (the "Compensation Committee"). Revlon, Inc. and
Products Corporation did not have any "executive officers" during 2002
other than Messrs. Stahl, Greeff, Shapiro and Nugent. Accordingly, for 2002
Revlon, Inc. and Products Corporation are reporting the compensation of
Messrs. Stahl, Greeff, Shapiro and Nugent. On February 19, 2002, Revlon,
Inc. and Products Corporation announced the 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 Revlon, Inc. and Products Corporation prior to 2001. Effective
February 14, 2002, Jeffrey M. Nugent, Revlon, Inc.'s and Products
Corporation'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 Revlon, Inc. and
Products Corporation 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
33
company-provided automobile, (ii) premiums paid or reimbursed 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 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 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
value of the restricted stock Awards to Mr. Stahl reflected in the table
are based on $3.06, the per share closing price of Revlon, Inc.'s Class A
Common Stock on the NYSE on December 31, 2002. Provided Mr. Stahl remains
continuously employed by Revlon, Inc., his 2002 restricted stock Award will
vest as to one-third of the restricted shares on the day after which such
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 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 Revlon, Inc.
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 Revlon, Inc.
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 Revlon,
Inc.'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 Revlon, Inc. and paid to Mr. Stahl
when, and if, the restrictions on such restricted stock lapse (other than
the subscription rights that Revlon, Inc. 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 Revlon, Inc. and Products Corporation 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
34
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 Revlon, Inc.'s Class A Common Stock on the NYSE on
December 31, 2002. Provided Mr. Greeff remains continuously employed
Revlon, Inc., 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 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 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 Products Corporation'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 Revlon, Inc.'s Class A Common Stock on the NYSE on
December 31, 2002. Provided Mr. Greeff remains continuously employed by
Revlon, Inc., 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 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 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 Revlon, Inc. and Products Corporation 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 Revlon, Inc.'s Class A Common Stock on
35
the NYSE on December 31, 2002. Provided Mr. Shapiro remains continuously
employed by Revlon, Inc., 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 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 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. 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 Revlon, Inc. 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 Products Corporation's 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 Revlon, Inc.
and Products Corporation during all of 2000 and 2001 and part of 2002. Mr.
Nugent ceased employment with Revlon, Inc. and Products Corporation
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 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 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 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 Revlon, Inc.'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 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 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 Revlon, Inc.'s
Class A Common Stock on the Stahl Grant Date, as indicated on the table above.
Provided Mr. Stahl continues his employment with Products Corporation, 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 Revlon, Inc.'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 Products Corporation terminates as a result of (a) Mr.
Stahl's "disability," (b) is terminated by Mr. Stahl with "good reason" or (c)
is terminated by Products Corporation 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 Revlon, Inc.'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 Revlon, Inc.'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 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 $4.05, the per
share closing price on the NYSE of Revlon, Inc.'s Class A Common Stock on such
grant date, as indicated in the table above. On the 2002 Grant Date, Revlon,
Inc. also granted an option to purchase 100,000 shares of Revlon, Inc.'s Class A
Common Stock pursuant to the Amended Stock Plan to Mr. Perelman, the Chairman of
the Board of Directors of Revlon, Inc. 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
37
share closing price on the NYSE of Revlon, Inc.'s Class A Common Stock on the
2002 Grant Date. Also on the 2002 Grant Date, Revlon, Inc. 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 Revlon, Inc., 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 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 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 Revlon, Inc.'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 Revlon, Inc.'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:
VALUE OF IN-THE-
NUMBER OF SECURITIES MONEY OPTIONS
UNDERLYING 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 Revlon, Inc.'s Class A Common Stock. The actual value,
if any, an executive may realize upon exercise of a stock option depends
upon the amount by which the market price of shares of Revlon, Inc.'s Class
A Common Stock exceeds the exercise price per share when the stock options
are exercised.
38
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 of Revlon,
Inc. and Products Corporation 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
non-renewal.
Mr. Greeff's employment agreement with Products Corporation, as
amended, provides that he will serve as Chief Financial Officer of Revlon, Inc.
and Products Corporation 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
of Revlon, Inc. and Products Corporation 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
Products Corporation 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 Products Corporation of a
material provision of such agreement for "good reason" (as defined in Mr.
Stahl's employment agreement), or by Products Corporation 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 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),
39
or if he were to breach such agreement or be terminated by Products Corporation
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 Products Corporation 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 Products Corporation 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 Products
Corporation 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 Products Corporation 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 Products Corporation 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 Products Corporation 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 Products Corporation 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 Products Corporation 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 Products Corporation
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 restricted stock which were granted to him by Revlon, Inc.
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
40
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 Products Corporation 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 Products Corporation 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 Products Corporation 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 Products Corporation 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 Products
Corporation 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 Revlon, Inc. and Products
Corporation 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, Products
Corporation 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 Products 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 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
41
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 non-cash 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.
HIGH 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 Revlon, Inc.
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 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 Revlon, Inc. and whose age and years
42
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 Revlon, Inc., 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 Revlon, Inc. 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 Revlon, Inc. 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
Products Corporation 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Ronald O. Perelman, 35 East 62nd Street, New York, New York, 10021,
through MacAndrews & Forbes, beneficially owns the membership interest in REV
Holdings. MacAndrews & Forbes, through Mafco Holdings (which, through REV
Holdings) beneficially owns (i) 11,650,000 shares of 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 referred
to in clause (i) above represent approximately 83% of the outstanding shares of
Revlon, Inc. Common Stock, and (iii) all of the outstanding 4,333 shares of the
Series B Preferred Stock. Based on the shares referred in clauses (i), (ii) and
(iii) above, Mr. Perelman through Mafco Holdings (which, through REV Holdings)
has approximately 97% of the combined voting power of the outstanding shares of
Common Stock of Revlon, Inc., entitled to vote at its 2003 Annual Meeting of
Shareholders. As of December 31, 2002, 4,186,104 shares of Revlon, Inc. Class A
Common Stock owned by REV Holdings were pledged by REV Holdings (the "Pledged
Shares") to secure $80.5 million principal amount of the New REV Holdings Notes.
From time to time, additional shares of Revlon, Inc.'s Class A Common Stock, the
membership interest in REV Holdings or shares of intermediate holding companies
between Revlon, Inc. 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 Revlon, Inc.'s Class A Common Stock pledged by REV Holdings.
43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MacAndrews & Forbes beneficially owns the membership interest in REV
Holdings. As a result, MacAndrews & Forbes is able to appoint the entire Board
of Managers of REV Holdings and control the vote on all matters submitted to a
vote of REV Holdings' member, including extraordinary transactions such as
mergers or sales of all or substantially all of REV Holdings' assets. MacAndrews
& Forbes is wholly owned by Ronald O. Perelman, who is Chairman of the Board of
Managers, Chief Executive Officer and a Manager of REV Holdings.
