Back to GetFilings.com
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, 1996
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 33-99558
REVLON, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3662955
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Madison Avenue, New York, New York 10022
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 527-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OR 12(g) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- -------------------------------- ----------------------------------------
CLASS A COMMON STOCK NEW YORK STOCK EXCHANGE, INC.
- -------------------------------- ----------------------------------------
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]
AS OF FEBRUARY 12, 1997, 19,875,000 SHARES OF CLASS A COMMON STOCK AND
31,250,000 SHARES OF CLASS B COMMON STOCK WERE OUTSTANDING. 11,250,000 SHARES
OF CLASS A COMMON STOCK AND ALL OF THE SHARES OF CLASS B COMMON STOCK WERE HELD
BY REVLON WORLDWIDE CORPORATION, AN INDIRECTLY WHOLLY OWNED SUBSIDIARY OF MAFCO
HOLDINGS INC. THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S CLASS A COMMON
STOCK HELD BY NON-AFFILIATES (USING NEW YORK STOCK EXCHANGE, INC. CLOSING PRICE
AS OF FEBRUARY 12, 1997) WAS APPROXIMATELY $307,266,000.
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
REVLON, Inc. (and together with its subsidiaries, the "Company")
operates in a single business segment with many different products, which
include an extensive array of glamorous, exciting and innovative cosmetics and
skin care, fragrance, personal care and professional products. REVLON is one of
the world's best known names in cosmetics and is a leading mass market
cosmetics brand. The Company's vision is to provide glamour, excitement and
innovation through quality products at affordable prices. To pursue this
vision, the Company's management team combines the creativity of a cosmetics
and fashion company with the marketing, sales and operating discipline of a
consumer packaged goods company. 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, with
products sold in approximately 175 countries and territories. The Company's
products are marketed under such well-known brand names as REVLON, COLORSTAY,
REVLON AGE DEFYING, ALMAY and ULTIMA II in cosmetics; MOON DROPS, ETERNA 27,
REVLON RESULTS, ALMAY TIME-OFF, ULTIMA II, JEANNE GATINEAU and NATURAL HONEY in
skin care; CHARLIE, FIRE & ICE, CIARA, CHERISH, and JONTUE in fragrances; FLEX,
OUTRAGEOUS, AQUAMARINE, MITCHUM, COLORSILK, JEAN NATE, BOZZANO and COLORAMA in
personal care products; and ROUX FANCI-FULL, REALISTIC, CREME OF NATURE,
FERMODYL, VOILA, COLOMER, CREATIVE NAIL DESIGN SYSTEMS and AMERICAN CREW in
professional products. To further strengthen its consumer brand franchises, the
Company markets each core brand with a distinct and uniform global image
including packaging and advertising, while retaining the flexibility to tailor
products to local and regional preferences.
The Company was founded by Charles Revson, who revolutionized the
cosmetics industry by introducing nail enamels matched to lipsticks in fashion
colors 65 years ago. Today, the Company has leading market positions in many of
its principal product categories in the United States self-select distribution
channel. The Company's leading market positions for its REVLON brand products
include the number one positions in the United States self-select distribution
channel in lip makeup and nail enamel (which the Company has occupied for the
past 20 years) for 1996. The Company has the number two position in face makeup
in the United States self-select distribution channel for 1996. Propelled by
the success of its new product launches and share gains in its existing product
lines, the Company has captured the number one position overall in color
cosmetics (consisting of lip, eye and face makeup and nail enamel) in the
United States self-select distribution channel, where its market share was
21.5% for 1996. The Company also has leading market positions in several
product categories in certain markets outside of the United States, including
in Brazil, Canada, South Africa and Australia.
The self-select distribution channel, in which consumers select their
own purchases without the assistance of an in-store demonstrator, includes in
the United States independent drug stores and chain drug stores (such as
Walgreens, CVS Drug stores, Eckerd Drug stores and Revco), mass volume
retailers (such as Wal-Mart, Target Stores and Kmart) and supermarkets and
combination supermarket/drug stores (such as Pathmark, Albertson's, Kroger's
and Smith's) and, internationally, Boots in the United Kingdom and Western
Europe, and Shoppers Drug Mart in Canada.
The Company operates in a single business segment with many different
products, which include cosmetics and skin care, fragrance and personal care
products ("consumer products"), and hair and nail care products principally for
use in and resale by professional salons ("professional products"). To reflect
the integration of management reporting responsibilities culminating in the
third quarter of 1996, the Company presents its business geographically as its
United States operation, which comprise the Company's business in the United
States, and its International operation, which comprise its business outside of
the United States. The Company previously presented its business as the
Consumer Group, which comprised the Company's consumer products operations
throughout the world (except principally Spain, Portugal, and Italy) and
professional products operations in certain markets, principally in South
Africa and Argentina, and the Professional Group, which comprised the Company's
professional products operations throughout the world (except principally South
Africa and Argentina) and consumer products operations in Spain, Portugal and
Italy.
On March 5, 1996, the Company completed an initial public offering
(the "Offering") in which it issued and sold 8,625,000 shares of its Class A
Common Stock for $24.00 per share. The proceeds, net of underwriter's discount
2
and related fees and expenses, of $187.8 million were contributed to Revlon
Consumer Products Corporation ("Products Corporation") and used to repay
borrowings outstanding under the credit agreement in effect at that time (the
"Former Credit Agreement") and to pay fees and expenses related to the credit
agreement which became effective on March 5, 1996 (the "Credit Agreement").
In January 1996, Products Corporation entered into the Credit
Agreement which became effective upon consummation of the Offering on March 5,
1996. The Credit Agreement includes the following changes from the Former
Credit Agreement, among other things: (i) an extension of the term of the
facilities from June 30, 1997 to December 31, 2000 (subject to earlier
termination in certain circumstances), (ii) a reduction of the interest rates,
(iii) an increase in the amount of the credit facilities from $500 million to
$600 million and (iv) the release of security interests in assets of certain
foreign subsidiaries of Products Corporation which were previously pledged. The
Credit Agreement is comprised of four senior secured facilities: a $130 million
term loan facility, a $220 million multi-currency facility, a $200 million
revolving acquisition facility and a $50 million standby letter of credit
facility.
On June 24, 1992, the Company succeeded to assets and liabilities of
the cosmetics and skin care, fragrance and personal care products business of
Revlon Holdings Inc. ("Holdings"). Holdings retained certain small brands that
historically had not been profitable (the "Retained Brands") and certain other
assets and liabilities. Unless the context otherwise requires, references to
the Company or Revlon relating to dates or periods prior to the formation of
the Company mean the cosmetics and skin care, fragrance and personal care
products business of Holdings to which the Company has succeeded. The Company's
business is conducted through its wholly owned subsidiary Products Corporation.
Unless the context otherwise requires, all references in this Form 10-K to the
Company or Revlon mean Revlon, Inc. and its subsidiaries.
All United States market share and market position data herein for the
Company's brands are based upon retail dollar sales which are derived from A.C.
Nielsen data. A.C. Nielsen measures retail sales volume of products sold in the
United States self-select distribution channel. Such data represent A.C.
Nielsen's estimates based upon data gathered by A.C. Nielsen from market
samples. Such data are therefore subject to some degree of variance.
BUSINESS STRATEGY
The Company's business strategy, which implements its vision and is
intended to continue to improve operating performance, is to:
o Strengthen and broaden its core brands through globalization of marketing
and advertising, product development and manufacturing and through
increasing its emphasis on advertising and promotion.
o Lead the industry in the development and introduction of technologically
advanced innovative products that set new trends.
o Expand the Company's presence in all markets in which the Company
competes and enter new and emerging markets.
o Continue to reduce costs and improve operating efficiencies, customer
service and product quality by reducing overhead, rationalizing factory
operations, upgrading management information systems, globally sourcing
raw materials and components and carefully managing working capital.
o Continue to expand market share and product lines through possible
strategic acquisitions or joint ventures.
3
PRODUCTS
The Company manufactures and markets a variety of products worldwide.
The following table sets forth the Company's principal brands.
- ------------------------------------------------------------------------------------------------------------------------
BRAND COSMETICS SKIN CARE FRAGRANCES PERSONAL CARE PROFESSIONAL
PRODUCTS PRODUCTS
- ------------------------------------------------------------------------------------------------------------------------
Revlon Revlon, ColorStay, Moon Drops, Charlie, Charlie Red, Flex, Flex Balsam, Revlon
Revlon Age Defying, Revlon Results, Charlie White, Outrageous, Professional, Roux
Super Lustrous, Moon Eterna 27 Charlie Sunshine, Aquamarine, Fanci-full,
Drops, Velvet Touch, Fire & Ice, Fire & Mitchum, Lady Realistic, Creme of
New Complexion, Ice Cool, Cherish, Mitchum, Hi & Dri, Nature, Arosci,
Touch & Glow, Lasting, Jontue, Colorsilk, Frost & Sensor Perm,
Lashful, Lengthwise, StreetWear Scents, Glow, Revlon Perfect Perm,
Naturally Glamorous, Ciara Shadings, Jean Fermodyl, Perfect
Custom Eyes, Nate, Roux Touch, Salon
Softstroke Fanci-full, Perfection,
Timeliner, Realistic, Creme Revlonissimo,
StreetWear, Revlon of Nature, Herba Voila, Young Color,
Implements Rich, Fabu-laxer Creative Nail
Design Systems,
Contours, American
Crew, R PRO,
True Cystem
Almay Almay, Time-Off, Time-Off, Almay
Almay Clear Moisture
Complexion Makeup, Balance,
Amazing, One Coat Moisture Renew,
Almay Clear
Complexion
SkinCare
Ultima II Ultima II, Ultima II, Madly, UII
Wonderwear, The Interactives,
Nakeds CHR
Significant Colorama(b), Jeanne Gatineau(b), Floid(b), Versace(a), Bozzano(b), Colomer(b),
Regional Juvena(b), Natural Honey Charlie Gold, Juvena(b), Intercosmo(b),
Brands Jeanne Gatineau(b) Myrurgia(a) Geniol(b), Personal Bio Point,
Colorama(b), Natural Wonder,
Llongueras(b), Llongueras(b)
Bain de Soleil(b),
ZP-11
- ----------------------------------------------------------------------------------------------------------------------
(a) License held for distribution in certain countries outside the
United States.
(b) Trademark owned in certain markets outside the United States.
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 self-select 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.
4
The Company markets several different lines of REVLON lip makeup
(which includes lipstick and liner). The Company's breakthrough COLORSTAY
lipcolor, which uses patented transfer-resistant technology that provides long
wear, is produced in 40 shades. SUPER LUSTROUS, the Company's flagship lipstick
brand, is produced in 57 shades. MOON DROPS, a moisturizing lipstick, is also
produced in 57 shades.
The Company's nail color and nail care lines include enamels, cuticle
preparations and enamel removers. The Company's flagship REVLON nail enamel is
produced in 85 shades and uses a patented formula that provides consumers with
improved wear, application, shine and gloss in a toluene-free and
formaldehyde-free formula. Revlon nail enamel is the number one brand in the
United States self-select distribution channel. STREETWEAR nail enamel,
launched in 1996, is produced in 19 shades targeted at the "trend" consumer.
STRONG WEAR is a patented strengthening nail enamel formula produced in 19
shades, which contains ingredients that provide protection against splitting,
chipping and breaking. The Company sells nail strengtheners, hardeners and
fortifiers and quick dry nail products, including CALCIUM GEL NAIL BUILDER
strengthener and TOP SPEED quick dry base coat and top coat.
The Company sells face makeup, including foundation, powder, blush and
concealers, under such REVLON brand names as REVLON AGE DEFYING, which is
targeted to women in the over 35 age bracket; COLORSTAY which uses proprietary
transfer-resistant technology that provides long wear; and NEW COMPLEXION, for
consumers in the 25 to 49 age bracket.
The Company's eye makeup products include mascaras, eye shadows and
liners. COLORSTAY Eyecolor, and COLORSTAY LASHCOLOR mascara, LASHFUL and
LENGTHWISE mascaras, SOFTSTROKE eyeliners and REVLON CUSTOM EYES and OVERTIME
SHADOW eye shadows are targeted towards women in the 18 to 49 age bracket, and
REVLON AGE DEFYING eye color is targeted to women over 35.
The Company's ALMAY brand consists of a complete line of
hypo-allergenic, dermatologist-tested, fragrance-free cosmetics and skin care
products targeted to consumers who want "healthy looking skin". The Company
positions the ALMAY brand as the clean, natural and healthy choice. ALMAY
products include lip makeup, nail color and nail care products, eye and face
makeup, skin care products, and sunscreen lotions and creams, including
TIME-OFF makeup and skin care, the AMAZING collection, which uses long wear
transfer-resistant technology and includes AMAZING LASH, ALMAY AMAZING eye
makeup, ALMAY AMAZING LASTING makeup, and ALMAY CLEAR COMPLEXION skin care and
makeup and ALMAY EASY-TO-WEAR eyecolor and ONE COAT mascara. The Company
targets ALMAY to value conscious consumers by offering benefits equal or
superior to higher priced products, such as Clinique, at affordable prices.
ALMAY is the leading brand in the hypo-allergenic market in the United States
self-select distribution channel.
The Company sells implements, which include nail and eye grooming
tools such as clippers, scissors, files, tweezers and eye lash curlers. The
Company's implements are sold individually and in sets under the REVLON brand
name.
The Company also sells cosmetics in international markets under
regional brand names including COLORAMA, which is the top selling popular
priced cosmetics line in Brazil, and JUVENA.
The Company's skin care products, including moisturizers, are sold
under the brand names ETERNA 27, MOON DROPS and REVLON RESULTS. In addition,
the Company sells skin care products in international markets under
internationally recognized brand names and under regional brands, including
NATURAL HONEY.
The Company's premium priced cosmetics and skin care products are sold
under the ULTIMA II brand name, which is the Company's flagship premium priced
brand sold throughout the world, and the JEANNE GATINEAU brand name, which is
sold outside the United States. The ULTIMA II line includes the WONDERWEAR
collection, which includes a long-wearing foundation that uses proprietary
technology, cheek and eyecolor products that use patented technology, and
WONDERWEAR LIPSEXXXY lipstick, which uses patented transfer-resistant
technology that provides long wear, and THE NAKEDS makeup, a trend-setting line
of makeup emphasizing neutral colors.
Fragrances. The Company sells a selection of moderately priced and
premium priced fragrances, including perfumes, eau de toilettes and colognes.
The Company's portfolio includes fragrances such as CHARLIE, FIRE & ICE, JONTUE
and CIARA; highly successful line extensions such as CHARLIE RED and CHARLIE
WHITE
5
and new additions such as CHERISH, CHARLIE SUNSHINE and FIRE & ICE COOL and
STREETWEAR SCENTS. The Company's CHARLIE fragrance has been a market leader
since the mid-1970's and, the Company believes, one of the top selling
fragrances worldwide. The Company's premium priced fragrance brands include
CIARA and, in international markets, the Company distributes under license
certain brands including VERSACE, VAN GILS and MYRURGIA.
Personal Care Products. The Company sells a broad line of personal
care consumer products that complements its core cosmetics lines and enables
the Company to meet the consumer's broader beauty care needs. In the
self-select distribution channel, the Company sells haircare, anti-perspirant
and other personal care products, including the FLEX, OUTRAGEOUS and AQUAMARINE
haircare lines throughout the world and, the COLORAMA, JUVENA, LLONGUERAS and
NATURAL HONEY brands outside the United States; the COLORSILK, REVLON SHADINGS,
FROST & GLOW and ROUX FANCI-FULL hair coloring lines in the United States; and
the MITCHUM, LADY MITCHUM and HI & DRI anti-perspirant brands throughout the
world. Certain hair care products, including ROUX FANCI-FULL hair coloring and
PERFECT TOUCH and SALON PERFECTION home permanents, were originally developed
for professional use. The Company also markets hypo-allergenic personal care
products, moisturizers and anti-perspirants, under the ALMAY brand.