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
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 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. REV Holdings does not
expect Revlon, Inc. or Products Corporation to request services under the
Reimbursement Agreements unless their costs would be at least as favorable to
Revlon, Inc. or Products Corporation, as the case may be, as could be obtained
from unaffiliated third parties. Revlon, Inc. and Products Corporation
participate in MacAndrews & Forbes' directors and officers insurance program,
which covers Revlon, Inc. and Products Corporation as well as MacAndrews &
Forbes and its other affiliates. The limits
44
of coverage are available on aggregate losses to any or all of the participating
companies and their respective directors and officers. Revlon, Inc. and Products
Corporation reimburse MacAndrews & Forbes for their allocable portion of the
premiums for such coverage which, the Company believes, is more favorable than
the premiums Revlon, Inc. and Products Corporation could secure were they to
secure stand-alone coverage. The amount paid by Revlon, Inc. and Products
Corporation to MacAndrews & Forbes for premiums is included in the amounts paid
under the Reimbursement Agreements.
In March 1993, REV Holdings and MacAndrews Holdings entered into a reimbursement
agreement pursuant to which MacAndrews Holdings agreed to provide third party
services to REV Holdings on the same basis as it provides services to Revlon,
Inc., and REV Holdings agreed to indemnify MacAndrews Holdings on the same basis
as Revlon, Inc. is obligated to indemnify MacAndrews Holdings under the
Reimbursement Agreements. REV Holdings also participates in MacAndrews & Forbes'
insurance programs, the coverage limits of which are available on aggregate
losses to any or all of the participating companies and their respective
directors and officers. There were no payments made pursuant to this agreement
during 2002.
TAX SHARING AGREEMENTS
Holdings, 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 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, the "1992 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 1992 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 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.
In March 1993, REV Holdings and Mafco Holdings entered into a tax
sharing agreement (as amended, the "1993 Tax Sharing Agreement" and, together
with the 1992 Tax Sharing Agreement, the "Tax Sharing Agreements") pursuant to
which, for all taxable periods beginning on or after January 1, 1993, REV
Holdings will pay to Mafco Holdings amounts equal to the taxes that REV Holdings
would otherwise have to pay if it were to file separate federal, state and local
income tax returns for itself, excluding Revlon, Inc. and its subsidiaries
(including any amounts determined to be due as a result of a redetermination
arising from an audit or otherwise of the tax liability relating to any such
period which is attributable to REV Holdings). In connection with the conversion
of REV Holdings Inc., a Delaware corporation, into a limited liability company
in December 2002, the 1993 Tax Sharing Agreement was amended to provide that REV
Holdings will make tax sharing payments to Mafco Holdings as if it was a taxable
corporation.
Since the payments to be made by Revlon, Inc. under the 1992 Tax
Sharing Agreement and by REV Holdings under the 1993 Tax Sharing Agreement will
be determined by the amount of taxes that Revlon, Inc. or REV Holdings, as the
case may be, would otherwise have to pay if they were to file separate federal,
state or local corporate income tax returns, the Tax Sharing Agreements will
benefit Mafco Holdings to the extent Mafco Holdings can offset the taxable
income generated by Revlon, Inc. or REV Holdings against losses and tax credits
generated by Mafco Holdings and its other subsidiaries. The 1992 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. With respect to REV Holdings, as a result
of the absence of business operations or a source of income of its own, no
federal tax payments or payments in lieu of taxes pursuant to the 1993 Tax
Sharing Agreement were required for 2002 or 2000. With respect to 2001, REV
45
Holdings recorded an alternative minimum tax liability of $5.2 million pursuant
to the 1993 Tax Sharing Agreement related to the retirement of the Old REV
Holdings Notes. However, as a result of tax legislation enacted in the first
quarter of 2002, REV Holdings was able to recognize tax benefits of $4.4 million
in 2002, which was offset against this liability and reduced it to $0.8 million,
which was contributed to capital in 2002. With respect to Revlon, Inc., 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
1992 Tax Sharing Agreement for 2002, 2001 or 2000. Revlon, Inc. had a liability
of $0.9 million to Holdings in respect of alternative minimum taxes for 1997
under the 1992 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
REV Holdings and 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.
46
KEEPWELL AGREEMENT
REV Holdings has entered into the Keepwell Agreement with GSB
Investments Corp., pursuant to which GSB Investments Corp. agreed to provide REV
Holdings with funds in an amount equal to any interest payments due on the New
REV Holdings Notes, to the extent that REV Holdings does not have sufficient
funds on hand to make such payments on the applicable due dates. However, the
Keepwell Agreement is not a guarantee of the payment of interest on the New REV
Holdings Notes. The obligations of GSB Investments Corp. under the Keepwell
Agreement are only enforceable by REV Holdings, and may not be enforced by the
holders of the New REV Holdings Notes or the trustee under the New Indenture
governing the New REV Holdings Notes. The failure of GSB Investments Corp. to
make a payment to REV Holdings under the Keepwell Agreement will not be an event
of default under the New Indenture. Further, the New Indenture has no
requirement that REV Holdings maintain the Keepwell Agreement. In addition,
although REV Holdings has the right to enforce the Keepwell Agreement, there can
be no assurance that GSB Investments Corp. will have sufficient funds to make
any payments to REV Holdings under the Keepwell Agreement or that it will comply
with its obligations under the Keepwell Agreement. During 2002 and 2001, GSB
Investments made non-interest bearing advances of $9.7 million and $4.5 million,
respectively, to REV Holdings under the Keepwell Agreement, which were used to
make interest payments on the New REV Holdings Notes. On February 1, 2003, GSB
Investments Corp. made a non-interest bearing advance of $4.8 million, which was
used to make the February 1, 2003 interest payment on the New REV Holdings
Notes. The Keepwell Agreement will terminate at such time as there are no New
REV Holdings Notes outstanding, at which time GSB Investments Corp. may require
repayment of advances under the Keepwell Agreement. See also "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Financial Condition, Liquidity and Capital Resources."
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
47
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 Products Corporation's
advertisements, which payments were competitive with industry rates for
similarly situated talent.
At December 31, 2002, REV Holdings had an outstanding payable to an
affiliate of approximately $5.0 relating to funds advanced to REV Holdings for
debt issuance costs in 1998 and 2001.
On March 15, 2001, an affiliate contributed $667.5 million principal
amount of Old REV Holdings Notes to REV Holdings, which were delivered to the
trustee for cancellation and contributed $22.0 million in cash to REV Holdings
to retire the remaining Old REV Holdings Notes at maturity.
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 a daughter of Donald
Drapkin, a director of Revlon, Inc., in a marketing position, with compensation
paid for 2002 of less than $80,000.
ITEM 14. 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.
48
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
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, availability of borrowings under the Mafco
Loans and Products Corporation's Credit Agreement and advances
under the Keepwell Agreement being sufficient to satisfy the
Company's cash requirements in 2003, the availability of
advances under the Keepwell Agreement and GSB Investment
Corp.'s plan to obtain capital contributions or loans from its
affiliates to make advances under the Keepwell Agreement if it
has not received sufficient dividend income from its Citigroup
Common Stock and the availability of funds from restructuring
indebtedness, selling assets or operations of Revlon, Inc.,
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. or the sale of equity
securities of REV Holdings to pay the principal amount at
maturity of the New REV Holdings Notes.
(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
49
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;
(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) Revlon, Inc.'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) Products Corporation's plan to refinance its 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). The information available from time to time on such
website 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 forward-looking statement. In addition to
factors that may be described in the Company's filings with the Commission,
including this filing, the following factors, among others, could cause the
Company's actual results to differ materially from those expressed in any
forward-looking statements made by the Company:
(i) difficulties or delays 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;
50
(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;
(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 additional 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,
from restructuring indebtedness or selling assets or
operations of Revlon, Inc., selling additional shares of
Revlon, Inc. or equity securities of REV Holdings or from the
Rights Offering or advances under the Keepwell Agreement or
GSB Investments Corp.'s inability to obtain capital
contributions or loans from its affiliates to make advances
under the Keepwell Agreement if it has not received sufficient
dividend income from its Citigroup Common Stock;
(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;
51
(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 Revlon, Inc. 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 Products Corporation
to refinance its 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.
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* Certificate of Formation of REV Holdings dated December 17,
2002.
3.2* State of Delaware Certificate of Conversion of REV Holdings
from a corporation to a limited liability company dated
December 18, 2002.
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")).
52
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).
53
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).
54
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 Exhibit 10.19 to the
Products Corporation February 2003 Form 8-K).
4.28 Indenture, dated as of February 1, 2001, between REV Holdings
and Wilmington Trust Company, as Trustee, relating to the 12%
Senior Secured Notes due 2004 (incorporated by reference to
Exhibit 4.14 to the Annual Report on Form 10-K of REV
Holdings for the year ended December 31, 2000 (the "REV
Holdings 2000 Form 10-K")).
4.29* Supplemental Indenture No. 1 dated as of December 18, 2002
between REV Holdings and Wilmington Trust Company, as
trustee, relating to the 12% Senior Secured Notes due 2004.
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).
55
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) (incorporated by reference to the Annual
Report on Form 10-K of Revlon, Inc. for the year ended
December 31, 2002 (the "Revlon, Inc. 2002 Form 10-K")).
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 (incorporated by reference to the Revlon, Inc. 2002
Form 10-K).
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
(incorporated by reference to the Revlon, Inc. 2002 Form
10-K).
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).
56
10.19 Tax Sharing Agreement, dated as of March 17, 1993, between
Revlon Worldwide Corporation and Mafco Holdings (incorporated
by reference to Exhibit 10.30 to the Registration Statement
on Form S-1 of Revlon Worldwide Corporation filed with the
Commission on April 2, 1993, File No. 33-60488 (the
"Worldwide 1993 Form S-1")).
10.20* Amendment dated December 18, 2002 to the Tax Sharing
Agreement dated as of March 17, 1993, between Revlon
Worldwide Corporation and Mafco Holdings.
10.21 Indemnity Agreement, dated March 25, 1993, between Revlon
Worldwide Corporation and Revlon (incorporated by reference
to Exhibit 10.32 to the Worldwide 1993 Form S-1).
10.22 Form of Registration Rights Agreement dated March 5, 1996
(the "Registration Rights Agreement") (incorporated by
reference to Exhibit 10.1 to the Annual Report on Form 10-K
for the year ended December 31, 1995 of Revlon Worldwide
Corporation).
10.23 Keepwell Agreement between GSB Investments Corp. and REV
Holdings dated February 12, 2001 (incorporated by reference
to Exhibit 10.21 to the REV Holdings 2000 Form 10-K).
10.24 First Amendment dated as of July 31, 2001 to the Registration
Rights Agreement (incorporated by reference to the Annual
Report on Form 10-K for the year ended December 31, 2001 of
REV Holdings).
10.25* Amended Limited Liability Company Agreement of REV Holdings
dated March 21, 2003.
21. SUBSIDIARIES.
*21.1 Subsidiaries of REV Holdings.
24. POWERS OF ATTORNEY.
*24.1 Power of Attorney executed by Ronald O. Perelman.
*24.2 Power of Attorney executed by Howard Gittis.
99. ADDITIONAL EXHIBITS.
*99.1 Certification of Ronald O. Perelman, Chief Executive Officer,
dated March 31, 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 Todd J. Slotkin, Chief Financial Officer,
dated March 31, 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
57
REV HOLDINGS LLC 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 Member's 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 Managers and Member of
REV Holdings LLC:
We have audited the accompanying consolidated balance sheets of REV Holdings LLC
and subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of operations, member's 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 REV Holdings LLC 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
REV HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
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 ....................................... 39.9 45.6
------------ -------------
Total current assets ......................................... 466.1 512.9
Property, plant and equipment, net ..................................... 133.4 142.8
Other assets ........................................................... 154.4 156.5
Goodwill, net .......................................................... 185.9 185.9
------------ -------------
Total assets ................................................. $ 939.8 $ 998.1
============ =============
LIABILITIES AND MEMBER'S DEFICIENCY
Current liabilities:
Short-term borrowings - third parties ............................ $ 25.0 $ 17.5
Accounts payable ................................................. 92.9 87.0
Accrued expenses and other ....................................... 396.3 285.4
------------ -------------
Total current liabilities .................................... 514.2 389.9
Long-term debt - third parties ......................................... 1,806.5 1,700.0
Long-term debt - affiliates ............................................ 38.3 28.6
Other long-term liabilities ............................................ 325.1 261.1
Member's deficiency:
Member's interest ................................................ - -
Additional paid-in-capital ....................................... 307.5 306.7
Accumulated deficit since June 24, 1992 .......................... (1,919.1) (1,627.1)
Accumulated other comprehensive loss ............................. (132.7) (61.1)
------------ -------------
Total member's deficiency .................................... (1,744.3) (1,381.5)
------------ -------------
Total liabilities and member's deficiency .................... $ 939.8 $ 998.1
============ =============
See Accompanying Notes to Consolidated Financial Statements.
F-3
REV HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS)
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............................................... . 168.9 165.0 219.4
Interest income.................................................. (3.5) (3.9) (2.1)
Amortization of debt issuance costs.............................. 7.7 7.1 9.2
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)
Gain on sale of subsidiary stock................................. - - (1.1)
Loss on early extinguishment of debt............................. - 3.6 -
Miscellaneous, net............................................... 1.2 3.2 0.8
-------------- -------------- --------------
Other expenses, net.......................................... 176.7 191.6 217.0
-------------- -------------- --------------
Loss before income taxes.............................................. (291.6) (175.5) (201.1)
Provision for income taxes............................................ 0.4 9.3 8.6
-------------- -------------- --------------
Net loss.............................................................. $ (292.0) $ (184.8) $ (209.7)
============== ============== ==============
See Accompanying Notes to Consolidated Financial Statements.