Professional Products. The Company sells a comprehensive line of salon
products, including permanent wave preparations, hair relaxers, temporary and
permanent hair coloring products, shampoos, conditioners, styling products and
hair conditioners, to professional salons and beauty supply stores under the
REVLON brand as well as other brand names such as ROUX FANCI-FULL, REALISTIC,
FERMODYL, VOILA, REVLONISSIMO, CREME OF NATURE, COLOMER, FABU-LAXER, LOTTABODY,
NATURAL WONDER, SENSOR and INTERCOSMO. Most of the Company's salon products in
the United States currently are distributed in the non-exclusive distribution
channels, in contrast to those products that are distributed exclusively to
professional salons. R PRO, launched in 1996, is a professionally targeted
cosmetic line being distributed through open line channels. Through Creative
Nail Design, Inc. ("Creative Nail"), which was acquired in November 1995, the
Company sells nail enhancement systems and nail color and treatment products
and services for use by the professional salon industry under the brand name of
CREATIVE NAIL DESIGN SYSTEMS. Through AMERICAN CREW, which was acquired in
April 1996 , the Company sells men's shampoos, conditioners, gels, and other
hair care products for use by professional salons. The Company also sells
retail hair care products under the LLONGUERAS, PERSONAL BIO POINT, GENIOL,
FIXPRAY and LANOFIL brands outside the United States. The Company markets in
salons, beauty supply stores and the self-select distribution channel several
lines of hair relaxers, styling products, hair conditioners and other hair care
products under such names as FABU-LAXER and CREME OF NATURE designed for the
particular needs of ethnic consumers. The Company has developed a new exclusive
line of ethnic products, AROSCI, which was successfully launched in 1996. The
Company also sells wigs and hair pieces to retail outlets and certain
professional salons under the REVLON brand and, pursuant to a license, under
the ADOLFO brand.
MARKETING
The Company's vision is to provide glamour, excitement and innovation
through quality products at affordable prices. The Company's marketing efforts
are designed to implement this vision. The Company has formed Global Marketing
Committees, consisting of managers from the Company's marketing, research and
development, operations, advertising and finance departments from the United
States and abroad, which develop strategies for the Company's current and new
brands and products. The Global Marketing Committees coordinate the Company's
globalization efforts while allowing sufficient flexibility to tailor products
to local and regional preferences.
Consumer Products. The Company markets extensive consumer product
lines at a range of retail prices primarily through the self-select
distribution channel and markets select premium lines through
demonstrator-assisted channels. Each line is distinctively positioned and is
marketed globally with consistently recognizable logos, packaging and
advertising designed to differentiate it from other brands. The Company's
existing consumer product lines are carefully segmented, and new product lines
are developed, to target specific consumer needs as measured by focus groups
and other market research techniques.
The Company uses print and television advertising and point-of-sale
merchandising, including displays and samples. The Company has shifted a
significant portion of its marketing to appeal to a broader audience and has
increased media advertising, particularly national television advertising. The
Company increased advertising expenditures by 17.3% for 1996 over 1995 levels
and by 26.2% for 1995 over 1994 levels. The Company's marketing emphasizes a
uniform global image and product for its portfolio of core brands, including
REVLON, COLORSTAY, REVLON
6
AGE DEFYING, ALMAY, ULTIMA II, FLEX, CHARLIE, OUTRAGEOUS 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 has devoted greater resources to promotional sales of its
permanent line of products and reduced the number of promotional sales of
non-recurring products, which historically have had a higher cost of sales and
resulted in larger sales returns. In the self-select distribution channel, 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. In the demonstrator-assisted distribution channel, the
Company principally uses cooperative advertising programs with retailers,
supported by Company-paid or Company-subsidized demonstrators and coordinated
in-store promotions and displays.
The Company also has developed unique marketing materials such as the
"Revlon Report", a glossy, color pamphlet distributed in magazines and on
merchandising units, available in 30 countries and 16 languages, which
highlights seasonal and other fashion and color trends, describes the Company's
products that address those trends and contains coupons, rebate offers and
other promotional material to encourage consumers to try the Company's
products. The Company has created two Color Mobiles, which are on-the-road
beauty sampling and information vehicles patterned on the innovative vehicles
that launched COLORSTAY lipcolor, that travel to major retailers in the United
States, at which Company trainers educate consumers on the COLORSTAY and REVLON
AGE DEFYING collections and the latest product and shade offerings. The Color
Mobiles create consumer and retail excitement about the Company's new products
and encourage trial and purchase by consumers. 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 display units
that provide information about the Company's products and permit consumers to
test the 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 has its own website which features current product and promotional
information.
Professional Products. Professional products are marketed through
educational seminars, advertising, displays and samples to communicate to
professionals and consumers the quality and performance characteristics of such
products. The shift to exclusive line distributors will significantly reinforce
the Company's marketing and educational efforts with salon professionals. The
Company believes that its presence in the professional markets benefits its
consumer products business since the Company is able to anticipate consumer
trends in hair, nail and skin care, which often appear first in salons.
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 and professional products.
The Company's marketing and research and development groups identify consumer
needs and shifts in consumer preferences in order to develop new product
introductions, tailor line extensions and promotions and redesign or
reformulate existing products to satisfy such needs or preferences. The
Company's Advanced Concept Group consists of a select group of researchers that
conducts research on a wide range of areas to develop new and innovative
technology. The Company independently develops substantially all of its new
products. The Company also has entered into joint research projects with major
universities and commercial laboratories worldwide to develop advanced
technologies.
The Company believes that its Edison, New Jersey facility is one of
the most extensive cosmetics research and development facilities in the United
States. The Edison facility is responsible for all new product research
worldwide. The Edison facility performs research for new products, ideas,
concepts and packaging. Research and development for consumer products is also
conducted at manufacturing facilities in Brazil. Research and development for
the professional products is conducted principally at the Edison facility.
The research and development group at the Edison facility performs
extensive safety and quality tests on the Company's products, including
toxicology, microbiology and package testing. Additionally, quality control
testing is performed at each manufacturing facility.
7
In certain instances, proprietary technology developed for use in
products and packaging is available for licensing to third parties. The Company
received the Innovation Award from the Coalition of NorthEast Governors
("CONEG") for its ENVIRO*GLUV glass decorating technology (which resulted in
significant cost reductions in decorating REVLON AGE DEFYING and COLORSTAY
makeup bottles and REVLON nail enamel bottles in 1996 and which is being
offered for licensing to qualified glass decorators). The CONEG challenge
awards program is a nationwide competition to publicly recognize companies that
make significant contributions to environmental issues relating to packaging
and source reduction.
As of December 31, 1996, the Company employed approximately 200 people
in its research and development activities, including specialists in
pharmacology, toxicology, chemistry, microbiology, engineering, biology,
dermatology and quality control. In 1996, the Company spent approximately $26.3
million, on research and development activities.
MANUFACTURING AND RELATED OPERATIONS AND RAW MATERIALS
The Company is rationalizing its worldwide manufacturing operations
which is intended to lower costs and improve customer service and product
quality. The globalization of the Company's core brands allows it to centralize
production of some product categories for sale throughout the world within
designated facilities and shift production of certain other product categories
to more cost effective manufacturing sites to reduce production costs. Shifts
of production may result in the closing of certain of the Company's less
significant manufacturing facilities, and the Company continually reviews its
needs in this regard. In addition, as part of its efforts to continuously
improve operating efficiencies, the Company attempts to ensure that a
significant portion of its capital expenditures are devoted to improving
operating efficiencies.
In the United States, the Company manufactures REVLON brand color
cosmetics, personal care products and fragrances for sale in the United States,
Japan and most of the countries in Latin America and Southeast Asia at its
Phoenix, Arizona facility. The Company manufactures ULTIMA II cosmetics and
skin treatment products for sale in the United States and most of the countries
in Latin America and Southeast Asia, personal care products for sale in the
United States and ALMAY brand products for sale throughout the world at its
Oxford, North Carolina facility. Nail care and other implements for sale
throughout the world are manufactured at the Company's Irvington, New Jersey
facility and Vista, California facility. The Company manufactures salon and
retail professional products and personal care consumer products for sale in
the United States and Canada at the Company's Jacksonville, Florida facility.
The Phoenix facility has been ISO-9002 certified.
The Company manufactures its entire line of consumer products (except
implements) for sale in most of the countries of Europe at its Maesteg, South
Wales facility. Local production of cosmetics and personal care products
takes place at the Company's facilities in Spain, Canada, Venezuela, Mexico,
New Zealand, Brazil, Australia and South Africa. The manufacture of professional
products for sale by retailers outside the United States has been centralized
principally at the Company's facilities in Ireland, Spain and Italy. Production
of color cosmetics for Japan and Mexico has been shifted to the United States
while production of personal care products for Argentina has been centralized
in Brazil. The Maestag facility has been certified by the British equivalent
of ISO-9002.
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.
The Company's improvements in manufacturing, sourcing and related
operations have contributed to improved customer service, including an
improvement in the percentage of timely order fulfillment at the Company's
manufacturing sites in Oxford, North Carolina; Phoenix, Arizona; Irvington, New
Jersey; and Maesteg, South Wales; and the timeliness and accuracy of new
product and promotion deliveries. To promote the Company's understanding of,
and responsiveness to the needs of its retail customers, the Company assigns
members of senior operations management to lead inter-departmental teams that
visit significant accounts, and has provided retail accounts with a
8
designated customer service representative. As a result of these efforts,
accompanied by stronger and more customer-focused management, the Company has
developed strong relationships with its retailers.
The Company emphasizes safety and increased training of employees
resulting in an improved safety record. The Company anticipates that the
globalization of, and continued improvement in, the quality of its
manufacturing operations will result in lower manufacturing costs.
BUSINESS PROCESS ENHANCEMENTS
The Company's management information systems have been substantially
upgraded to provide comprehensive order processing, production and accounting
support for the Company's business. The Company's expenditures on improvements
to its management information systems were approximately $13 million for 1996.
The Company intends to continue to upgrade management information systems in
1997, which will include improved systems for forecasting, production,
inventory management, order processing, general and fixed asset ledgers and
others. Systems improvements have been and the Company anticipates that they
will continue to be instrumental in contributing to the reduction of the time
from order entry to shipment, improved forecasting of demand and improved
operating efficiencies.
DISTRIBUTION
As a result of its improved customer service and consumer traffic
generated by its products and innovative marketing programs, the Company
believes that its relationships with self-select distribution cosmetic
retailers are the best in the cosmetics industry.
The Company's products are sold in approximately 175 countries and
territories. The Company's worldwide sales force had approximately 2,100 people
as of December 31, 1996, including a dedicated sales force for cosmetics, skin
care and fragrance products in the self-select distribution channel, for the
demonstrator-assisted distribution channel, for personal care products
distribution and for salon distribution. In addition, the Company utilizes
sales representatives and independent distributors to serve specialized markets
and related distribution channels.
United States. The United States operation's net sales accounted for
approximately 58.0% of the Company's 1996 net sales. Of these net sales,
approximately 86% were made in the self-select distribution channel. However,
the Company intends to use premium products such as ULTIMA II to maintain its
presence in the demonstrator-assisted distribution channel. The Company also
sells a broad range of consumer and retail professional products to United
States 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,
1996, 19 licenses were in effect relating to 23 product categories to be
marketed in the self-select distribution channel. Pursuant to the 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
earned royalties, royalty advances and, in some cases, up-front licensing fees.
Products designed for professional use or resale by beauty salons are sold
through wholesale beauty supply distributors and directly to professional
salons. Various hair care products, such as ethnic hair relaxers, scalp
conditioners, shampoos and hair coloring products and wigs and hairpieces are
sold directly and through wholesalers to chain drug stores and mass volume
retailers. Wigs and hairpieces are also sold through mail order direct
marketing, retail outlet malls, salons and certain department stores.
The Company also operates through Prestige Fragrance & Cosmetics, Inc.
("PFC"), a subsidiary of Products Corporation, approximately 200 retail outlet
stores throughout the United States in factory outlet malls, rural areas and
other similar locations that are not disruptive to the Company's principal
distribution channels. In these stores, the Company sells first quality, first
quality excess, returned and refurbished, and discontinued consumer products
and retail professional products, as well as similar products of competing
cosmetics companies. On November 27, 1996, Products Corporation and PFC entered
into an Agreement and Plan of Merger with The Cosmetic Center, Inc. ("Cosmetic
Center") pursuant to which PFC will merge with and into Cosmetic Center, with
Cosmetic Center surviving the merger (the "Merger"). In the Merger, Products
Corporation would receive newly issued Class C common stock of Cosmetic Center
constituting between 74% and 84% of the outstanding common stock. The Merger is
subject to a
9
number of significant conditions, including obtaining financing for Cosmetic
Center and approval of the transaction by Cosmetic Center stockholders, among
other conditions. Subject to satisfaction of these conditions, the transaction
is expected to close during the first quarter of 1997.
International. The International operation's net sales accounted for
approximately 42.0% of the Company's 1996 net sales. The International
operation's ten largest countries in terms of these sales, which include
Brazil, Japan, the United Kingdom, Australia, South Africa, Canada and Spain,
accounted for approximately 30.7% of the Company's net sales in 1996, with
Brazil accounting for approximately 6.1% of the Company's net sales. The
International operation is increasing distribution through the expanding
self-select distribution channels outside the United States, such as drug
stores/chemists, hypermarkets/mass volume retailers and variety stores, as
these channels gain importance. The International operation also distributes
through department stores and specialty stores such as perfumeries. The
International operation's professional products are sold directly to beauty
salons by the Company's direct sales force in Spain, France, Germany, Portugal,
Italy, Mexico and Ireland and through distributors in other countries. The
Company actively sells its products through wholly owned subsidiaries in 26
countries outside of the United States, through joint ventures in India and
Indonesia, and through a large number of distributors and licensees elsewhere
around the world. The Company continues to pursue strategies to establish its
presence in new emerging markets. Such new and emerging markets include Eastern
Europe; South Korea; Southeast Asia; Chile; the Middle East; India; and China,
where in 1996 the Company established a subsidiary with a local minority
partner. In addition, the Company is building a franchise through local
distributorships in northern and central Africa, where the Company intends to
expand the distribution of its products by capitalizing on its market strengths
in South Africa.
CUSTOMERS
The Company's principal customers include chain drug stores and large
mass volume retailers, including such well known retailers as Wal-Mart,
Walgreens, Kmart, Target, CVS Drug Stores, Drug Emporium, American Drug Stores,
Eckerd Drug stores, Revco and Thrifty Payless in the self-select distribution
channel, J.C. Penney in the demonstrator-assisted distribution channel, Sally's
Beauty Company for professional products, Shoppers Drug Mart in Canada and
Boots in the United Kingdom and Western Europe. The foregoing customers are
representative of the Company's customers, and for 1996, each of the foregoing
customers accounted for 1% or more of the Company's net sales. Wal-Mart and its
affiliates accounted for approximately 10.1% of the Company's 1996 consolidated
net sales. Although the loss of Wal-Mart as a customer could have an adverse
effect on the Company, the Company believes that its relationship with Wal-Mart
is satisfactory and the Company has no reason to believe that Wal-Mart will not
continue as a customer.
COMPETITION
The cosmetics and skin care, fragrance, personal care and professional
products business is characterized by vigorous competition throughout the
world. Brand recognition, together with product quality, performance and price
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 sales force affect
product reception, in-store position, permanent display space and inventory
levels in retail outlets. The Company competes in most of its product
categories against a number of companies, some of which have substantially
greater resources than the Company. In addition to products sold in the
self-select and demonstrator-assisted distribution channels, the Company's
products also compete with similar products sold door-to-door or through mail
order or telemarketing by representatives of direct sales companies. The
Company's principal competitors include L'Oreal S.A., The Procter & Gamble
Company, Helene Curtis Industries, Inc., and Joh A. Benckiser GmbH in the
self-select distribution channel; L'Oreal S.A., Unilever N.V., Estee Lauder,
Inc. and Joh A. Benckiser GmbH in the demonstrator-assisted distribution
channel; and L'Oreal S.A. and Matrix Essentials, Inc., which is owned by
Bristol-Myers Squibb Company, in professional products.