F-4
REV HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBER'S DEFICIENCY AND COMPREHENSIVE LOSS
(DOLLARS IN MILLIONS)
ADDITIONAL ACCUMULATED
PAID-IN-CAPITAL OTHER TOTAL
(CAPITAL ACCUMULATED COMPREHENSIVE MEMBER'S
DEFICIENCY) DEFICIT LOSS (a) DEFICIENCY
------------ ------------ ------------------ -------------
Balance, January 1, 2000.............................. $ (390.4) $ (1,232.6) $ (68.1) $ (1,691.1)
Net distribution from affiliate.................. (1.4)(c) (1.4)
Comprehensive loss:
Net loss.................................. (209.7) (209.7)
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......................... (171.4)
------------ ------------ ------------------ -------------
Balance, December 31, 2000............................ (391.8) (1,442.3) (29.8) (1,863.9)
Net distribution from affiliate.................. (1.0)(c) (1.0)
Capital contribution from indirect parent........ 699.5 699.5
Comprehensive loss:
Net loss............. .................... (184.8) (184.8)
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......................... (216.1)
------------ ------------ ------------------ -------------
Balance, December 31, 2001............................ 306.7 (1,627.1) (61.1) (1,381.5)
Net contribution from affiliate.................. 0.8 0.8
Comprehensive loss:
Net loss.................................. (292.0) (292.0)
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......................... (363.6)
------------ ------------ ------------------ -------------
Balance, December 31, 2002............................ $ 307.5 $ (1,919.1) $ (132.7) $ (1,744.3)
============ ============ ================== =============
- --------------------
(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 14).
See Accompanying Notes to Consolidated Financial Statements.
F-5
REV HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31,
---------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 2002 2001 2000
------------ ------------ -------------
Net loss .................................................................. $ (292.0) $ (184.8) $ (209.7)
Adjustments to reconcile net loss to net cash
(used for) provided by operating activities:
Depreciation and amortization......................................... 118.9 116.0 130.5
Amortization of debt discount......................................... 0.2 15.7 74.9
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)
Gain on sale of subsidiary stock.................... ................. - - (1.1)
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 (2.1) 18.8
Increase (decrease) in accounts payable.......................... 6.3 4.4 (21.0)
Increase (decrease) in accrued expenses and other
current liabilities................................... 98.3 (38.4) (80.7)
Purchase of permanent displays.................................... (66.2) (44.0) (51.4)
Other, net........................................................ (13.1) 10.3 7.0
------------ ------------ -------------
Net cash used for operating activities..................................... (122.0) (91.0) (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) (636.0) (538.7)
Net distribution from affiliate............................................ - (1.0) (1.4)
Capital contribution from indirect parent.................................. - 22.0 -
Advances under the Keepwell Agreement...................................... 9.7 4.5 -
Payment of debt issuance costs............................................. (0.3) (25.9) -
------------ ------------ -------------
Net cash provided by (used for) financing activities....................... 120.0 50.8 (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 ......................................................... $ 164.9 $ 139.1 $ 141.3
Income taxes, net of refunds...................................... 3.6 3.4 4.7
Supplemental schedule of noncash financing activities:
Noncash capital contributions from indirect parent to cancel the
Old REV Holdings Notes and pursuant to the tax sharing
agreements........................................................ $ 0.8 $ 677.5 $ -
See Accompanying Notes to Consolidated Financial Statements.
F-6
REV HOLDINGS LLC 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:
REV Holdings LLC (together with its subsidiaries, "REV Holdings" or the
"Company") is a Delaware limited liability company formed in December 2002 in
connection with the conversion of its predecessor, REV Holdings Inc., a Delaware
corporation formed in 1997, into a limited liability company. REV Holdings
conducts its business exclusively through its indirect 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.
REV Holdings has no business operations of its own and its only
material asset is its ownership of approximately 83% of the outstanding shares
of capital stock of Revlon, Inc. (which represents approximately 97% of the
voting power of those outstanding shares), which, in turn, owns all of the
outstanding capital stock of Products Corporation. As such, its net (loss)
income consists primarily of its equity in the net (loss) income of Revlon, Inc.
and accretion of interest expense and amortization of debt issuance costs
related to the REV Holdings Senior Secured Discount Notes due 2001 (the "Old REV
Holdings Notes") and the 12% Senior Secured Notes due 2004 (the "New REV Holding
Notes"). REV Holdings has had no cash flows of its own other than proceeds from
the issuance of the Old REV Holdings Notes, capital contributions in 2001 from
its indirect parent in connection with the repayment of a portion of the Old REV
Holdings Notes and advances under the Keepwell Agreement (as hereinafter
defined) in 2002 and 2001.
The Consolidated Financial Statements include the accounts of REV
Holdings 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 REV Holdings membership interest is owned by its sole member,
Revlon Holdings LLC ("Holdings"), whose membership interest in turn is owned
indirectly by 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.
F-7
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 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.
F-8
At 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, 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 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 long-lived 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 would have been $177.1 and $200.7, 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."
From its formation through December 17, 2002, REV Holdings Inc., for
federal income tax purposes, was included in the affiliated group of which Mafco
Holdings was the common parent, and REV Holdings Inc.'s federal taxable income
and loss was included in such group's consolidated tax return filed by Mafco
Holdings. REV Holdings Inc. was also included in certain state and local returns
of Mafco Holdings or its subsidiaries. REV Holdings, which was formed on
December 18, 2002, is organized as a limited liability company and as such
passes through its federal and certain state taxable income to its member, which
is responsible for income taxes on such taxable income. The 1993 Tax Sharing
Agreement (as hereinafter defined) provides, however, that
F-10
REV Holdings LLC will make tax sharing payments to Mafco Holdings as if it were
a taxable corporation. For all periods presented, federal, state and local
income taxes are provided as if REV Holdings filed its own corporate income tax
returns (excluding Revlon, Inc. and subsidiaries) and as if Revlon, Inc. and its
subsidiaries filed its own separate tax returns. Holdings, Revlon, Inc.,
Products Corporation and certain of its subsidiaries and Mafco Holdings entered
into the 1992 Tax Sharing Agreement and REV Holdings and Mafco Holdings entered
into the 1993 Tax Sharing Agreement each of which is defined and described in
Notes 11 and 14.
PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS:
Products Corporation 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.
Products Corporation 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.
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 Revlon, Inc.'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 as if the Company had applied the fair value
method to its stock-based compensation, which is more fully described in Note 13
as required under the disclosure provisions of Statement No. 123:
F-11
YEAR ENDED DECEMBER 31,
------------------------------------------------
2002 2001 2000
------------- ------------ -------------
Net loss as reported............................................. $ (292.0) $ (184.8) $ (209.7)
Add: Stock-based employee compensation
included in reported net loss, net of related tax effects... 1.7 0.6 -
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects................................. (6.9) (10.2) (11.0)
------------- ------------ -------------
Pro forma net loss............................................... $ (297.2) $ (194.4) $ (220.7)
============= ============ =============
The effects of applying SFAS No. 123 in this pro forma disclosure are
not necessarily indicative of future amounts.
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-12
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.
Products Corporation has various arrangements with its customers
pursuant to its trade terms to reimburse them for a portion of their advertising
costs, which provide advertising benefits to Products Corporation. Additionally,
from time to time Products Corporation may pay fees to customers in order to
expand or maintain shelf space for its products. The costs that Products
Corporation 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.
F-13
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.
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, Products Corporation 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 Products Corporation 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-14
3. DISPOSITIONS
Described below are the principal sales of a product line, certain
brands and facilities entered into by Products Corporation 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
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$145.5 over the 8-year term of such agreement. In exchange, Products Corporation
waived approximately $10.0 of 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............................ 15.4 19.8
-------------- --------------
$ 39.9 $ 45.6
============== ==============
The asset held for sale represents a building in Canada, which Products
Corporation 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-16
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.................................................... 43.6 44.3
Taxes, other than federal income taxes...................... 12.2 5.5
Restructuring costs......................................... 8.3 18.9
Other ...................................................... 35.7 25.3
------------- --------------
$ 396.3 $ 285.4
============= ==============
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 Products Corporation 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
12% Senior Secured Notes due 2004 (f)....................... 80.5 80.5
Advances from Holdings and under the Keepwell Agreement (g). 38.3 28.6
------------- --------------
1,844.8 1,728.6
Less current portion........................................ - -
------------- --------------
$ 1,844.8 $ 1,728.6
============= ==============
(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
F-17
"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. (See Note 18 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, Products Corporation 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 Note 18). 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,
F-18
subject to certain limitations, on a first-priority basis, with specified types
of other obligations incurred or guaranteed 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, with a par value of $0.01 per share
(the "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 18, 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 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 (as hereinafter defined) 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-19
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-20
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 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; 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 the 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-21
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) On February 12, 2001, REV Holdings issued $80.5 principal amount of
its New REV Holdings Notes, which were issued in exchange for a like principal
amount of the Old REV Holdings Notes. The New REV Holdings Notes bear interest
at 12% per year, payable semi-annually, and mature on February 1, 2004. 4.2
million shares of Revlon, Inc. common stock owned by REV Holdings were pledged
to secure the New REV Holdings Notes. On March 15, 2001, an affiliate
contributed $667.5 principal amount of Old REV Holdings Notes to REV Holdings,
which were delivered to the trustee for cancellation and contributed $22.0 in
cash to REV Holdings to retire the remaining Old REV Holdings Notes at maturity.
Upon cancellation, the indenture governing the Old REV Holdings Notes was
discharged.
The New REV Holdings Notes are secured by a pledge of 52 shares of
Class A Common Stock of Revlon, Inc. per $1,000 principal amount of New REV
Holdings Notes and all dividends, cash instruments and property and proceeds
from time to time received in respect of the foregoing shares (collectively, the
"New Collateral"). In addition, the indenture governing the New REV Holdings
Notes (the "New Indenture") contains covenants that, among other things, limit
(i) the issuance of additional debt and redeemable stock by REV Holdings, (ii)
the creation of additional liens on the New Collateral (other than the lien
created by the New Indenture), (iii) the payment of dividends on capital stock
of REV Holdings and the redemption of capital stock of REV Holdings or any of
its direct or indirect parents, (iv) the sale of assets and subsidiary stock
(including by way of consolidations, mergers and similar transactions), and (v)
transactions with affiliates. All of these limitations and prohibitions,
however, are subject to a number of qualifications, which are set forth in the
New Indenture.
The New Indenture contains customary events of default for debt
instruments of such type. The New Indenture includes a cross acceleration
provision which provides that it shall be an event of default under the New
Indenture if any debt of REV Holdings or any of its significant subsidiaries (as
defined in the New Indenture), 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 the New Indenture. If any such event of default
occurs, the trustee under the New Indenture or the holders of at least 25% in
principal amount of the outstanding New REV Holdings Notes may declare all such
notes to be due and payable immediately, provided that the holders of a majority
in aggregate principal amount of the New REV Holdings Notes may, by notice to
the trustee, waive any such default or event of default and its consequences
under the New Indenture.
F-22
(g) 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 remaining balance was $24.1 and is evidenced by
noninterest-bearing promissory notes payable to Holdings that are subordinated
to Products Corporation's obligations under the Credit Agreement. At December
31, 2002, the balance outstanding under the Keepwell Agreement (as discussed
above) was $14.2. The Keepwell Agreement will terminate at such time as there
are no New REV Holdings Notes outstanding, at which time GSB Investments Corp.
may require repayment of advances under the Keepwell Agreement.
The New Indenture contains customary events of default of debt
instruments of such type.
The aggregate amounts of long-term debt maturities (at December 31,
2002), in the years 2003 through 2007 are nil, $80.5, $614.7, $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 18) (which may be advanced
to Revlon, Inc. and contributed to Products Corporation as a result of the $50
million Series C preferred stock investment (as hereinafter defined in Note 18)
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 18)), funds available for borrowing under the Credit Agreement
and the Mafco Loans (as hereinafter defined in Note 18) and advances under the
Keepwell Agreement 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 of its subsidiaries
for 2003 and interest on the New REV Holdings Notes. 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 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 subsidiary
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
selling its equity securities or reducing other discretionary spending. The
Company has substantial debt maturing in 2004 and 2005 which will require
refinancing, consisting of $80.5 of the New REV Holdings Notes due in 2004 and
the following due in 2005: $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 18, 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
F-23
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 Products Corporation 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, as well as
under the New Indenture, 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.
REV Holdings, as a holding company, will be dependent on distributions
with respect to its approximately 83% ownership interest in Revlon, Inc. from
the earnings generated by Products Corporation and advances under the Keepwell
Agreement (as defined herein) to pay its expenses and to pay interest and the
principal amount at maturity of the New REV Holdings Notes. The terms of the
Credit Agreement, the 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.
REV Holdings currently anticipates that it will be dependent upon
advances under the Keepwell Agreement to pay interest when due under the New REV
Holdings Notes. However, the Company currently anticipates that it will be
required to adopt one or more alternatives to pay the principal amount at
maturity of the New REV Holdings Notes, such as refinancing its indebtedness,
repaying its indebtedness with the proceeds from the sale of assets or
operations of Revlon, Inc., selling its equity securities or equity securities
of Revlon, Inc. or seeking additional capital contributions or loans from
MacAndrews & Forbes or the Company's other affiliates or third parties. There
can be no assurance that any of the foregoing actions could be effected on
satisfactory terms, that any of the foregoing actions would enable the Company
to pay the principal amount at maturity of the New REV Holdings Notes or that
any of such actions would be permitted by the terms of the New Indenture or any
other debt instruments of the Company and the Company's subsidiaries then in
effect, because, among other reasons, market conditions may be unfavorable for
an equity or debt offering or 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
F-24
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.
REV Holdings has entered into a Keepwell Agreement with GSB Investments
Corp., one of its affiliates (the "Keepwell Agreement"), pursuant to which GSB
Investments Corp. agreed to provide REV Holdings with funds in an amount equal
to any interest payments due on the New REV Holdings Notes, to the extent that
REV Holdings does not have sufficient funds on hand to make such payments on the
applicable due dates. However, the Keepwell Agreement is not a guarantee of the
payment of interest on the New REV Holdings Notes. The obligations of GSB
Investments Corp. under the Keepwell Agreement are only enforceable by REV
Holdings, and may not be enforced by the holders of the New REV Holdings Notes
or the trustee under the New Indenture. The failure of GSB Investments Corp. to
make a payment to REV Holdings under the Keepwell Agreement will not be an event
of default under the New Indenture. Further, the New Indenture has no
requirement that REV Holdings maintain the Keepwell Agreement. In addition,
although REV Holdings has the right to enforce the Keepwell Agreement, there can
be no assurance that GSB Investments Corp. will have sufficient funds to make
any payment to REV Holdings under the Keepwell Agreement or that it will comply
with its obligations under the Keepwell Agreement.