10
SEASONALITY
The Company's business is subject to certain seasonal fluctuations,
with net sales in the second half of the year generally benefiting from
increased retailer purchases in the United States for the back-to-school and
Christmas selling seasons.
PATENTS, TRADEMARKS AND PROPRIETARY TECHNOLOGY
The Company's major trademarks are registered in the United States and
in many other countries, and the Company considers trademark protection to be
very important to its business. Significant trademarks include REVLON,
COLORSTAY, REVLON AGE DEFYING, FLEX, MITCHUM, ETERNA 27, ULTIMA II, ALMAY,
CHARLIE, JEAN NATE, REVLON RESULTS, COLORAMA, FIRE & ICE, MOON DROPS, SUPER
LUSTROUS and WONDERWEAR LIPSEXXXY for consumer products and REVLON, ROUX
FANCI-FULL, REALISTIC, FERMODYL, COLOMER, CREATIVE NAIL, AMERICAN CREW, R PRO
and INTERCOSMO for
professional products.
The Company utilizes certain proprietary or patented technologies in
the formulation or manufacture of a number of the Company's products, including
COLORSTAY lipcolor and cosmetics, FLEX & GO shampoo, LENGTHWISE mascara, REVLON
nail enamel, REVLON AGE DEFYING foundation and cosmetics, NEW COMPLEXION
makeup, WONDERWEAR foundation, WONDERWEAR LIPSEXXXY lipstick, DAY INTO NIGHT
eyeshadows, ALMAY TIME-OFF skin care and makeup, OUTRAGEOUS shampoo, FLEX
hairspray and various professional products, including FERMODYL shampoo and
conditioners. 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
Phoenix, Arizona and Oxford, North Carolina manufacturing facilities are
registered with the FDA as drug manufacturing establishments, 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 capital expenditures,
earnings or competitive position of the Company. State and local regulations in
the United States that are designed to protect consumers or the environment
have an increasing influence on product claims, contents and packaging.
INDUSTRY SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS
The Company operates in a single business segment. Certain information
concerning geographic segments of the Company is set forth in Note 15 of the
Notes to Consolidated Financial Statements of the Company.
EMPLOYEES
As of December 31, 1996, the Company employed the equivalent of
approximately 14,300 full-time persons. Approximately 2,100 of such employees
in the United States at the end of 1996 were covered by collective bargaining
agreements. The agreements covering employees in Phoenix, Arizona and
Jacksonville, Florida expire in 1997. In addition, the Company will be
negotiating collective bargaining agreements or portions thereof covering
employees in twelve countries outside the United States during 1997. The
Company expects that such agreements will be renewed in the ordinary course of
negotiations, and further believes that its employee relations are
satisfactory.
11
ITEM 2. PROPERTIES
The following table sets forth as of December 31, 1996 the Company's
major manufacturing, research and warehouse/distribution facilities all of
which are owned except where otherwise noted.
APPROXIMATE FLOOR
LOCATION USE SPACE SQ. FT.
- -------- --- ------------------
Oxford, North Carolina..... Manufacturing, warehousing, distribution and office 1,012,000
Phoenix, Arizona .......... Manufacturing, warehousing, distribution and office 706,000
(partially leased)
Holmdel, New Jersey ....... Warehousing, distribution and office 540,000
Jacksonville, Florida ..... Manufacturing, warehousing, distribution, research and 526,000
office
Mississauga, Canada ....... Manufacturing, warehousing, distribution and office 245,000
Edison, New Jersey ........ Research and office (leased) 133,000
Irvington, New Jersey ..... Manufacturing, warehouse and office 96,000
Sao Paulo, Brazil ......... Manufacturing, warehousing, distribution, office and 408,000
research
Maesteg, South Wales,
United Kingdom ............ Manufacturing, distribution and office 316,000
Santa Maria, Spain ........ Manufacturing and warehousing 173,000
Barcelona, Spain .......... Manufacturing, warehousing, research and office 152,000
Caracas, Venezuela Manufacturing, distribution and office 145,000
Argenteuil, France ........ Warehousing and distribution (leased) 73,000
Kempton Park, South Africa. Warehousing, distribution and office (leased) 127,000
Canberra, Australia ....... Warehousing, distribution and office (leased) 125,000
Isando, South Africa ...... Manufacturing, warehousing, distribution and office 94,000
Rydalmere, Australia ...... Manufacturing, warehousing, distribution and office 93,000
Bologna, Italy ............ Manufacturing, warehousing, distribution, office and 60,000
research
In addition to the facilities described above, additional facilities
are owned and leased in various areas throughout the world, including the lease
for the Company's executive offices in New York, New York (345,000 square feet,
of which 85,000 square feet are currently sublet to affiliates of the Company).
Management considers the Company's facilities to be well-maintained and
satisfactory for the Company's operations, and believes that the Company's
facilities provide sufficient capacity for its current and expected production
requirements. Products Corporation leases from Holdings on arms' length terms
its research and development facility located in Edison, New Jersey.
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.
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.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MacAndrews & Forbes Holdings Inc. ("MacAndrews & Forbes"), which is
wholly owned by Ronald O. Perelman, which through Revlon Worldwide Corporation
("Revlon Worldwide"), beneficially owns 11,250,000 shares of the Class A Common
Stock (representing 56.6% of the outstanding shares of Class A Common Stock) and
all of the outstanding 31,250,000 shares of Class B Common Stock, which together
represent 83.1% of the outstanding shares of Common Stock, and the remaining
8,625,000 shares of Class A Common Stock are owned by the public. No dividends
were declared or paid during 1996. The terms of the Credit Agreement and
Products Corporation's 10 1/2 % Senior Subordinated Notes Due 2003 (the "Senior
Subordinated Notes"), 9 3/8% Senior Notes Due 2001 (the "Senior Notes") and 9
1/2% Senior Notes Due 1999 (the "1999 Notes") currently restrict the ability of
Products Corporation to pay dividends or make distributions to Revlon, Inc. See
the Consolidated Financial Statements of the Company and the Notes thereto.
The table below shows the Company's high and low quarterly stock
prices for the year ended December 31, 1996.
1996 QUARTERLY STOCK PRICES (1)
-------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
High $28 1/4 $31 3/8 $31 1/8 $36 1/2
Low 25 1/2 24 3/4 23 1/2 28 5/8
(1) Represents the closing price on the New York Stock exchange
(NYSE), which is the market in which shares of the Company's stock are traded.
The Company's symbol is REV.
13
ITEM 6. SELECTED FINANCIAL DATA
The statements of Operations Data for each of the years in the
five-year period ended December 31, 1996 and the Balance Sheet Data as of
December 31, 1996, 1995, 1994, 1993 and 1992 are derived from the Consolidated
Financial Statements of the Company, which have been audited by KPMG Peat
Marwick 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,
--------------------------------------------------------------------
1996 1995(A) 1994(A) 1993(A) 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Net sales ......................................... $ 2,167.0 $ 1,937.8 $ 1,732.5 $ 1,588.3 $ 1,632.2
=========== =========== =========== =========== ===========
Operating income (loss) ........................... $ 200.2 $ 146.6 $ 108.4 $ 49.9 $ (82.6)(d)
=========== =========== =========== =========== ===========
Income (loss) before extraordinary items and
cumulative effect of accounting changes .......... $ 24.4 $ (40.2) $ (74.0) $ (130.8) $ (224.0)
Extraordinary items -early extinguishments of debt (6.6) -- -- (9.5) (2.9)
Cumulative effect of accounting changes ........... -- -- (28.8)(b) (6.0)(c) --
----------- ----------- ----------- ----------- -----------
Net income (loss) ................................. $ 17.8 $ (40.2) $ (102.8) $ (146.3) $ (226.9)
=========== =========== =========== =========== ===========
INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary items and
cumulative effect of accounting changes .......... $ 0.49 $ (0.95) $ (1.74) $ (3.08) $ (5.27)
Extraordinary items ............................... (0.13) -- -- (0.22) (0.07)
Cumulative effect of accounting changes ........... -- -- (0.68) (0.14) --
----------- ----------- ----------- ----------- -----------
Net income (loss) ................................. $ 0.36 $ (0.95) $ (2.42) $ (3.44) $ (5.34)
=========== =========== =========== =========== ===========
Weighted average common shares outstanding (e) .... 49,687,500 42,500,000 42,500,000 42,500,000 42,500,000
=========== =========== =========== =========== ===========
DECEMBER 31,
----------------------------------------------------------
1996 1995(A) 1994(A) 1993(A) 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
BALANCE SHEET DATA:
Total assets ...................................... $1,621.3 $1,535.3 $1,418.1 $1,548.7 $1,438.3
Long-term debt, excluding current portion ......... 1,352.2 1,467.5 1,327.5 1,203.8 969.0
Total stockholders' deficiency .................... (496.7) (702.0) (656.5) (555.3) (443.1)
(a) Effective January 1, 1996, Products Corporation acquired from Holdings
substantially all of the assets of the Tarlow Advertising Division ("Tarlow")
in consideration for the assumption of substantially all of the liabilities and
obligations of Tarlow. Net liabilities assumed were approximately $3.4 million.
The assets acquired and liabilities assumed were accounted for at historical
cost in a manner similar to that of a pooling of interests and, accordingly,
prior period financial statements beginning with January 1, 1993 have been
restated as if the acquisition took place at the beginning of such period.
Products Corporation paid $4.1 million to Holdings which was accounted for as
an increase to capital deficiency.
(b) Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." The Company recognized a charge of
$28.8 million in the first quarter of 1994 to reflect the cumulative effect of
the accounting change, net of income tax benefit.
(c) Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," for its retiree
benefit plan in the United States. Accordingly, the Company recognized a charge
of $6.0 million in the 1993 first quarter to reflect the cumulative effect of
the accounting change.
(d) Includes restructuring charges of $162.7 million in 1992, which included
(i) consolidation of certain worldwide manufacturing and warehouse facilities,
(ii) consolidation in management information systems, (iii) vacating premises
under lease, (iv) personnel reductions and (v) discontinuance of certain
product lines.
(e) Represents the weighted average common shares outstanding for the period.
See Note 1 to the Consolidated Financial Statements.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
OVERVIEW
The Company operates in a single business segment with many different
products, which include an extensive array of glamorous, exciting and
innovative cosmetics and skin care, fragrance and personal care products, and
professional products, consisting of hair and nail care products principally
for use in and resale by professional salons. In addition, the Company also
operates retail outlet stores and has a licensing group.
To reflect the integration of management reporting responsibilities
culminating in the third quarter of 1996, the Company presents its business
geographically as its United States operation, which comprises the Company's
business in the United States, and its International operation, which comprises
its business outside of the United States. The Company previously presented its
business as the Consumer Group, which comprised the Company's consumer products
operations throughout the world (except principally Spain, Portugal and Italy)
and professional products operations in certain markets, principally in South
Africa and Argentina, and the Professional Group, which comprised the Company's
professional products operations throughout the world (except principally South
Africa and Argentina) and consumer products operations in Spain, Portugal and
Italy. The Company has restated the management's discussion and analysis data
for prior periods to conform to the presentation for 1996.
RESULTS OF OPERATIONS
The following table sets forth the Company's net sales by operation
for each of the last three years:
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------- ---------- ---------
Net sales:
United States .............................. $1,257.2 $1,113.2 $ 983.2
International .............................. 909.8 824.6 749.3
---------- ---------- ---------
$2,167.0 $1,937.8 $1,732.5
========== ========== =========
The following sets forth certain statements of operations data as a
percentage of net sales:
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
Cost of sales ............................... 33.5% 33.7% 34.5%
Gross profit ................................ 66.5 66.3 65.5
Selling, general and administrative expenses 57.3 58.8 59.3
Operating income ............................ 9.2 7.5 6.2
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
NET SALES
Net sales were $2,167.0 and $1,937.8 for 1996 and 1995, respectively,
an increase of $229.2, or 11.8%, primarily as a result of successful new
product introductions worldwide, increased demand in the United States,
acquisitions of certain exclusive line professional product businesses,
increased distribution internationally into the expanding self-select
distribution channel and the further development of new international markets.
United States. The United States operation's net sales increased to
$1,257.2 for 1996 from $1,113.2 for 1995, an increase of $144.0, or 12.9%. Net
sales improved for 1996 primarily as a result of continued consumer acceptance
of new product offerings, general improvement in consumer demand for the
Company's color cosmetics in the United States and acquisitions of certain
exclusive line professional product businesses, partially offset by overall
softness in the fragrance industry and lower sales of one of the Company's
prestige brands. The Company improved the dollar
15
share of its Revlon branded cosmetics in the color cosmetics business in the
United States self-select distribution channel to 21.5% for 1996 from 19.8%
for 1995, moving into the leading position in market share. Market share,
which is subject to a number of conditions, can vary from quarter to quarter
as a result of such things as timing of new product introductions and
advertising and promotional spending. New product introductions (including, in
1996, certain products launched during 1995) generated incremental net sales
in 1996, principally as a result of launches of products in the COLORSTAY
collection, including COLORSTAY foundation, lip makeup, eye makeup and
COLORSTAY LASHCOLOR mascara, launches of products in the ALMAY AMAZING
collection, including lip makeup, eye makeup, face makeup and concealer, and
launches of Cherish fragrance and MITCHUM CLEAR and ALMAY CLEAR COMPLEXION
line extensions.
International. The International operation's net sales increased to
$909.8 for 1996 from $824.6 for 1995, an increase of $85.2, or 10.3% on a
reported basis or 12.6% on a constant U.S. dollar basis. Net sales improved
principally as a result of successful new product introductions, including the
continued roll-out of the COLORSTAY cosmetics collection and REVLON AGE DEFYING
makeup, increased distribution into the expanding self-select distribution
channel, the further development of new international markets, partially
offset, on a reported basis, by the unfavorable effect on sales of a stronger
U.S. dollar against certain foreign currencies, primarily the South African
rand, Japanese yen, and several European currencies. The International
operation's sales are divided into the following geographic areas: Europe,
which is comprised of Europe, the Middle East and Africa (in which net sales
increased to $404.0 for 1996 from $374.6 for 1995, an increase of $29.4, or
7.8%); the Western Hemisphere, which is comprised of Canada, Mexico, Central
America, South America and Puerto Rico (in which net sales increased to $311.9
for 1996 from $275.4 for 1995, an increase of $36.5, or 13.3%); and the Far
East (in which net sales increased to $193.9 for 1996 from $174.6 for 1995, an
increase of $19.3, or 11.1%).
The Company's operations in Brazil are significant and, along with
operations in certain other countries, have been subject to, and may continue
to be subject to, significant political and economic uncertainties. In Brazil,
net sales, operating income and income before taxes were $132.7, $25.1 and
$20.0, respectively, for 1996 compared to $118.6, $22.8 and $19.8,
respectively, for 1995. In Mexico, net sales for 1996 and 1995 were adversely
affected by the December 1994 devaluation of the Mexican peso and related
economic weakness. Additionally, Mexico will be considered a hyperinflationary
economy beginning in 1997. In Venezuela, net sales and income before taxes for
1996 and 1995 were adversely affected by high inflation and in the 1996 period
by a currency devaluation.
Cost of sales
As a percentage of net sales, cost of sales was 33.5% for 1996
compared to 33.7% for 1995, respectively. The improvement for 1996 resulted
from the benefits of improved overhead absorption against higher production
volumes and more efficient global production and purchasing. This improvement
was partially offset by changes in product mix involving an increase in sales
of the Company's higher cost technology-based products, an increase in export
sales, lower margin products (such as those products sold in Brazil), the
effect of weaker local currencies on the cost of imported purchases and
competitive pressures on the Company's toiletries business in certain
international markets. The aforementioned increases in sales that negatively
impacted cost of sales were, however, more profitable to the Company's overall
operating results.
Selling, general and administrative ("SG&A") expenses
As a percentage of net sales, SG&A expenses were 57.3% for 1996, an
improvement from 58.8% for 1995. SG&A expenses other than advertising expense,
as a percentage of net sales, improved to 40.9% for 1996 compared with 43.2%
for 1995 primarily as a result of reduced general and administrative expenses,
improved productivity and lower distribution costs in 1996 compared with 1995.
In accordance with its business strategy, the Company increased advertising and
consumer-directed promotion in 1996 compared with 1995 to support growth in
existing product lines, new product launches and increased distribution in the
self-select distribution channel in many of the Company's markets in the
International operation. Advertising expense increased by 17.3% to $355.2, or
16.4% of net sales, for 1996 compared to $302.7, or 15.6% of net sales, for
1995.
16
Operating income
As a result of the foregoing, operating income increased by $53.6, or
36.6%, to $200.2 for 1996 from $146.6 for 1995.
Other expenses/income
Interest expense was $133.4 for 1996 compared to $142.6 for 1995. The
reduction in interest expense is attributable to lower average outstanding
borrowings as a result of the paydown of debt under the Credit Agreement and
under the Former Credit Agreement with the use of proceeds from the Company's
Offering in the 1996 period and lower interest rates under the Credit Agreement
than under the Former Credit Agreement.
Foreign currency losses, net, were $5.7 for 1996 compared to $10.9 for
1995. The reduction in the foreign currency loss in 1996 as compared to 1995
was due to lower foreign currency losses primarily in Mexico and Venezuela and
the Company's simplification of its international corporate structure, which
resulted in $2.1 of gains, previously deferred in the currency translation
account, partially offset by the strengthening of the U.S. dollar against the
Spanish peseta and the strengthening of the U.K. pound against several European
currencies.
Miscellaneous, net, was $6.3 for 1996 compared to $1.8 for 1995. The
increase relates primarily to the Company's continued investment in certain
emerging markets.
Extraordinary item
The extraordinary item resulted from the write-off recorded in the
first quarter of 1996 of deferred financing costs associated with the
extinguishment of the Former Credit Agreement prior to its maturity with the
net proceeds from the Offering and borrowings under the Credit Agreement.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Net sales
Net sales were $1,937.8 and $1,732.5 for 1995 and 1994, respectively,
an increase of $205.3, or 11.8%, primarily as a result of successful new
product introductions worldwide, increased demand in the United States,
increased distribution internationally into the expanding self-select
distribution channel, the development of new international markets and a weaker
U.S. dollar versus most foreign currencies.
United States. The United States operation's net sales increased to
$1,113.2 for 1995 from $983.2 for 1994, an increase of $130.0, or 13.2%. Net
sales improved primarily as a result of continued consumer acceptance of new
product offerings and general improvement in consumer demand for the Company's
color cosmetics in the United States, contributing to the Company's improved
share of the color cosmetics business in the United States self-select
distribution channel, as well as increased net sales at the retail outlet
stores. New product introductions (including, in 1995, certain products
launched during 1994) generated incremental net sales in 1995, principally as a
result of the June 1994 launch of COLORSTAY lipcolor, the 1994 first quarter
launch of REVLON AGE DEFYING makeup, the 1995 second and third quarter launches
of COLORSTAY lip makeup line extensions and eye and face makeup, respectively,
which are part of the COLORSTAY collection, the 1995 second quarter launches of
REVLON AGE DEFYING line extensions, CHARLIE WHITE fragrance and ALMAY CLEAR
COMPLEXION makeup, and the 1995 third quarter launches of ALMAY TIME-OFF line
extensions and LASTING fragrance.
International. The International operation's net sales increased to
$824.6 for 1995 from $749.3 for 1994, an increase of $75.3, or 10.0%. Net sales
improved principally as a result of successful new product introductions,
increased distribution into the expanding self-select distribution channel, the
development of new international markets and the favorable effect on sales of a
weaker U.S. dollar versus most foreign currencies, partially offset by lower
unit volume in Mexico and Argentina resulting from recessionary conditions. Net
sales were also favorably affected by the continued roll-out of COLORSTAY
lipcolor, REVLON AGE DEFYING makeup and CHARLIE WHITE fragrance into various
international markets, the continued expansion during the third quarter of 1994
of the ALMAY cosmetics line outside the
17
United States and the expansion during the third quarter of 1994 of the
CHARLIE RED fragrance outside the United States. Introduction of the COLORSTAY
cosmetics collection began in the fourth quarter of 1995 and continued in the
first part of 1996. The International operation's sales are divided into the
following geographic areas: Europe, which is comprised of Europe, the Middle
East and Africa (in which net sales increased to $374.6 for 1995 from $334.8
for 1994, an increase of $39.8, or 11.9%); the Western Hemisphere, which is
comprised of Canada, Mexico, Central America, South America and Puerto Rico
(in which net sales increased to $275.4 for 1995 from $269.7 for 1994, an
increase of $5.7, or 2.1%); and the Far East (in which net sales increased to
$174.6 for 1995 from $144.8 for 1994, an increase of $29.8, or 20.6%).
The Company's operations in Brazil and Mexico have been subject to
significant political and economic uncertainties. Operations in Brazil were
significantly improved for 1995 over 1994 primarily as a result of higher unit
volume in the first half of 1995. Unit volume in the second half of 1995
declined from the unit volume for the second half of 1994 due to the strong
unit volume in the second half of 1994 as a result of the Brazilian
government's July 1, 1994 introduction of a new economic and monetary policy,
which resulted in increased consumer purchasing. In Brazil, net sales,
operating income and income before taxes were $118.6, $22.8 and $19.8,
respectively, for 1995 compared with $108.1, $29.5 and $14.9, respectively, for
1994. However, net sales and operating income for 1994 benefited from the
hyperinflationary pricing component included in these accounts until the
Brazilian government's July 1, 1994 introduction of a new economic and monetary
policy and related issuance of a new currency, which significantly reduced
inflation. The Company's income before taxes and cash flow from operations in
Brazil for 1994 were not affected to the same extent as operating income
because of a corresponding charge in the foreign currency translation account.
In Mexico, net sales and operating income were $20.5 and $1.6, respectively,
for 1995 compared with $31.1 and $3.2, respectively, for 1994. While the
December 1994 devaluation of the Mexican peso did not have a significant
adverse effect on 1994 operating results in Mexico, 1995 operating results in
Mexico were, and future operating results may continue to be, adversely
affected by this devaluation and other factors such as decreases in unit
volume, limitations on price increases and higher relative costs of products
sourced outside of Mexico. The Company has taken measures to mitigate the
effect of these conditions by increasing prices in line with inflation, where
possible, and efficiently managing its working capital levels.
Cost of sales
As a percentage of net sales, cost of sales was 33.7% for 1995, an
improvement from 34.5% for 1994. This improvement resulted from the benefits on
overhead absorption of higher production volumes allocated over a fixed
manufacturing base, and globalization benefits such as more efficient
production and purchasing performance in 1995 compared with 1994, partially
offset by changes in the product mix involving increases in 1995 compared to
1994 in sales of lower margin products sold in Brazil and by the Company's
retail outlet stores. The first half of 1994 included the benefit of the
inflationary component of pricing in Brazil, partially offset by the adverse
impact of higher transition costs associated with factory consolidations
charged to cost of sales for inventory produced in 1993 and sold during 1994.
Selling, general and administrative expenses
As a percentage of net sales, SG&A expenses were 58.8% for 1995 and
59.3% for 1994. SG&A expenses, other than advertising expense, as a percentage
of net sales improved to 43.2% for 1995 compared with 45.4% for 1994, primarily
as a result of reduced general and administrative expenses and improved
productivity in 1995 compared with 1994, partially offset by higher European
regional headquarters expenses and severance costs in 1995. The Company
increased advertising and consumer directed promotion during 1995 compared with
1994, principally in the United States and Europe, to support growth in
existing product lines, new product launches and increased distribution in the
self-select distribution channel in Europe in 1995. Advertising expense
increased by 26.2% to $302.7, or 15.6% of net sales, for 1995 from $239.9, or
13.8% of net sales, for 1994.
18
Operating income
As a result of the foregoing, operating income increased by $38.2, or
35.2%, to $146.6 for 1995 from $108.4 for 1994.
Other expenses/income
Interest expense was $142.6 for 1995 and $136.7 for 1994, an increase
of $5.9, or 4.3%. The increase in 1995 was due to higher outstanding borrowings
under the Company's credit facilities.
Foreign currency losses, net, were $10.9 for 1995 and $18.2 for 1994.
Results improved in 1995 primarily as a result of reduced inflation associated
with the Brazilian government's July 1, 1994 introduction of a new economic and
monetary policy and related issuance of a new currency and the January 1995
repayment of approximately $26.9 under the Company's Japanese yen-denominated
credit agreement (the "Yen Credit Agreement"), partially offset by the adverse
effect of currency devaluation in Venezuela primarily in the fourth quarter of
1995.
Provision for income taxes
The provision for income taxes was $25.4 and $22.8 for 1995 and 1994,
respectively. The increase in the provision for income taxes was primarily
attributable to higher taxable earnings of certain foreign operations.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities was $10.1, $51.7 and $1.1 for
1996, 1995 and 1994, respectively. The decrease in net cash used for operating
activities for 1996 compared with 1995 resulted primarily from higher operating
income, lower restructuring payments ($13.3 for 1996 compared with $24.2 for
1995) and improved management of inventory relative to business growth,
partially offset by higher trade receivable balances as a result of higher net
sales and increased spending on merchandise display units in connection with
the Company's continued expansion into the self-select distribution channel.
The increase in net cash used for operating activities for 1995 compared with
1994 resulted primarily from an increase in inventories associated with
expected sales volume, higher trade receivable balances, increased spending on
merchandise display units in connection with the Company's continued expansion
into the self-select distribution channel and higher income taxes paid, net of
refunds, offset in part by higher operating income, lower restructuring
payments ($24.2 for 1995 compared with $37.2 for 1994) and lower severance
payments.
Net cash used for investing activities was $65.1, $72.5 and $51.0 for
1996, 1995 and 1994, respectively. Net cash used for investing activities for
1996, 1995 and 1994 consisted primarily of capital expenditures and in 1996 and
1995 included $7.1 and $21.2, respectively, used for acquisitions. The
Company's capital expenditures for 1996, 1995 and 1994 were $58.0, $54.3 and
$52.5, respectively. The increase in capital expenditures through 1996 was
primarily attributable to significant information system enhancements in
accordance with the Company's business strategy.
Net cash provided by (used for) financing activities was $78.4, $125.2
and $(49.0) for 1996, 1995 and 1994, respectively. Net cash provided by
financing activities for 1996 included the net proceeds from the Offering, cash
drawn under the Former Credit Agreement and under the Credit Agreement,
partially offset by the repayment of borrowings under the Former Credit
Agreement, the payment of fees and expenses related to the Credit Agreement and
repayment of approximately $5.2 under the Yen Credit Agreement. Net cash
provided by financing activities for 1995 consisted primarily of borrowings
under the credit agreement of Products Corporation in effect at that time and
borrowings under the Former Credit Agreement, partially offset by repayments of
cash drawn under those credit agreements, repayment of $26.9 under the Yen
Credit Agreement and payment of debt issuance costs under the Former Credit
Agreement. Net cash used for financing activities for 1994 consisted primarily
of repayments of borrowings under the credit agreement of Products Corporation
in effect at that time and a repayment of $12.0 under the Yen Credit Agreement.
In February 1995, Products Corporation entered into the Former Credit
Agreement, which provided up to $500.0 comprised of three senior secured
facilities: a $100.0 term loan facility, a $225.0 revolving credit facility and
a $175.0 multi-currency facility. Borrowings under the Former Credit Agreement
were used to refinance
19
Products Corporation's previous $150.0 credit agreement, refinance then
existing lines of credit outside of the United States and refinance
approximately $26.9 paid under the Yen Credit Agreement in January 1995. The
Former Credit Agreement was scheduled to terminate on June 30, 1997. The net
proceeds of $187.8 from the Offering were contributed to Products Corporation
and were used to repay borrowings under the Former Credit Agreement and to pay
fees and expenses related to the Credit Agreement.
In January 1996, Products Corporation entered into the Credit
Agreement, which became effective upon consummation of the Offering on March 5,
1996. The Credit Agreement provides, among other things, (i) an extension of
the term of the facilities from June 30, 1997 to December 31, 2000, subject to
earlier termination in certain circumstances, (ii) a reduction of the interest
rates, (iii) an increase in the aggregate amount of the credit facilities from
$500 to $600 and (iv) the release of security interests in assets of certain
foreign subsidiaries of Products Corporation which were then pledged. The
Credit Agreement is comprised of four senior secured facilities: a $130.0 term
loan facility, a $220.0 multi-currency facility, a $200.0 revolving acquisition
facility and a $50.0 special standby letter of credit facility. As of December
31, 1996, Products Corporation had approximately $130.0 outstanding under the
term loan facility, $57.2 outstanding under the multi-currency facility,
nothing outstanding under the revolving acquisition facility and $33.5
outstanding under the special standby letter of credit facility. In January
1997, the Credit Agreement was amended to, among other things, permit the
Merger of PFC into Cosmetic Center and to generally exclude Cosmetic Center (as
the survivor of the Merger) from the definition of "subsidiary" under the
Credit Agreement. See Note 7(a) to the Consolidated Financial Statements.
A subsidiary of Products Corporation is the borrower under the Yen
Credit Agreement, which had a principal balance of approximately Y4.8
billion as of December 31, 1996 (approximately $41.7 U.S. dollar equivalent as
of December 31, 1996). In accordance with the terms of the Yen Credit
Agreement, approximately Y2.7 billion (approximately $26.9 U.S. dollar
equivalent) was paid in January 1995 and approximately Y539 million
(approximately $5.2 U.S. dollar equivalent) was paid in January 1996. A payment
of approximately Y539 million (approximately $4.6 U.S. dollar equivalent
as of December 31, 1996) was paid in January 1997 and the balance of the Yen
Credit Agreement of approximately Y4.3 billion (approximately $37.1 U.S.
dollar equivalent as of December 31, 1996) is currently due on December 31,
1997. The Company is currently renegotiating an extension of the term of the
terms of the Yen Credit Agreement. In the event that such extension is not
obtained, the Company is able and intends to refinance the Yen Credit Agreement
under existing long-term credit facilities. Accordingly, the Company's
obligation under the Yen Credit Agreement has been classified as long-term as
of December 31, 1996.
The $61.0 aggregate principal amount of Products Corporation's 10 7/8%
Sinking Fund Debentures due 2010 previously purchased on the open market by
Products Corporation (which was not previously used for sinking fund payments,
including the payment in July 1996) and no longer outstanding will be used to
meet future sinking fund requirements of such issue. $9.0 aggregate principal
amount of previously purchased debentures was used for the sinking fund payment
due July 15, 1996.
Products Corporation borrows funds from its affiliates from time to
time to supplement its working capital borrowings at interest rates more
favorable to Products Corporation than interest rates under the Credit
Agreement. No such borrowings were outstanding as of December 31, 1996.
In June 1996, $10.9 in notes due to Products Corporation from Holdings
under the Financing Reimbursement Agreement (See "Certain Relationships and
Related Transactions") was offset against an $11.7 demand note payable by
Products Corporation to Holdings.
The Company's principal sources of funds are expected to be cash flow
generated from operations and borrowings under the Credit Agreement and other
existing working capital lines. The Company's principal uses of funds are
expected to be the payment of operating expenses, working capital and capital
expenditure requirements and debt service payments.
The Company estimates that capital expenditures for 1997 will be
approximately $60, including approximately $10 for upgrades to the Company's
management information systems. In addition, cash payments related to the 1991
and 1992 restructuring charges are estimated to be approximately $9 for 1997.