At December 31, 2002, GSB Investments Corp. owned 19.0 million shares
of common stock of Citigroup, Inc. ("Citigroup Common Stock" and "Citigroup",
respectively). At December 31, 2002, the last reported sale price of Citigroup
Common Stock on the NYSE was $35.19 per share. At December 31, 2002, 13.1
million shares of Citigroup Common Stock owned by GSB Investments Corp. were
pledged to secure forward contracts and 0.9 million shares were held in escrow
pursuant to the terms of a stockholders agreement between GSB Investments Corp.
and Citigroup. In February 2003, GSB Investments Corp. settled certain forward
contracts by delivering 1.2 million shares of Citigroup Common Stock to the
counterparty and 0.2 million shares were released from pledge. As of February
28, 2003, GSB Investments Corp. owned 17.8 million shares of Citigroup Common
Stock. At February 28, 2003, 11.7 million shares of Citigroup Common Stock owned
by GSB Investments Corp. were pledged to secure forward contracts and 0.9
million shares of Citigroup Common Stock continue to be held in escrow pursuant
to such stockholders agreement.
Citigroup has paid quarterly dividends, which have increased from $0.12
per share in the first quarter of 2000 to $0.20 per share in the first quarter
of 2003. Pursuant to the forward contracts, GSB Investments Corp. is entitled to
a maximum dividend of $0.18 per share with respect to 3.3 million shares of its
pledged Citigroup Common Stock, while all other pledged shares are not limited
as to dividends. If Citigroup were to continue to pay quarterly dividends at the
current rate of $0.20 per share and GSB Investments Corp. were to continue to
own 17.8 million shares of Citigroup Common Stock, GSB Investments Corp. would
have sufficient income from dividends paid on its Citigroup Common Stock to make
the payments to REV Holdings that it might be required to make under the
Keepwell Agreement. However, there can be no assurance that Citigroup, which the
Company does not control, will continue to pay dividends at this rate, if at
all, or that GSB Investments Corp. will continue to own shares of Citigroup
Common Stock in an amount sufficient to cover advances under the Keepwell
Agreement.
If GSB Investments Corp. fails to comply with its obligations under the
forward contracts that are secured by the pledge of its 11.7 million shares of
Citigroup Common Stock, the beneficiary of such pledge could enforce its rights
with respect to such collateral and could deprive GSB Investments Corp. of its
rights to receive dividends on such pledged shares. GSB Investments Corp. has
advised REV Holdings that, if GSB Investments Corp. does not receive sufficient
dividend income from its Citigroup Common Stock to satisfy its obligations under
the Keepwell Agreement, GSB Investments Corp. expects to obtain capital
contributions or loans from affiliates to satisfy such obligations. There can be
no assurance that GSB Investments Corp. could obtain any such funds because its
affiliates are under no obligation to provide them to GSB Investments Corp.
From August 2001 through December 31, 2002, GSB Investments Corp. made
non-interest bearing advances of $14.2 to REV Holdings under the Keepwell
Agreement, which were used to make the August 1, 2001, February 1, 2002 and
August 1, 2002 interest payments on the New REV Holdings Notes. On February 1,
2003, GSB Investments Corp. made a non-interest bearing advance of $4.8, which
was used to make the February 1, 2003 interest payment on the New REV Holdings
Notes. The Keepwell Agreement will terminate at such time as there are no New
REV Holdings Notes outstanding, at which time GSB Investments Corp. may require
repayment of advances under the Keepwell Agreement.
F-25
10. 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 Company is unable to assess the
fair market value of the New REV Holdings Notes as there is no active trading
market for the New REV Holdings Notes. The estimated fair value of long-term
debt (excluding amounts due to affiliates of $38.3 and $28.6 at December 31,
2002 and 2001, respectively, and $80.5 under the New REV Holdings Notes) 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.
11. INCOME TAXES
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, the "1992 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 1992 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 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.
In March 1993, REV Holdings and Mafco Holdings entered into a tax
sharing agreement (as amended, the "1993 Tax Sharing Agreement" and, together
with the 1992 Tax Sharing Agreement, the "Tax Sharing Agreements") pursuant to
which, for all taxable periods beginning on or after January 1, 1993, REV
Holdings will pay to Mafco Holdings amounts equal to the taxes that REV Holdings
would otherwise have to pay if it were to file separate federal, state and local
income tax returns for itself, excluding Revlon, Inc. and its subsidiaries
(including any amounts determined to be due as a result of a redetermination
arising from an audit or otherwise of the tax liability relating to any such
period which is attributable to REV Holdings). In connection with the conversion
of REV Holdings Inc., a Delaware corporation into a limited liability company in
December 2002, the 1993 Tax Sharing Agreement was amended to provide that REV
Holdings will make tax sharing payments to Mafco Holdings as if it was a
taxable corporation.
Since the payments to be made by Revlon, Inc. under the 1992 Tax
Sharing Agreement and by REV Holdings under the 1993 Tax Sharing Agreement will
be determined by the amount of taxes that Revlon, Inc. or REV Holdings, as the
case may be, would otherwise have to pay if they were to file separate federal,
state or local corporate income tax returns, the Tax Sharing Agreements will
benefit Mafco Holdings to the extent Mafco Holdings can offset the taxable
income generated by Revlon, Inc. or REV Holdings against losses and tax credits
generated by Mafco Holdings and its other subsidiaries. The 1992 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
F-26
and principal payable by Mafco Holdings on December 31, 2005. With respect to
REV Holdings, as a result of the absence of business operations or a source of
income of its own, no federal tax payments or payments in lieu of taxes pursuant
to the 1993 Tax Sharing Agreement were required for 2002 or 2000. With respect
to 2001, REV Holdings recorded an alternative minimum tax liability of $5.2
pursuant to the 1993 Tax Sharing Agreement related to the retirement of the Old
REV Holdings Notes. However, as a result of tax legislation enacted in the first
quarter of 2002, REV Holdings was able to recognize tax benefits of $4.4 in
2002, which was offset against this liability and reduced it to $0.8, which
amount was contributed to capital in 2002. With respect to Revlon, Inc., 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
1992 Tax Sharing Agreement for 2002, 2001 or 2000. Revlon, Inc. had a liability
of $0.9 to Holdings in respect of alternative minimum taxes for 1997 under the
1992 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 in 2002, which completely offset this liability.
Pursuant to the asset transfer agreement referred to in Note 14,
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.