Pursuant to a tax sharing agreement (See "Certain Relationships and Related
Party Transactions - Tax Sharing Agreement"), the
20
Company may be required to make tax sharing payments to Mafco Holdings Inc. as
if the Company were filing separate income tax returns, except that no
payments are required by the Company if and to the extent that Products
Corporation is prohibited under the Credit Agreement from making tax sharing
payments to the Company. The Credit Agreement prohibits Products Corporation
from making any cash tax sharing payments other than in respect of state and
local income taxes. The Company anticipates that, as a result of net operating
tax losses and prohibitions under the Credit Agreement, no federal tax
payments or payments in lieu of taxes pursuant to the tax sharing agreement
will be required for 1997.
As of December 31, 1996, Products Corporation was party to a series of
interest rate swap agreements (which expire at various dates through December
2001) totaling a notional amount of $225.0 in which Products Corporation agreed
to pay on such notional amount a variable interest rate equal to the six month
London Inter-Bank Offered Rate (5.602% per annum at February 11, 1997) to its
counterparties and the counterparties agreed to pay on such notional amounts
fixed interest rates averaging approximately 6.03% per annum. Products
Corporation entered into these agreements in 1993 and 1994 (and in the first
quarter of 1996 extended a portion equal to a notional amount of $125.0 through
December 2001) to convert the interest rate on $225.0 of fixed-rate
indebtedness to a variable rate. If Products Corporation had terminated these
agreements, which Products Corporation considers to be held for other than
trading purposes, on December 31, 1996, a loss of approximately $3.5 would have
been realized. Certain other swap agreements were terminated in 1993 for a gain
of $14.0. The amortization of the realized gain on these agreements for 1996
and 1995 was approximately $3.2 in each of the years. The remaining unamortized
gain, which is being amortized over the original lives of the agreements, is
$3.1 as of December 31, 1996. Although cash flow from the presently outstanding
agreements was positive for 1996, future positive or negative cash flows from
these agreements will depend upon the trend of short-term interest rates during
the remaining lives of such agreements. Based on current interest rate levels,
Products Corporation expects to have a positive cash flow of $0.6 from these
agreements in 1997, although no assurances can be given. In the event of
nonperformance by the counterparties at any time during the remaining lives of
the agreements, Products Corporation could lose some or all of any possible
future positive cash flows from these agreements. However, Products Corporation
does not anticipate nonperformance by such counterparties, although no
assurances can be given.
Products Corporation enters into forward foreign exchange contracts
from time to time to hedge certain cash flows denominated in foreign
currencies. At December 31, 1996, Products Corporation had forward foreign
exchange contracts denominated in various currencies, predominantly the U.K.
pound, of approximately $62.0 (U.S. dollar equivalent). If Products Corporation
had terminated these contracts on December 31, 1996, no material gain or loss
would have been realized.
Based upon the Company's current level of operations and anticipated
growth in net sales and earnings as a result of its business strategy, the
Company expects that cash flows from operations and funds from currently
available credit facilities and refinancings of existing indebtedness will be
sufficient to enable the Company to meet its anticipated cash requirements for
the foreseeable future on a consolidated basis, including for debt service. If
the Company is unable to satisfy such cash requirements, the Company could be
required to adopt one or more alternatives, such as reducing or delaying
capital expenditures, restructuring indebtedness, selling assets or operations,
seeking capital contributions or loans from affiliates of the Company or
issuing additional shares of capital stock of the Company. The Company, as a
holding company, will be dependent on the earnings and cash flow of, and
dividends and distributions from, Products Corporation to pay its expenses and
to pay any cash dividends or distributions on the Class A Common Stock that may
be authorized by the Board of Directors of the Company. The terms of the Credit
Agreement, the Senior Subordinated Notes, the 1999 Senior Notes and the Senior
Notes generally restrict Products Corporation from paying dividends or making
distributions, except that Products Corporation is permitted to pay dividends
and make distributions to the Company, among other things, to enable the
Company to pay expenses incidental to being a public holding company,
including, among other things, professional fees such as legal and accounting,
regulatory fees such as Commission filing fees and other miscellaneous expenses
related to being a public holding company and to pay dividends or make
distributions up to $5.0 per annum in certain circumstances to finance the
purchase by the Company of its Class A Common Stock in connection with the
delivery of such Class A Common Stock to grantees under the Revlon, Inc. 1996
Stock Plan. However, there can be no assurance that cash flow from operations
and funds from existing credit facilities and refinancing of existing
indebtedness will be sufficient to meet the Company's cash requirements on a
consolidated basis.
21
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K for the year ended December 31, 1996
as well as other public documents of the Company contains forward-looking
statements which 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 expectation and
estimates as to future financial performance, including growth in net sales and
earnings, cash flows from operations, capital expenditures and the availability
of funds from refinancings of indebtedness. Readers are urged to consider
statements which use the terms "believes," "no reason to believe," "expects,"
"plans," "intends," "estimates," "anticipated" or "anticipates" to be uncertain
and forward-looking. In addition to factors that may be described in the
Company's Commission filings, including this filing, the following factors,
among others, could cause the Company's actual results to differ materially
from those expressed in any forward-looking statements made by the Company: (i)
difficulties or delays in developing and introducing new products or failure of
customers to accept new product offerings; (ii) changes in consumer
preferences, including reduced consumer demand for the Company's color
cosmetics and other current products; (iii) difficulties or delays in the
Company's continued expansion into the self-select distribution channel and
development of new markets; (iv) unanticipated costs or difficulties or delays
in completing projects associated with the Company's strategy to improve
operating efficiencies, including information system upgrades; (v) effects of
and changes in economic conditions, including inflation and monetary
conditions, and in trade, monetary, fiscal and tax policies in countries
outside of the U.S. in which the Company operates, including Brazil; (vi)
actions by competitors, including business combinations, technological
breakthroughs, new product offerings and marketing and promotional successes;
and (vii) combinations among significant customers or the loss, insolvency or
failure to pay its debts by a significant customer or customers.
INFLATION
In general, 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 or foreign
non-hyperinflationary countries. The Company operates in certain countries
around the world, such as Brazil, that have experienced hyperinflation in the
past three years. This hyperinflation has had a material effect on the
Company's results of operations in Brazil and may, in the future, have a
material effect on results of operations in Mexico. 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.
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.
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the
Directors and executive officers of the Company. Each Director holds office
until his successor is duly elected and qualified or until his resignation or
removal, if earlier.
NAME POSITION
- ---- --------
Ronald O. Perelman Chairman of the Executive Committee of the Board and Director
Jerry W. Levin Chairman of the Board and Director
George Fellows President, Chief Executive Officer and Director
William J. Fox Senior Executive Vice President, Chief Financial Officer and
Director
Carlos Colomer Executive Vice President
Ronald H. Dunbar Senior Vice President, Human Resources
M. Katherine Dwyer Senior Vice President
Wade H. Nichols III Senior Vice President and General Counsel
Donald G. Drapkin Director
Meyer Feldberg Director
Howard Gittis Director
Vernon E. Jordan Director
Henry A. Kissinger Director
Edward J. Landau Director
Linda G. Robinson Director
Terry Semel Director
Martha Stewart Director
The name, age, principal occupation for the last five years and
selected biographical information for each of the directors and for the
executive officers of the Company are set forth below. Information is as of
February 13, 1997.
Mr. Perelman (54) has been Chairman of the Executive Committee of the
Board of the Company and of Products Corporation since November 1995, and a
Director of the Company and of Products Corporation since their respective
formations in 1992. Mr. Perelman was Chairman of the Board of the Company and
of Products Corporation from their respective formations in 1992 to November
1995. Mr. Perelman has been Chairman of the Board and Chief Executive Officer
of MacAndrews & Forbes and various of its affiliates for more than the past five
years. Mr. Perelman also is Chairman of the Board of Andrews Group Incorporated
("Andrews Group"), Consolidated Cigar Holdings Inc. ("Cigar Holdings Inc."),
Mafco Consolidated Group Inc. ("Mafco Consolidated"), Meridian Sports
Incorporated ("Meridian"), Power Control Technologies, Inc. ("PCT") and Toy
Biz, Inc. ("Toy Biz") and Chairman of the Executive Committee of the Board of
Marvel Entertainment Group, Inc. ("Marvel"). Mr. Perelman is a Director of the
following corporations which file reports pursuant to the Securities Exchange
Act of 1934, as amended (the "Exchange Act"): Andrews Group, California Federal
Bank, a Federal Savings Bank ("Cal Fed"), The Coleman Company, Inc. ("Coleman"),
Coleman Holdings Inc. ("Coleman Holdings"), Coleman Worldwide Corporation
("Coleman Worldwide"), Cigar Holdings, Consolidated Cigar Corporation
("Consolidated Cigar"), First Nationwide (Parent) Holdings Inc. ("First
Nationwide
23
Parent"), First Nationwide Holdings Inc. ("FN Holdings"), Mafco Consolidated,
Marvel, Marvel Holdings Inc. ("Marvel Holdings"), Marvel (Parent) Holdings
Inc. ("Marvel Parent"), Marvel III Holdings Inc. ("Marvel III"), Meridian,
PCT, Pneumo Abex Corporation ("Pneumo Abex"), Products Corporation, Revlon
Worldwide and Toy Biz. On December 27, 1996, Marvel Holdings, Marvel Parent,
Marvel III and Marvel and several of its subsidiaries filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code.
Mr. Levin (52) has been Chairman of the Board of the Company and of
Products Corporation since November 1995 and a Director of the Company and of
Products Corporation since their respective formations in 1992. Mr. Levin was
Chief Executive Officer of the Company and of Products Corporation from their
respective formations in 1992 to January 1997 and President of the Company and
of Products Corporation from their respective formations in 1992 to November
1995. He has been the President and a Director of Holdings since 1991 and Chief
Executive Officer since March 1992. Mr. Levin has been Executive Vice President
of MacAndrews Holdings since March 1989. Mr. Levin has been Chairman and Acting
Chief Executive Officer of Coleman since February 1997. For 15 years prior to
joining MacAndrews Holdings, he held various senior executive positions with
The Pillsbury Company. Mr. Levin is a Director of the following corporations
which file reports pursuant to the Exchange Act: Coleman, Coleman Holdings,
Coleman Worldwide, Ecolab, Inc., First Bank System, Inc., Meridian, Products
Corporation and Revlon Worldwide.
Mr. Fellows (54) has been President and Chief Executive Officer of the
Company and of Products Corporation since January 1997. He was President and
Chief Operating Officer of the Company and Products Corporation from November
1995 until January 1997, and has been a Director of the Company since November
1995 and a Director of Products Corporation since 1994. Mr. Fellows was Senior
Executive Vice President of the Company and of Products Corporation and
President and Chief Operating Officer of the Company's Consumer Group from
February 1993 to November 1995. From 1989 through January 1993, he was a senior
executive officer of Mennen Corporation and then Colgate-Palmolive Company,
which acquired Mennen Corporation in 1992. From 1986 to 1989 he was Senior Vice
President of Holdings. Prior to 1986, he was President of Holdings' Domestic
Beauty Group.
Mr. Fox (40) has been Senior Executive Vice President and Chief
Financial Officer of the Company and of Products Corporation since January 1997
and was Executive Vice President and Chief Financial Officer of the Company and
of Products Corporation from their respective formations in 1992 until January
1997. Mr. Fox was elected as a Director of the Company in November 1995 and of
Products Corporation in September 1994. He has been Executive Vice President
and Chief Financial Officer of Holdings since November 1991 and prior to such
time had been a Vice President of Holdings since 1987. He has been Senior Vice
President of MacAndrews Holdings since August 1990. He was Vice President of
MacAndrews Holdings from February 1987 to August 1990 and was Treasurer of
MacAndrews Holdings from February 1987 to September 1992. Prior to February
1987, he was Vice President and Assistant Treasurer of MacAndrews Holdings. Mr.
Fox joined MacAndrews & Forbes Group, Incorporated in 1983 as Assistant
Controller prior to which time he was a certified public accountant at the
international auditing firm of Coopers & Lybrand. Mr. Fox is a Director of The
Hain Food Group, Inc., which files reports pursuant to the Exchange Act.
Mr. Colomer (52) has been Executive Vice President of the Company and
of Products Corporation since August 1993. Prior to August 1993, he served as
President and General Manager of various of the Company's and Holdings'
international subsidiaries. Mr. Colomer joined Holdings in 1979 when Henry
Colomer, S.A., the haircare and cosmetics company that was founded by his
father, was acquired by Holdings, and has held positions of increasing
responsibility since that date.
Mr. Dunbar (59) has been Senior Vice President, Human Resources of the
Company and of Products Corporation since their respective formations in 1992.
He was elected Senior Vice President, Human Resources of Holdings in July 1991.
Mr. Dunbar was Vice President and General Manager of Arnold Menn and
Associates, a career management consulting and executive outplacement firm,
from 1989 to 1991 and Executive Vice President and Chief Human Resources
Officer of Ryder System Inc., a highway transportation firm, from 1978 to 1989.
Prior to that, Mr. Dunbar served in senior executive human resources positions
at Xerox Corporation and Ford Motor Company.
24
Ms. Dwyer (47) was elected as Senior Vice President of the Company and
of Products Corporation in November 1996. Prior to that she served in various
appointed officer positions for the Company and for Products Corporation,
including President of Products Corporation's United States Cosmetics Unit from
November 1995 to November 1996 and Executive Vice President and General Manager
of Products Corporation's Mass Cosmetics Unit from June 1993 to November 1995.
From 1991 to 1993, Ms. Dwyer was Executive Vice President and General Manager
for Victoria Creations. Prior to 1991, she served in various senior positions
for Avon Products Inc., Cosmair, Inc.
and Gillette.
Mr. Nichols (54) has been Senior Vice President and General Counsel
of the Company and of Products Corporation since their respective formations
in 1992. He was elected Senior Vice President and General Counsel of Holdings
in March 1992. He was Vice President and Secretary of Holdings from 1984 to
1992 and Secretary from 1981 to 1984. He joined Holdings in 1978. Mr. Nichols
has been Vice President-Law of MacAndrews Holdings since 1988.
Mr. Drapkin (48) has been a Director of the Company and of Products
Corporation since their respective formations in 1992 and of Holdings since
January 1992. He has been Vice Chairman of MacAndrews Holdings and various of
its affiliates since March 1987. Mr. Drapkin was a partner in the law firm of
Skadden, Arps, Slate, Meagher & Flom for more than five years prior to March
1987. Mr. Drapkin is a Director of the following corporations which file
reports pursuant to the Exchange Act: Algos Pharmaceutical Corporation, Andrews
Group, Coleman, Coleman Holdings, Coleman Worldwide, Cigar Holdings,
Consolidated Cigar, Marvel, Marvel Holdings, Marvel Parent, Marvel III,
Products Corporation, Revlon Worldwide, Toy Biz, and VIMRx Pharmaceuticals Inc.
On December 27, 1996, Marvel Holdings, Marvel Parent, Marvel III and Marvel and
several of its subsidiaries filed voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code.
Dr. Feldberg (54) has been a Director of the Company since February
1997. Dr. Feldberg has been the Dean of Columbia University Business School
for more than the past five years. Dr. Feldberg is a Director of the following
corporations which file reports pursuant to the Exchange Act: Federated
Department Stores, Inc., Paine Webber Group, Inc. (certain funds) and KIII
Communications Corporation.
Mr. Gittis (62) has been a Director of the Company and of Products
Corporation since their respective formations in 1992 and of Holdings since
1985. He has been Vice Chairman of MacAndrews Holdings and various of its
affiliates for more than five years. Mr. Gittis is a Director of the following
corporations which file reports pursuant to the Exchange Act: Andrews Group,
Cal Fed, Cigar Holdings, Consolidated Cigar, FN Holdings, First Nationwide
Parent, Mafco Consolidated, PCT, Pneumo Abex, Products Corporation, Revlon
Worldwide, Jones Apparel Group, Inc., Loral Space & Communications Ltd. and
Rutherford-Moran Oil Corporation.