The Company's loss before income taxes and the applicable provision
(benefit) for income taxes are as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------
Loss before income taxes: 2002 2001 2000
------------- ------------ -------------
Domestic................................................ $ (222.9) $ (109.1) $ (127.4)
Foreign................................................. (68.7) (66.4) (73.7)
------------- ------------ -------------
$ (291.6) $ (175.5) $ (201.1)
============= ============ =============
Provision (benefit) for income taxes:
Federal................................................. $ (5.3) $ 5.2 $ -
State and local......................................... 0.4 0.4 0.4
Foreign................................................. 5.3 3.7 8.2
------------- ------------ -------------
$ 0.4 $ 9.3 $ 8.6
============= ============ =============
Current................................................. $ 8.0 $ 83.7 $ 8.5
Deferred................................................ (5.6) 5.1 0.8
Benefits of operating loss carryforwards................ (2.0) (79.5) (1.9)
Carryforward utilization applied to goodwill............ - - 0.7
Effect of enacted change of tax rates................... - - 0.5
------------- ------------ -------------
$ 0.4 $ 9.3 $ 8.6
============= ============ =============
The effective tax rate on loss before income taxes is reconciled to the
applicable statutory federal income tax rate as follows:
F-27
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 0.1 0.1
Foreign and U.S. tax effects attributable to
operations outside the U.S.............................. (4.0) 0.5 1.1
Change in valuation allowance................................. 42.3 (15.5) 6.5
Sale of businesses............................................ (3.0) 8.3 16.3
Nondeductible amortization expense............................ - 1.2 1.2
Cancellation of indebtedness income........................... - 45.8 13.8
Other......................................................... (0.3) (0.1) 0.3
------------- ------------ -------------
Effective rate................................................ 0.1 % 5.3 % 4.3 %
============= ============ =============
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,
-----------------------------
Deferred tax assets: 2002 2001
------------ -------------
Accounts receivable, principally due to doubtful accounts............... $ 5.0 $ 2.9
Inventories............................................................. 18.9 9.9
Net operating loss carryforwards - domestic............................. 377.4 344.7
Net operating loss carryforwards - foreign.............................. 122.6 128.2
Accruals and related reserves........................................... 5.9 10.0
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................................................................... 35.4 31.0
------------ -------------
Total gross deferred tax assets..................................... 715.7 603.2
Less valuation allowance............................................ (681.7) (565.1)
------------ -------------
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 $116.6 during 2002, decreased by
$72.7 during 2001 and decreased by $27.1 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. During 2001, the Company used
domestic operating loss carryforwards to credit the current provision for income
taxes
F-28
by $75.9. At December 31, 2002, the Company had tax loss carryforwards of
approximately $1,456.2, of which $1,078.2 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-$1,147.9; 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 Agreements, 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 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.
12. POSTRETIREMENT BENEFITS
Pension:
A substantial portion of Products Corporation'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:
Products Corporation 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. Products Corporation 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 Products Corporation's significant pension and
other postretirement plans at the dates indicated is as follows:
F-29
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 Products
Corporation'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-30
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
13. 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. The Company 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 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 the Company 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 1999 to allow the
options to become fully vested on the first anniversary date of the grant.
F-31
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 Revlon, Inc.
achieved certain performance objectives relating to its 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, Revlon, Inc.'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 (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. Additionally, various
option grants made by Revlon, Inc. to its employees vest upon a "change in
control" as defined in the respective stock option agreements. During each of
2002, 2001 and 2000, Revlon, Inc. granted to Mr. Perelman, Chairman of the Board
of Directors, Chief Executive Officer and a Director of Revlon, Inc., 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-32
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 the Company and its
subsidiaries. On September 17, 2002 and June 18, 2001 (the "Grant Dates"), the
Compensation and Stock Plan Committee (the "Compensation Committee") awarded
50,000 shares and 120,000 shares, respectively, of restricted stock to Mr.
Perelman as a director of Revlon, Inc. 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 Revlon, Inc. (or, in the
case of Mr. Perelman, he continuously provides services as a director to Revlon,
Inc.), 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 Revlon, Inc.'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 Revlon, Inc. Class A
Common Stock or Class B common stock, with a par value of $0.01 per share (the
"Class B Common Stock" and together with the Class A Common Stock, the "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 Revlon, Inc. 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-33
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 Revlon, Inc. to enhance Revlon, Inc.'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 of Revlon,
Inc. 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 Revlon, Inc.'s
standard Employee Agreement as to Confidentiality and Non-Competition.
14. 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-34
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. REV Holdings does not expect Revlon, Inc. or Products
Corporation to request services under the Reimbursement Agreements unless their
costs would be at least as favorable to Revlon, Inc. or Products Corporation, as
the case may be, as could be obtained from unaffiliated third parties. Revlon,
Inc. and Products Corporation participate in MacAndrews & Forbes' directors and
officers insurance program, which covers Revlon, Inc. and Products Corporation
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. Revlon, Inc. and Products
Corporation reimburse MacAndrews & Forbes for their allocable portion of the
premiums for such coverage, which the Company believes, is more favorable than
the premiums Revlon, Inc. and Products Corporation could secure were they to
secure stand-alone coverage. The amount paid by Revlon, Inc. and Products
Corporation to MacAndrews & Forbes for premiums is included in the amounts paid
under the Reimbursement Agreement.
In March 1993, REV Holdings and MacAndrews Holdings entered into a
reimbursement agreement pursuant to which MacAndrews Holdings agreed to provide
third party services to REV Holdings on the same basis as it provides services
to Revlon, Inc., and REV Holdings agreed to indemnify MacAndrews Holdings on the
same basis as Revlon, Inc. is obligated to indemnify MacAndrews Holdings under
the Reimbursement Agreements. REV Holdings also participates in MacAndrews &
Forbes' insurance programs, the coverage limits of which are available on
aggregate losses to any or all of the participating companies and their
respective directors and officers. There were no payments made pursuant to this
agreement during 2002.
TAX SHARING AGREEMENTS
Holdings, Revlon, Inc., Products Corporation and certain of its
subsidiaries and Mafco Holdings are parties to the 1992 Tax Sharing Agreement
and REV Holdings and Mafco Holdings are parties to the 1993 Tax Sharing
Agreement, each of which is described in Note 11. Since payments to be made by
Revlon, Inc. under the 1992 Tax Sharing Agreement and REV Holdings under the
1993 Tax Sharing Agreement will be determined by the amount of taxes that
Revlon, Inc. or REV Holdings, as the case may be, would otherwise have to pay if
it were to file separate federal, state or local corporate income tax returns,
the Tax Sharing Agreements will benefit Mafco Holdings to the extent Mafco
Holdings can offset the taxable income generated by Revlon, Inc. or REV Holdings
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 1992 Tax Sharing Agreement for 2002, 2001 and 2000.
With respect to 2001, REV Holdings recorded an alternative minimum tax liability
of $5.2 pursuant to the 1993 Tax Sharing Agreement related to the retirement of
the Old REV Holdings Notes. However, as a result of tax legislation enacted in
the first quarter of 2002, REV Holdings was able to recognize tax benefits of
$4.4 in 2002, which was offset against this liability and reduced it to $0.8,
which was contributed to capital in 2002. There were no cash payments in respect
of federal taxes made by REV Holdings pursuant to the 1993 Tax Sharing Agreement
for 2002 and 2000.
REGISTRATION RIGHTS AGREEMENT
REV Holdings and 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 (as hereinafter defined) 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.
F-35
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. On July 31, 2001, the Registration Rights Agreement was amended to
require Revlon, Inc. to register under the Securities Act all or part of Revlon,
Inc.'s Class A Common Stock issuable upon conversion of Revlon, Inc.'s Series B
Preferred Stock (as hereinafter defined).