Dr. Kissinger (73) has been a Director of the Company since June
1996. Dr. Kissinger has been Chairman of the Board and Chief Executive Officer
of Kissinger Associates, Inc., an international consulting firm since 1982.
Dr. Kissinger is an Advisor to the Board of Directors of American Express
Company, serves as Counselor to the Chase Manhattan Bank and is a member of
its International Advisory Committee. He is Chairman of the International
Advisory Board of American International Group, Inc. and is a Director of
Continental Grain Company, Hollinger International Inc. and Freeport-McMoran,
Inc., all of which file reports pursuant to the Exchange Act.
Mr. Jordan (61) has been a Director of the Company since June 1996.
Mr. Jordan is a Senior Partner in the Washington, D.C. law firm of Akin, Gump,
Strauss, Hauer & Feld, LLP where he has practiced law since 1982. He is a
Director of the following corporations which file reports pursuant to the
Exchange Act: American Express Company, Bankers Trust Company, Bankers Trust
New York Company, Corning Incorporated, Dow Jones & Company, Inc., J.C. Penney
Company, Inc., Ryder System, Inc., Sara Lee Corporation, Union Carbide
Corporation and Xerox Corporation. He is also trustee of the Ford Foundation
and Howard University.
Mr. Landau (67) has been a Director of the Company since June 1996.
Mr. Landau has been a Senior Partner in the New York law firm of Lowenthal,
Landau, Fischer & Bring, P.C. for more than the past five years. He has been a
Director of Products Corporation since June 1992 and was a director of
Holdings from 1989 until April 1993. Mr. Landau is a director of Offitbank
Investment Fund, Inc., which files reports pursuant to the Exchange Act.
25
Ms. Robinson (44) has been a Director of the Company since June 1996.
Ms. Robinson has been Chairman and Chief Executive Officer of Robinson Lerer &
Montgomery, LLC, a strategic communications consulting firm, since May 1996.
For more than five years prior to that she was Chairman and Chief Executive
Officer of Robinson Lerer Sawyer Miller Group, or its predecessors. Ms. Robinson
is a director of VIMRx Pharmaceuticals, Inc. which files reports pursuant to
the Exchange Act, and is a trustee of New York University Medical Center.
Mr. Semel (53) has been a Director of the Company since June 1996.
Mr. Semel has been Chairman and Co-Executive Officer of the Warner Bros.,
Division of Time Warner Entertainment LP ("Warner Brothers") since March 1994
and of Warner Music Group since November 1995. For more than ten years prior
to that he was President of Warner Brothers or its predecessor Warner Bros.
Inc.
Ms. Stewart (55) has been a Director of the Company since June 1996.
Ms. Stewart is the Chairman of Martha Stewart Living Omnimedia LLC. She has
been an author, founder of the magazine Martha Stewart Living, creator of a
syndicated television series, a syndicated newspaper column and a catalog
company and a lifestyle consultant and lecturer for more than the past five
years.
BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors has an Executive Committee, an Audit Committee
and a Compensation and Stock Plan Committee (the "Compensation Committee").
The Executive Committee consists of Messrs. Perelman, Gittis and
Levin. The Executive Committee may exercise all of the powers and authority of
the Board, except as otherwise provided under the Delaware General Corporation
Law ("DGCL"). The Audit Committee, consisting of Messrs. Landau and Ms.
Robinson and, effective February 13, 1997, Dr. Feldberg, makes recommendations
to the Board of Directors regarding the engagement of the Company's independent
auditors, reviews the plan, scope and results of the audit, reviews with the
auditors and management the Company's policies and procedures with respect to
internal accounting and financial controls, changes in accounting policy and
the scope of the non-audit services which may be performed by the Company's
independent auditors, among other things. The Audit Committee also monitors
policies to prohibit unethical, questionable or illegal activities by the
Company's employees. The Compensation Committee, consisting of Messrs. Gittis
and Drapkin and effective June 5, 1996, Mr. Semel, makes recommendations to the
Board regarding compensation and incentive arrangements (including
performance-based arrangements) for the Chief Executive Officer, other
Executive Officers, officers and other key managerial employees of the Company.
The Compensation Committee also considers and recommends awards of stock
options to purchase shares of Common Stock pursuant to the Revlon, Inc. 1996
Stock Plan (the "Stock Plan") and administers the Stock Plan.
During 1996, the Board of Directors held four meetings and acted two
times by unanimous written consent of all members thereof in accordance with
the Company's By-Laws and the DGCL, and the Executive Committee acted two times
by unanimous written consent of all members thereof in accordance with the
Company's By-Laws and the DGCL. The Audit Committee held two meetings in 1996.
During 1996, the Compensation Committee acted five times by unanimous written
consent of all members thereof in accordance with the Company's By-Laws and the
DGCL. During 1996, all Directors attended 75% or more of the meetings of the
Board of Directors and of the Committees of which they were members.
26
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information for the years indicated
concerning the compensation awarded to, earned by or paid to the Chief
Executive Officer of the Company and the four most highly paid executive
officers, other than the Chief Executive Officer, who served as executive
officers of the Company as of December 31, 1996, for services rendered in all
capacities to the Company and its subsidiaries during such periods.
SUMMARY COMPENSATION TABLE
------------------------------- --------- --------------------------------------- ------------ -------------
LONG-TERM
ANNUAL COMPENSATION (A) COMPENSATION
------------- ------------- ----------- AWARDS
------------
OTHER SECURITIES
ANNUAL UNDER- ALL OTHER
NAME AND COMPEN- LYING COMPEN-
PRINCIPAL POSITION YEAR SALARY BONUS SATION OPTIONS SATION
($) ($) ($) ($)
------------------------------- --------- ------------- ------------- ----------- ------------ -------------
Jerry W. Levin (b) 1996 1,500,000 1,500,000 93,801 170,000 307,213
Chairman of the Board 1995 1,450,000 1,450,000 42,651 0 308,002
1994 1,300,000 1,300,000 39,184 0 540,177
------------------------------- --------- ------------- ------------- ----------- ------------ -------------
George Fellows (c) 1996 1,025,000 870,000 15,242 120,000 4,500
President and Chief Executive 1995 841,667 531,700 68,559 0 4,500
Officer 1994 745,833 449,200 11,625 0 104,500
------------------------------- --------- ------------- ------------- ----------- ------------ -------------
William J. Fox (d) 1996 750,000 598,600 50,143 50,000 56,290
Senior Executive Vice 1995 660,000 455,000 54,731 0 56,290
President and Chief Financial 1994 601,333 329,900 59,143 0 56,290
Officer
------------------------------- --------- ------------- ------------- ----------- ------------ -------------
Carlos Colomer 1996 700,000 192,600 ---------- 37,000 ----------
Executive Vice President 1995 600,000 135,200 ---------- 0 ----------
1994 550,000 280,200 ---------- 0 ----------
------------------------------- --------- ------------- ------------- ----------- ------------ -------------
M. Katherine Dwyer (e) 1996 500,000 326,100 90,029 45,000 4,500
Senior Vice President
------------------------------- --------- ------------- ------------- ----------- ------------ -------------
(a) The amounts shown in Annual Compensation for 1996, 1995 and 1994 reflect
salary and bonus and other annual compensation awarded to, earned by or
paid to the persons listed for services rendered to the Company and its
subsidiaries. The Company has a bonus plan (the "Executive Bonus Plan")
in which executives participate (including the Chief Executive Officer
and the other Named Executive Officers). The Executive Bonus Plan
provides for payment of cash compensation upon the achievement of
predetermined individual and corporate performance goals during the
calendar year (with the opportunity for higher awards based upon
overachievement of such goals but in no event higher than 100%).
(b) Mr. Levin was Chief Executive Officer of the Company during 1994, 1995
and 1996. The amount shown for Mr. Levin under Other Annual
Compensation for 1996 includes $26,400 in respect of personal use of a
Company provided automobile and payments in respect of gross ups for
taxes on imputed income arising out of personal use of a
Company-provided automobile and for taxes on imputed income arising out
of premiums paid or reimbursed by the Company in respect of life
insurance. The amount shown for Mr. Levin under All Other
27
Compensation for 1996 reflects $302,713 in respect of life insurance
premiums and $4,500 in respect of matching contributions under the
Revlon Employees' Savings and Investment Plan (the "401(k) Plan"). The
amount shown for Mr. Levin under Other Annual Compensation for 1995
reflects payments in respect of gross ups for taxes on imputed income
arising out of personal use of a Company-provided automobile and for
taxes on imputed income arising out of premiums paid or reimbursed by
the Company in respect of life insurance. The amount shown for Mr.
Levin under All Other Compensation for 1995 reflects $303,502 in
respect of life insurance premiums and $4,500 in respect of matching
contributions under the 401(k) Plan. The amount shown for Mr. Levin
under Other Annual Compensation for 1994 reflects payments in respect
of gross ups for taxes on imputed income arising out of personal use of
a Company-provided automobile and for taxes on imputed income arising
out of premiums paid or reimbursed by the Company in respect of life
insurance. The amounts shown for Mr. Levin under All Other Compensation
for 1994 reflect payments in respect of life insurance premiums and
certain relocation expenses and matching contributions under the 401(k)
Plan. In connection with such relocation, the Company purchased for
face value a $525,000 purchase money note made by the purchaser of Mr.
Levin's home secured by a mortgage on such home.
(c) Mr. Fellows became Chief Executive Officer of the Company in January
1997. The amount shown for Mr. Fellows under Other Annual Compensation
for 1996 reflects payments in respect of gross ups for taxes on imputed
income arising out of personal use of a Company-provided automobile and
for taxes on imputed income arising out of premiums paid or reimbursed
by the Company in respect of life insurance. The amount shown for Mr.
Fellows under All Other Compensation for 1996 reflects matching
contributions under the 401(k) Plan. The amount shown for Mr. Fellows
under Other Annual Compensation for 1995 includes $43,251 in respect of
membership fees and related expenses for personal use of a health and
country club and $9,458 in respect of gross up for taxes on imputed
income arising out of personal use of a Company-provided automobile.
The amount shown for Mr. Fellows under All Other Compensation for 1995
reflects matching contributions under the 401(k) Plan. The amount shown
for Mr. Fellows under Other Annual Compensation for 1994 reflects
payments in respect of gross up for taxes on imputed income arising out
of personal use of a Company-provided automobile. The amounts shown for
Mr. Fellows under All Other Compensation for 1994 reflect matching
contributions under the 401(k) Plan and reimbursement for long-term
compensation and other benefits under plans of his prior employer,
which Mr. Fellows forfeited by accepting employment with the Company.
(d) Mr. Fox became Senior Executive Vice President of the Company in
January 1997. The amount shown for Mr. Fox under Other Annual
Compensation for 1996 reflects payments in respect of gross ups for
taxes on imputed income arising out of personal use of a
Company-provided automobile and for taxes on imputed income arising out
of premiums paid or reimbursed by the Company in respect of life
insurance. The amount shown for Mr. Fox under All Other Compensation
for 1996 reflects $51,790 in respect of life insurance premiums and
$4,500 in respect of matching contributions under the 401(k) Plan. The
amount shown for Mr. Fox under Other Annual Compensation for 1995
reflects payments in respect of gross ups for taxes on imputed income
arising out of personal use of a Company-provided automobile and for
taxes on imputed income arising out of premiums paid or reimbursed by
the Company in respect of life insurance. The amount shown for Mr. Fox
under All Other Compensation for 1995 reflects $51,790 in respect of
life insurance premiums and $4,500 in respect of matching contributions
under the 401(k) Plan. The amount shown for Mr. Fox under Other Annual
Compensation for 1994 reflects payments in respect of gross ups for
taxes on imputed income arising out of personal use of a
Company-provided automobile and for taxes on imputed income arising out
of premiums paid or reimbursed by the Company in respect of life
insurance for Mr. Fox. The amounts shown for Mr. Fox under All Other
Compensation for 1994 reflect payments in respect of life insurance
premiums and matching contributions under the 401(k) Plan.
(e) Ms. Dwyer became an executive officer of the Company on December 17,
1996. The amount shown for Ms. Dwyer under Other Annual Compensation for
1996 reflects $57,264 in expense reimbursements and payments in respect
of gross up for taxes on imputed income arising out of personal use of a
Company-provided automobile. The amount shown for Ms. Dwyer under All
Other Compensation for 1996 reflects matching contributions under the
401(k) Plan.
28
OPTION GRANTS IN THE LAST FISCAL YEAR
During 1996, the following grants of stock options were made pursuant to
the Stock Plan to the executive officers named in the Summary Compensation
Table:
----------------------------------------------------------------------------------- --------------
Grant Date
Value
Individual Grants (a) (b)
----------------------------------------------------------------------------------- --------------
Percent
of Total
Options
Number of Granted
Securities To Exercise Grant Date
Underlying Employees Of Base Present
Option In Fiscal Price Value $
Name Granted (#) Year ($/Sh) Expiration
Date
----------------------------- ------------- ------------ ------------ ------------- --------------
Jerry W. Levin
Chairman (c) 170,000 17% 24.00 2/28/06 1,885,079
----------------------------- ------------- ------------ ------------ ------------- --------------
George Fellows
President and Chief 120,000 12% 24.00 2/28/06 1,330,644
Executive Officer (c)
----------------------------- ------------- ------------ ------------ ------------- --------------
William J. Fox
Senior Executive Vice
President and Chief 50,000 5% 24.00 2/28/06 554,435
Financial Officer (c)
----------------------------- ------------- ------------ ------------ ------------- --------------
Carlos Colomer
Executive Vice President 37,000 4% 24.00 2/28/06 410,282
----------------------------- ------------- ------------ ------------ ------------- --------------
M. Katherine Dwyer
Senior Vice President 45,000 5% 24.00 2/28/06 498,992
----------------------------- ------------- ------------ ------------ ------------- --------------
(a) Prior to the consummation of the Offering, the Board of Directors
made initial grants under the Stock Plan of non-qualified options having a term
of 10 years to purchase shares of Class A Common Stock at an exercise price
equal to the initial public offering price. The grants to Messrs. Levin,
Fellows, Fox and Colomer and Ms. Dwyer will not vest as to any portion until
the third anniversary of the grant date and will thereupon become 100% vested,
except that upon termination of employment by the Company other than for
"cause", death or "disability" under the applicable employment agreement, such
options will vest with respect to 50% of the shares subject thereto (if the
termination is between the second and third anniversaries of the grant).
(b) Present values were calculated using the Black-Scholes option
pricing model. The model as applied used the grant date of February 29, 1996
and the exercise price per share specified in the table above was equal to the
fair market value per share of Common Stock on the date of grant. The model
also assumes (i) risk-free rate of return of 5.99% which was the rate as of the
grant date for the U.S. Treasury Zero Coupon Bond issues with a remaining term
similar to the expected term of the option, (ii) stock price volatility of .31
based upon the peer group average, (iii) a constant dividend rate of zero
percent and (iv) that the options normally would be exercised on the final day
of the seventh year after grant. No discount from the theoretical value was
taken to reflect the waiting period, if any, prior to vesting of the stock
options, the restrictions on the transfer of the stock options and the
likelihood that the stock options will be exercised in advance of the final day
of their term.
(c) Mr. Levin served as Chief Executive Officer during 1996. Mr.
Fellows was elected Chief Executive Officer in January 1997. Mr. Fox was
elected Senior Executive Vice President in January 1997.
29
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following chart shows the number of stock options exercised during
1996 and the 1996 year-end value of the stock options held by the executive
officers named in the Summary Compensation Table:
--------------------------- --------------- ------------ -------------------------- -------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options At
Options At Fiscal Fiscal Year-End ($)
Shares Value Year-End (#) Exercisable/
Acquired on Realized Exercisable/ Unexercisable
Name Exercise (#) ($) Unexercisable (a)
--------------------------- --------------- ------------ -------------------------- -------------------------
Jerry W. Levin
Chairman (b)
0 0 0 / 170,000 0 / 998,750
--------------------------- --------------- ------------ -------------------------- -------------------------
George Fellows
President and
Chief Executive Officer 0 0 0 / 120,000 0 / 705,000
(b)
--------------------------- --------------- ------------ -------------------------- -------------------------
William J. Fox
Senior Executive Vice
President and
Chief Financial Officer 0 0 0 / 50,000 0 / 293,750
(b)
--------------------------- --------------- ------------ -------------------------- -------------------------
Carlos Colomer
Executive Vice President 0 0 0 / 37,000 0 / 217,375
--------------------------- --------------- ------------ -------------------------- -------------------------
M. Katherine Dwyer
Senior Vice President 0 0 0 / 45,000 0 / 264,375
--------------------------- --------------- ------------ -------------------------- -------------------------
(a) Amounts shown represent the market value of the underlying shares of
Class A Common Stock at year-end calculated using the December 31, 1996 New
York Stock Exchange (the "NYSE") closing price per share of Class A Common
Stock of $29.875 minus the exercise price of the stock option. The actual
value, if any, an executive may realize is dependent upon the amount by which
the market price of shares of Common Stock exceeds the exercise price per share
when the stock options are exercised. The actual value realized may be greater
or less than the value shown in the table.
(b) Mr. Levin served as Chief Executive Officer during 1996. Mr.
Fellows was elected Chief Executive Officer in January 1997. Mr. Fox was
elected Senior Executive Vice President in January 1997.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
Each of the Named Executive Officers has entered into an Executive
Employment Agreement with the Company's wholly owned subsidiary, Products
Corporation (except in the case of Mr. Colomer, who has entered into an
Executive Employment Agreement with a subsidiary of Products Corporation),
which became effective upon consummation of the Offering, providing for their
continued employment. At any time on or after the second anniversary of the
effective date of the relevant Executive Employment Agreement, the Company may
terminate the term by 12 months prior notice of non-renewal. The agreements
provide for base salary of not less than $1,500,000, $1,650,000 and $1,800,000
during 1996, 1997 and 1998 and thereafter, respectively, in the case of Mr.
Levin, and not less than $1,000,000, $750,000, $700,000 and $500,000 (or any
greater amount to which such base salary amounts may be increased) in the case
of Messrs. Fellows, Fox and Colomer and Ms. Dwyer, respectively, participation
in the Executive Bonus Plan, continuation of life insurance and executive
medical insurance coverage in the event of permanent disability, the provision
of post-retirement life insurance coverage in the amount of two times base
salary in certain circumstances, and participation in other executive benefit
plans on a basis equivalent to senior executives of the
30
Company generally. The agreements with Messrs. Fellows and Colomer and
Ms. Dwyer provide for Company-paid supplemental term life insurance
during employment in the amount of three times base salary, while the
agreements with Messrs. Levin and Fox provide that, in lieu of any
participation in Company-paid pre-retirement life insurance coverage,
Products Corporation will pay premiums and gross up for taxes thereon
in respect of, in the case of Mr. Levin, whole life insurance policies
on his life in the amount of $14,100,000 under a split dollar
arrangement pursuant to which Products Corporation would be repaid the
amount of premiums it paid up to the cash surrender value of the
policies from insurance proceeds payable under the policies and, in the
case of Mr. Fox, a whole life insurance policy on his life in the
amount of $5,000,000 under an arrangement providing for all insurance
proceeds to be paid to the designated beneficiary under such policy.
The agreements also require that management recommend to the
Compensation Committee that Messrs. Levin, Fellows, Fox and Colomer and
Ms. Dwyer be granted options to purchase 170,000, 120,000, 50,000,
37,000, and 45,000 (in first year and 30,000 thereafter) shares of
Class A Common Stock, respectively, each year during the term of the
relevant Executive Employment Agreement. The agreements provide that in
the event of termination of the term of the relevant Executive
Employment Agreement by Products Corporation otherwise than for "good
reason" as defined in the Executive Severance Policy or failure of the
Compensation Committee to adopt and implement the recommendations of
management with respect to stock option grants, the executive would be
entitled to severance pursuant to the Executive Severance Policy as in
effect on January 1, 1996 (see -"Executive Severance Policy"). In
addition, the employment agreement with Mr. Fellows provides that if he
remains continuously employed with 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 (expressed as
a straight life annuity) equals $500,000. Upon any earlier retirement
with Products Corporation's consent or any earlier termination of
employment by Products Corporation otherwise than for "good reason" (as
defined in the Executive Severance Policy), Mr. Fellows will be
entitled to a reduced annual payment in an amount equal to the product
of multiplying $28,540 by the number of anniversaries, as of the date
of retirement or termination, of Mr. Fellows' fifty-third birthday (but
in no event more than would have been payable to Mr. Fellows under the
foregoing provision had he retired at age 60). In each case, Products
Corporation reserves the right to treat Mr. Fellows as having deferred
payment of pension for purposes of computing such supplemental
payments.
As of December 31, 1996, 1995, and 1994, Mr. Colomer had a loan
outstanding from the Company's subsidiary in Spain in the amount of 25.0
million Spanish pesetas (approximately $205,000 U.S. dollar equivalent as of
December 31, 1996) dating from 1991 pursuant to a management retention program
grandfathered under a 1992 change in the Spanish tax law which currently covers
certain executives of such subsidiary, including Mr. Colomer. Pursuant to this
management retention program, outstanding loans do not bear interest but an
amount equal to the one-year government bond interest rate in effect at the
beginning of the year is deducted from the executives' annual compensation, and
loans must be repaid in full upon termination of employment. The amount
deducted from Mr. Colomer's compensation was 2.15 million Spanish pesetas
(approximately $16,988 U.S. dollar equivalent as of December 31, 1996) for
1996; 2.25 million Spanish pesetas (approximately $18,097 U.S. dollar
equivalent as of December 31, 1995) for 1995 and 2.25 million Spanish pesetas
(approximately $17,094 U.S. dollar equivalent as of December 31, 1994) for
1994.
EXECUTIVE SEVERANCE POLICY
Products Corporation's Executive Severance Policy, as amended
effective January 1, 1996, provides that upon termination of employment of
eligible executive employees, including the Named Executive Officers, other
than voluntary resignation, retirement or termination by Products Corporation
for good reason, in consideration for the execution of a release and
confidentiality agreement and the Company's standard Employee Agreement as to
Confidentiality and Non-Competition (the "Non-Competition Agreement"), the
eligible executive will be entitled to receive, in lieu of severance under any
employment agreement then in effect or under Products Corporation's basic
severance plan, a number of months of severance pay in semi-monthly
installments based upon such executive's grade level and years of service
reduced by the amount of any compensation from subsequent employment,
unemployment compensation or statutory termination payments received by such
executive during the severance period, and, in certain circumstances, by the
actuarial value of enhanced pension benefits received by the executive as well
as continued participation in medical and certain other benefit plans for the
severance period (or in lieu thereof, upon commencement of subsequent
employment, a lump sum payment equal to the then present value of 50% of the
amount of base salary then remaining payable through the balance of the
severance period, not to exceed
31
six months' base salary). Pursuant to the Executive Severance Policy,
upon meeting the conditions set forth therein, Messrs. Levin, Fellows,
Colomer and Fox and Ms. Dwyer would be entitled to severance pay equal
to two years of base salary at the rate in effect on the date of
employment termination plus continued participation in the medical and
dental plans for two years on the same terms as active employees.
DEFINED BENEFIT PLANS
The following table shows the estimated annual retirement benefits
payable (as of December 31, 1996) 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, under the
Revlon Employees' Retirement Plan (the "Retirement Plan"), including amounts
attributable to the Pension Equalization Plan, each as described below:
HIGHEST CONSECUTIVE
FIVE-YEAR AVERAGE
COMPENSATION ESTIMATED ANNUAL STRAIGHT LIFE BENEFITS AT RETIREMENT
DURING FINAL TEN YEARS WITH INDICATED YEARS OF CREDITED SERVICE (A)
- ---------------------- ----------------------------------------------------------
15 20 25 30 35
---------- ---------- ---------- ---------- ----------
$600,000 $152,022 $202,696 $253,370 $304,044 $304,044
700,000 178,022 237,363 296,703 356,044 356,044
800,000 204,022 272,029 340,037 408,044 408,044
900,000 230,022 306,696 383,370 460,044 460,044
1,000,000 256,022 341,363 426,703 500,000 500,000
1,100,000 282,022 376,029 470,037 500,000 500,000
1,200,000 308,022 410,696 500,000 500,000 500,000
1,300,000 334,022 445,363 500,000 500,000 500,000
1,400,000 360,022 480,029 500,000 500,000 500,000
1,500,000 386,022 500,000 500,000 500,000 500,000
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 life annuity.
The Retirement Plan is intended to be a tax qualified defined benefit
plan. Retirement Plan benefits are a function of service and final average
compensation. The Retirement Plan 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 only includes all periods of employment with the
Company or a subsidiary prior to retirement. The base salaries and bonuses of
each of the Named Executive Officers are set forth in the Summary Compensation
Table under columns entitled "Salary" and "Bonus," respectively.
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 January 1, 1996, is a
non-qualified benefit arrangement designed to provide for the payment by the
Company of the difference, if any, between the amount of such maximum
limitations and the annual benefit that would be payable under the Retirement
Plan 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, in any case, on the participant not competing
with Products Corporation for one year after termination of employment.
The number of years of credited service under the Retirement Plan and
the Pension Equalization Plan as of January 1, 1997 for Mr. Levin is seven
years (which includes credit for service with MacAndrews Holdings), for Mr.
32
Fellows is eight years (which includes credit for prior service with Holdings),
for Mr. Fox is 13 years (which includes credit for service with MacAndrews
Holdings) and for Ms. Dwyer is 3 years. Mr. Colomer does not participate in the
Retirement Plan or the Pension Equalization Plan. Mr. Colomer participates in
the Revlon Foreign Service Employees Pension Plan (the "Foreign Pension Plan").
The Foreign Pension Plan is a non-qualified defined benefit plan. The plan is
designed to provide an employee with 2% of final average salary for each year
of credited service, up to a maximum of 30 years, reduced by the sum of all
other Company provided retirement benefits and social security or other
government provided retirement benefits. Credited service includes all periods
of employment with the Company or a subsidiary prior to retirement. Final
average salary is defined as average annual base salary during the five
consecutive calendar years in which base salary was highest out of the last 10
years prior to retirement. The normal form of payment under the Foreign Pension
Plan is a life annuity. Mr. Colomer's credited service as of January 1, 1997
under the Foreign Pension Plan is 17 years (which includes credit for service
with Holdings).
COMPENSATION OF DIRECTORS
Directors who currently are not receiving compensation as officers or
employees of the Company or any of its affiliates are paid an annual retainer
fee of $25,000, payable in monthly installments, and a fee of $1,000 for each
meeting of the Board of Directors or any committee thereof they attend.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company conducts its business through Products Corporation and
Products Corporation's subsidiaries. For 1996, the Company's executive officers
were compensated by Products Corporation for services rendered to the Company
and its subsidiaries, participated in benefit plans sponsored by Products
Corporation and did not receive compensation from the Company other than grants
of options under the Stock Plan. The Compensation Committee (made up of Messrs.
Gittis and Drapkin effective February 22, 1996 and Mr. Semel effective June 6,
1996) determined compensation of executive officers of the Company from and
after the Offering.
During 1996, the Company has used an airplane which was owned by a
corporation of which Messrs. Gittis, Drapkin and Levin were the sole
stockholders. As of December 31, 1996, Mr. Levin no longer holds an ownership
interest in the corporation that owns the airplane. See "Certain Relationships
and Related Transactions - Other."
33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of February 1, 1996, the number of
shares of Common Stock beneficially owned, and the percent so owned, by (i)
each person known to the Company to be the beneficial owner of more than 5% of
the outstanding shares of Common stock, (ii) each director of the Company who
is a beneficial owner of any shares of Common Stock, (iii) the chief executive
officer and each of the four most highly compensated executive officers of the
Company during 1996 and (iv) all directors and executive officers of the
Company as a group. The number of shares owned are those beneficially owned, as
determined under the rules of the Securities and Exchange Commission (the
"SEC"), and such information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rules, beneficial ownership
includes any shares of Common Stock as to which a person has sole or shared
voting power or investment power and any shares of Common Stock which the
person has the right to acquire within 60 days through the exercise of any
option, warrant or right, through conversion of any security or pursuant to the
automatic termination of a power of attorney or revocation of a trust,
discretionary account or similar arrangement.
34
NAME AND ADDRESS AMOUNT AND NATURE
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------- -------------------- ----------------
Ronald O. Perelman 11,250,000 (Class A) (1) 56.6%
35 E. 62nd St. 31,250,000 (Class B) (1) 100%
New York, NY 10021
Carlos Colomer 0
Donald Drapkin 12,000 (Class A) (2) *
M. Katherine Dwyer 3,000 (Class A) *
Meyer Feldberg 0
George Fellows 10,000 (Class A) *
William J. Fox 10,000 (Class A) (3) *
Howard Gittis 15,000 (Class A) *
Vernon E. Jordan 0
Henry A. Kissinger 0 *
Edward J. Landau 0
Jerry W. Levin 26,000 (Class A) (4) *
Linda Gosden Robinson 0 *
Terry Semel 5,000 (Class A) (5) *
Martha Stewart 0
- ------------
All Nominees and Executive Officers as a
Group (18 Persons) (6) 11,352,250 (Class A) 57.1%
31,250,000 (Class B) 100%
- ------------
* Less than one percent
(1) Mr. Perelman through Mafco Holdings Inc. (which through Revlon Worldwide)
beneficially owns 11,250,000 shares of Class A Common Stock (representing 56.6%
of the outstanding shares of Class A Common Stock) and all of the outstanding
31,250,000 shares of Class B Common Stock, which together represent 83.1% of
the outstanding shares of Common Stock and has approximately 97.4% of the
combined voting power of the outstanding shares of Common Stock. All of the
shares of Common Stock owned by Revlon Worldwide are pledged by Revlon
Worldwide to secure its obligations under certain indebtedness, and shares of
intermediate holding companies are or may from time to time be pledged to
secure obligations of Mafco Holdings Inc. or its affiliates.
(2) All of such shares are held by trusts for Mr. Drapkin's children and
beneficial ownership is disclaimed.
(3) Includes 5,800 shares owned by Mr. Fox's wife and 4,200 shares owned by
his children as to which beneficial ownership is disclaimed.
34
(4) Includes 1,000 shares owned by Mr. Levin's daughter as to which beneficial
ownership is disclaimed.
(5) Includes 2,000 shares owned by Mr. Semel's children as to which beneficial
ownership is disclaimed.
(6) Includes 16,500 shares owned by executive officers not listed in the table
as to which beneficial ownership is disclaimed for 2,350 shares. Also includes
4,750 shares which may be acquired under options which vest on February 28,
1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Through Revlon Worldwide, MacAndrews & Forbes beneficially owns shares
of Common Stock having approximately 97.4% of the combined voting power of the
outstanding shares of Common Stock. As a result, MacAndrews & Forbes is able to
elect the entire Board of Directors of the Company and control the vote on all
matters submitted to a vote of the Company's stockholders. MacAndrews & Forbes
is wholly owned by Ronald O. Perelman, who is Chairman of the Executive
Committee of the Board and a Director of the Company.
TRANSFER AGREEMENTS
In June 1992, the Company and Products Corporation entered into an
asset transfer agreement with Holdings and certain of its wholly owned
subsidiaries (the "Asset Transfer Agreement"), and the Company 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"). Holdings retained certain small
brands that historically had not been profitable ("Retained Brands"). Holdings
agreed to indemnify the Company and Products Corporation against losses arising
from the Excluded Liabilities, and the Company 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 1996 was $1.4 million.