KEEPWELL AGREEMENT
REV Holdings has entered into the Keepwell Agreement with GSB
Investments Corp., one of its affiliates, pursuant to which GSB Investments
Corp. agreed to provide REV Holdings with funds in an amount equal to any
interest payments due on the New REV Holdings Notes, to the extent that REV
Holdings does not have sufficient funds on hand to make such payments on the
applicable due dates. However, the Keepwell Agreement is not a guarantee of the
payment of interest on the New REV Holdings Notes. The obligations of GSB
Investments Corp. under the Keepwell Agreement are only enforceable by REV
Holdings, and may not be enforced by the holders of the New REV Holdings Notes
or the trustee under the New Indenture governing the New REV Holdings Notes. The
failure of GSB Investments Corp. to make a payment to REV Holdings under the
Keepwell Agreement will not be an event of default under the New Indenture.
Further, the New Indenture has no requirement that REV Holdings maintain the
Keepwell Agreement. In addition, although REV Holdings has the right to enforce
the Keepwell Agreement, there can be no assurance that GSB Investments Corp.
will have sufficient funds to make any payments to REV Holdings under the
Keepwell Agreement or that it will comply with its obligations under the
Keepwell Agreement. During 2002 and 2001, GSB Investments Corp. made
non-interest bearing advances of $9.7 and $4.5, respectively, to REV Holdings
under the Keepwell Agreement, which were used to make interest payments on the
New REV Holdings Notes. The Keepwell Agreement will terminate at such time as
there are no New REV Holdings Notes outstanding, at which time GSB Investments
Corp. may require repayment of advances under the Keepwell Agreement.
INVESTMENT AGREEMENT AND MAFCO LOAN AGREEMENTS
See Note 18 - "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 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 Convertible Preferred Stock (the "Series B Preferred Stock")
which are convertible into 433,333 shares in the aggregate of Revlon, Inc.'s
Class A Common Stock. 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
F-36
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 member's 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, Revlon,
Inc.'s and Products Corporation'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, Revlon, Inc.'s and Products Corporation's 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, Products Corporation'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 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 Products Corporation's advertisements.
At December 31, 2002, REV Holdings had an outstanding payable to an
affiliate of approximately $5.0 relating to funds advanced to REV Holdings for
debt issuance costs in 1998 and 2001.
F-37
On March 15, 2001, an affiliate contributed $667.5 principal amount of
Old REV Holdings Notes to REV Holdings, which were delivered to the trustee for
cancellation and contributed $22.0 in cash to REV Holdings to retire the
remaining Old REV Holdings Notes at maturity.
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.
15. 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.
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 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-38
16. 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)....................................... (44.3) (41.4) (24.5) (181.8)
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)....................................... (63.1) (59.6) (25.8) (36.3)
(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.
17. 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 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
F-39
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.
GEOGRAPHIC AREAS: YEAR ENDED DECEMBER 31,
--------------------------------------------------------
Net sales: 2002 2001 2000
--------------- --------------- --------------
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,
-----------------------------------
Long-lived assets: 2002 2001
--------------- ---------------
United States ................................... $ 395.6 $ 411.1
Canada........................................... 3.5 2.5
--------------- ---------------
United States and Canada......................... 399.1 413.6
International.................................... 74.6 71.6
--------------- ---------------
$ 473.7 $ 485.2
=============== ===============
CLASSES OF SIMILAR PRODUCTS: YEAR ENDED DECEMBER 31,
--------------------------------------------------------
Net sales: 2002 2001 2000
--------------- --------------- --------------
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-40
18. SUBSEQUENT EVENTS
In December 2002, the Company's principal owner, MacAndrews & Forbes,
proposed providing Revlon, Inc. 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.
Revlon, Inc.'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 Revlon, Inc.'s Board of Directors by the special committee of
Revlon, Inc.'s Board of Directors and approved by Revlon, Inc.'s full board.
In connection with MacAndrews & Forbes' enhanced proposal, in February
2003 Revlon, Inc. entered into an investment agreement with MacAndrews & Forbes
(the "Investment Agreement") pursuant to which Revlon, Inc. will undertake a $50
equity rights offering (the "Rights Offering") that will allow its
stockholders to purchase additional shares of Revlon, Inc.'s Class A Common
Stock. Pursuant to the Rights Offering, Revlon, Inc. 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 Revlon, Inc.'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, through REV
Holdings, 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
Revlon, Inc.'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 Revlon, Inc. 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),
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 Revlon, Inc. would raise from the Rights Offering,
MacAndrews & Forbes has agreed to advance Revlon, Inc. these funds prior to
closing the Rights Offering by purchasing up to $50 of newly-issued shares of
Revlon, Inc.'s Series C preferred stock which would be redeemed with the
proceeds Revlon, Inc. receives from the Rights Offering (this investment in
Revlon, Inc.'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. Revlon, Inc. 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
F-41
statement (which Revlon, Inc. filed with the Commission on February 5, 2003).
Based on this expectation, Revlon, Inc. 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 Revlon, Inc. 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 of
Revlon, Inc.'s Series C preferred stock (or if Revlon, Inc. 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 Revlon, Inc.'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 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 Products
Corporation'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, Products Corporation 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, Products
Corporation 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 Products Corporation 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.
On February 1, 2003, GSB Investments Corp. made a non-interest bearing
advance of $4.8 to the Company which it used to make its February 1, 2003
interest payment on the New REV Holdings Notes.
F-42
SCHEDULE II
REV HOLDINGS LLC 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-43
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.
REV Holdings LLC
(Registrant)
By: /s/ Todd J. Slotkin
----------------------------------------
Todd J. Slotkin
Executive Vice President,
Chief Financial Officer,
Chief Accounting Officer and
Manager
Dated: March 31, 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
31, 2003 and in the capacities indicated.
Signature Title
*/s/ Ronald O. Perelman Chairman of the Board of Managers, Chief Executive
- ----------------------------------- Officer and Manager
(Ronald O. Perelman)
*/s/ Howard Gittis Vice Chairman of the Board of Managers and Manager
- -----------------------------------
(Howard Gittis)
* Todd J. Slotkin, by signing his name hereto, does hereby sign this report on
behalf of the managers of the registrant after whose typed names asterisks
appear, pursuant to powers of attorney duly executed by such managers and filed
with the Securities and Exchange Commission.
By: /s/ Todd J. Slotkin
Todd J. Slotkin
Attorney-in-fact
CERTIFICATIONS
I, Ronald O. Perelman, certify that:
1. I have reviewed this annual report on Form 10-K of REV Holdings LLC (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/ Ronald O. Perelman
-------------------------------
Name: Ronald O. Perelman
Title: Chief Executive Officer
Date: March 31, 2003
CERTIFICATIONS
I, Todd J. Slotkin, certify that:
1. I have reviewed this annual report on Form 10-K of REV Holdings LLC (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/ Todd J. Slotkin
------------------------------------
Name: Todd J. Slotkin
Title: Chief Financial Officer
Date: March 31, 2003