BENEFIT PLANS ASSUMPTION AGREEMENT
Holdings, Products Corporation and the Company entered into a benefit
plans assumption agreement dated as of July 1, 1992 pursuant to which Products
Corporation assumed all rights, liabilities and obligations under all of
Holdings' benefit plans, arrangements and agreements, including obligations
under the Revlon Employees' Retirement Plan and the Revlon Employees' Savings
and Investment Plan. Products Corporation was substituted for Holdings as
sponsor of all such plans theretofore sponsored by Holdings.
OPERATING SERVICES AGREEMENT
In June 1992, the Company, Products Corporation and Holdings entered
into an operating services agreement (as amended and restated, and as
subsequently amended, the "Operating Services Agreement") pursuant to which
Products Corporation manufactures, markets, distributes, warehouses and
administers, including the collection of accounts receivable, the Retained
Brands for Holdings. Pursuant to the Operating Services Agreement, Products
Corporation is reimbursed an amount equal to all of its and the Company's
direct and indirect costs incurred in connection with furnishing such services,
net of the amounts collected by Products Corporation with respect to the
Retained Brands, payable quarterly. The net amount reimbursed by Holdings to
the Company for such direct and indirect costs for 1996 was $5.1 million.
Holdings also pays Products Corporation a fee equal to 5% of the net sales of
the Retained Brands, payable quarterly. The fees paid by Holdings to Products
Corporation pursuant to the Operating Services Agreement for services with
respect to the Retained Brands for 1996 was approximately $.6 million
35
REIMBURSEMENT AGREEMENTS
The Company, Products Corporation and MacAndrews Holdings have entered
into reimbursement agreements (the "Reimbursement Agreements") pursuant to
which (i) MacAndrews Holdings is obligated to provide certain professional and
administrative services, including employees, to the Company and its
subsidiaries, including Products Corporation, and purchase services from third
party providers, such as insurance and legal and accounting services, on behalf
of the Company 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 purchase services from third
party providers, such as insurance and legal and accounting services, on behalf
of MacAndrews Holdings 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. The Company reimburses MacAndrews Holdings for the allocable costs of
the services purchased for or provided to the Company and for reasonable
out-of-pocket expenses incurred in connection with the provision of such
services. MacAndrews Holdings reimburses the Company for the allocable costs of
the services purchased for or provided to MacAndrews Holdings and for the
reasonable out-of-pocket expenses incurred in connection with the purchase or
provision of such services. In addition, in connection with certain insurance
coverage provided by MacAndrews Holdings, Products Corporation obtained letters
of credit under the standby letter of credit facility (which aggregated
approximately $26.4 million as of December 31, 1996) to support certain
self-funded risks of MacAndrews Holdings and its affiliates, including the
Company, associated with such insurance coverage. The costs of such letters of
credit are allocated among, and paid by, the affiliates of MacAndrews Holdings,
including the Company, which participate in the insurance coverage to which the
letters of credit relate. The Company expects that these self-funded risks will
be paid in the ordinary course and, therefore, it is unlikely that such letters
of credit will be drawn upon. MacAndrews Holdings has agreed to indemnify the
Company to the extent amounts are drawn under any of such letters of credit
with respect to claims for which the Company is not responsible. The net amount
reimbursed by MacAndrews Holdings to the Company for the services provided
under the Reimbursement Agreements for 1996 was $2.2 million. Each of the
Company 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.
The Company does not intend to request services under the Reimbursement
Agreements unless their costs would be at least as favorable to the Company as
could be obtained from unaffiliated third parties.
TAX SHARING AGREEMENT
The Company, for federal income tax purposes, is included in the
affiliated group of which Mafco Holdings is the common parent, and the
Company's federal taxable income and loss is included in such group's
consolidated tax return filed by Mafco Holdings. The Company also may be
included in certain state and local tax returns of Mafco Holdings or its
subsidiaries. In June 1992, Holdings, the Company and certain of its
subsidiaries, and Mafco Holdings entered into a tax sharing agreement (as
subsequently amended, the "Tax Sharing Agreement"), pursuant to which Mafco
Holdings has agreed to indemnify the Company 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 the Company or its
subsidiaries) is the common parent for taxable periods beginning on or after
January 1, 1992 during which the Company or a subsidiary of the Company is a
member of such group. Pursuant to the Tax Sharing Agreement, for all taxable
periods beginning on or after January 1, 1992, the Company will pay to Holdings
amounts equal to the taxes that the Company 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 the Company), except that the Company
will not be entitled to carry back any losses to taxable periods ending prior
to January 1, 1992. No payments are required by the Company if and to the
extent Products Corporation is prohibited under the Credit Agreement from
making cash tax sharing payments to the Company. The Credit Agreement prohibits
Products Corporation from making such cash tax sharing payments other than in
respect of state and local income taxes. Since the payments to be made by the
Company under the Tax Sharing Agreement will be determined by the amount of
taxes that the Company would otherwise have to pay if it were to file separate
federal, state or local income tax returns, the Tax Sharing Agreement will
benefit Mafco Holdings to the extent Mafco Holdings can offset the taxable
income generated by the
36
Company against losses and tax credits generated by Mafco Holdings and its
other subsidiaries. There were no cash payments by the Company pursuant to the
Tax Sharing Agreement for 1996.
FINANCING REIMBURSEMENT AGREEMENT
Holdings and Products Corporation entered into a financing
reimbursement agreement (the "Financing Reimbursement Agreement") in 1992
pursuant to which Holdings agreed to reimburse Products Corporation for
Holdings' allocable portion of (i) the debt issuance cost and advisory fees
related to the capital restructuring of Holdings and (ii) interest expense
attributable to the higher cost of funds paid by Products Corporation under the
credit agreement in effect at that time as a result of additional borrowings
for the benefit of Holdings in connection with the assumption of certain
liabilities by Products Corporation under the Asset Transfer Agreement and the
repurchase of Old Senior Subordinated Notes from affiliates. In February 1995,
the Financing Reimbursement Agreement was amended and extended to provide that
Holdings would reimburse Products Corporation for a portion of the debt
issuance costs and advisory fees related to the Former Credit Agreement and 1
1/2 % per annum of the average balance outstanding under the Former Credit
Agreement and the average balance outstanding under working capital borrowings
from affiliates through June 30, 1996 and such amounts were evidenced by a
noninterest-bearing promissory note payable on June 30, 1996. In June 1996,
$10.9 million in notes due to Products Corporation, which included $2.0 million
of interest reimbursement in 1996, under the Financing Reimbursement Agreement
from Holdings was offset against a $11.7 million demand note payable by
Products Corporation to Holdings. The Financing Reimbursement Agreement expired
on June 30, 1996.
REGISTRATION RIGHTS AGREEMENT
Prior to the consummation of the Offering, the Company and Revlon
Worldwide, the direct parent of the Company entered into the Registration
Rights Agreement pursuant to which Revlon Worldwide and certain transferees of
Common Stock held by Revlon Worldwide (the "Holders") have the right to require
the Company to register all or part of the Class A Common Stock owned by such
Holders and the Class A Common Stock issuable upon conversion of the Class B
Common Stock owned by such Holders under the Securities Act (a "Demand
Registration"); provided that the Company may postpone giving effect to a
Demand Registration up to a period of 30 days if the Company believes such
registration might have a material adverse effect on any plan or proposal by
the Company with respect to any financing, acquisition, recapitalization,
reorganization or other material transaction, or the Company 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 the
Company. In addition, the Holders have the right to participate in
registrations by the Company 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. The Company will pay any expenses
incurred in connection with a Piggyback Registration, except for underwriting
discounts, commissions and expenses attributable to the shares of Class A
Common Stock sold by such Holders.
OTHER
Pursuant to a lease dated April 2, 1993 (the "Edison Lease"), Holdings
leases 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 are not to exceed $2.0 million per year. Pursuant to an assumption
agreement dated February 18, 1993, Holdings agreed to assume all costs and
expenses of the ownership and operation of the Edison facility as of January 1,
1993, other than (i) the operating expenses for which Products Corporation is
responsible under the Edison Lease and (ii) environmental claims and compliance
costs relating to matters which occurred prior to January 1, 1993 up to an
amount not to exceed $8.0 million (the amount of such claims and costs for
which Products Corporation is responsible, the "Environmental Limit"). In
addition, pursuant to such assumption agreement, Products Corporation agreed to
indemnify Holdings for environmental claims and compliance costs relating to
matters which occurred prior to January 1, 1993 up to an amount not to exceed
the Environmental Limit and Holdings agreed to indemnify Products Corporation
for environmental claims and compliance costs relating to matters which
occurred prior to January 1, 1993 in excess of the Environmental Limit and all
such claims and costs relating to matters occurring on or after January 1,
1993. Pursuant to an occupancy agreement, during 1996 Products Corporation
rented a portion of the administration building located at the Edison
37
facility and space for a retail store of the Company. Products Corporation
provides certain administrative services, including accounting, for Holdings
with respect to the Edison facility pursuant to which Products Corporation
pays on behalf of Holdings costs associated with the Edison facility and is
reimbursed by Holdings for such costs, less the amount owed by Products
Corporation to Holdings pursuant to the Edison Lease and the occupancy
agreement. The net amount reimbursed by Holdings to Products Corporation
for such costs with respect to the Edison facility for 1996 was $1.1 million.
Effective January 1, 1996, Products Corporation acquired from Holdings
substantially all of the assets of Tarlow in consideration for the assumption
of substantially all of the liabilities and obligations of Tarlow. Net
liabilities assumed were approximately $3.4 million. Products Corporation paid
$4.1 million to Holdings which was accounted for as an increase in capital
deficiency. A nationally recognized investment banking firm rendered its
written opinion that the terms of the purchase are fair from a financial
standpoint to Products Corporation.
During 1996, Products Corporation leased certain facilities to
MacAndrews & Forbes or its affiliates pursuant to occupancy agreements and
leases including space at Products Corporation's New York headquarters and at
Products Corporation's offices in London and Tokyo. The rent paid by MacAndrews
& Forbes or its affiliates to Products Corporation for 1996 was $4.6 million.
The Credit Agreement is supported by, among other things, guarantees
from Holdings and certain of its subsidiaries. The obligations under such
guarantees are secured by, among other things, (i) the capital stock and
certain assets of certain subsidiaries of Holdings and (ii) a mortgage on
Holdings' Edison, New Jersey facility.
Products Corporation borrows funds from its affiliates from time to
time to supplement its working capital borrowings. No such borrowings were
outstanding as of December 31, 1996. The interest rates for such borrowings are
more favorable to Products Corporation than interest rates under the Credit
Agreement and, for borrowings occurring prior to the execution of the Credit
Agreement, the credit facility in effect at the time of such borrowing. The
amount of interest paid by Products Corporation for such borrowings for 1996
was $0.5 million.
In November 1993, Products Corporation assigned to Holdings a lease
for warehouse space in New Jersey (the "N.J. Warehouse") between Products
Corporation and a trust established for the benefit of certain family members
of the Chairman of the Executive Committee. The N.J. Warehouse had become
vacant as a result of divestitures and restructuring of Products Corporation.
The lease has annual lease payments of approximately $2.3 million and
terminates on June 30, 2005. In consideration for Holdings assuming all
liabilities and obligations under the lease, Products Corporation paid
Holdings $7.5 million (for which a liability was previously recorded) in
three installments of $2.5 million each in January 1994, January 1995 and
January 1996. A nationally recognized investment banking firm rendered its
written opinion that the terms of the lease transfer were fair from a financial
standpoint to Products Corporation. During 1996, Products Corporation paid
$0.2 million associated with the N.J. Warehouse on behalf of Holdings and was
reimbursed by Holdings for such amount.
During 1996, the Company used an airplane which was owned by a
corporation of which Messrs. Gittis, Drapkin and Levin were the sole
stockholders. In 1996, the Company paid approximately $0.2 million for the
usage of the airplane. As of December 31, 1996, Mr. Levin no longer holds an
ownership interest in the corporation that owned the airplane.
Consolidated Cigar, an affiliate of the Company, assembles lipstick
cases for Products Corporation. Products Corporation paid approximately $1.0
million for such services in 1996.
In the fourth quarter of 1996, Products Corporation and certain of its
subsidiaries purchased an inactive subsidiary from an affiliate for net cash
consideration of approximately $3.0 million in a series of transactions in
which the Company expects to realize certain tax benefits in future years.
The law firm of which Mr. Jordan is a senior partner provided legal
services to the Company and its subsidiaries during 1996 and it is anticipated
that it will provide legal services to the Company and its subsidiaries during
1997.
38
The Company believes that the terms of the foregoing transactions are
at least as favorable to the Company or Products Corporation, as applicable, as
those that could be obtained from unaffiliated third parties.
PART IV
ITEM 14. 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:
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3. CERTIFICATE OF INCORPORATION AND BY-LAWS.
3.1 Amended and Restated Certificate of Incorporation of Revlon, Inc. dated March 4, 1996.
(Incorporated by reference to Exhibit 3.4 to the Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1996 of Revlon, Inc. (the "Revlon 1996 First Quarter 10-Q")).
*3.2 Amended and Restated By-Laws of Revlon, Inc. dated January 30, 1997.
4. INSTRUMENTS DEFINING THE RIGHT OF SECURITY HOLDERS, INCLUDING INDENTURES.
4.1 Indenture, dated as of July 15, 1980, between Holdings and The Chase Manhattan Bank, N.A., as
Trustee, relating to the 10 7/8 % Sinking Fund Debentures due
2010 (the "Debentures Indenture"). (Incorporated by reference
to Exhibit 4.1 to the Form S-1 of Revlon, Inc. filed with the
Securities and Exchange Commission on May 22, 1992, File No.
33-47100 (the "Revlon 1992 Form S-1")).
4.2 First Supplemental Indenture, dated as of August 15, 1986, to the Debentures Indenture.
(Incorporated by reference to Exhibit 4.2 to the Revlon 1992 Form S-1).
4.3 Instrument of Appointment and Acceptance of Successor Trustee and Appointment of Agent dated as
of November 19, 1987, to appoint First National Bank of Minneapolis, as Trustee, relating to the
Debentures Indenture. (Incorporated by reference to Exhibit 4.3 to the Revlon 1992 Form S-1).
4.4 Second Supplemental Indenture, dated as of June 24, 1992, among Holdings, Revlon, Inc. and First
National Bank of Minneapolis, as Trustee, to the Debentures Indenture. (Incorporated by reference
to Exhibit 4.4 to the Amendment No. 1 to the Revlon Form S-1 filed with the Securities and
Exchange Commission on June 29, 1992, File No. 33-47100 (the "Revlon 1992 Amendment No. 1")).
4.5 Third Supplemental Indenture, dated as of June 24, 1992, among Revlon, Inc., Products Corporation
and First National Bank of Minneapolis, as Trustee, to the Debentures Indenture. (Incorporated by
reference to Exhibit 4.5 to the Revlon 1992 Amendment No. 1).
4.6 Indenture, dated as of February 15, 1993, between Products Corporation and The Bank of New York,
as Trustee, relating to Products Corporation's 10 1/2% Series B Senior Subordinated Notes Due
2003. (Incorporated by reference to Exhibit 4.31 to the Registration Statement on Form S-1 of
Products Corporation filed with the Securities and Exchange Commission on March 17, 1993, File
No. 33-59650).
39
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.7 Indenture, dated as of April 1, 1993, between Products Corporation and NationsBank of Georgia,
National Association, as Trustee, relating to the Products Corporation's 9 3/8 % Senior Notes Due
2001 and Products Corporation's 9 3/8 % Series B Senior Notes Due 2001. (Incorporated by
reference to Exhibit 4.28 to the Amendment No. 1 to the Registration Statement on Form S-1 of
Products Corporation as filed with the Securities and Exchange Commission on April 13, 1993, File
No. 33-59650).
4.8 Indenture dated as of June 1, 1993, between Products Corporation and NationsBank of Georgia,
National Association, as Trustee, relating to Products Corporation's 91/2% Senior Notes Due 1999.
(Incorporated by reference to Exhibit 4.31 to the Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1993 of Products Corporation).
4.9 Financing Reimbursement Agreement by and between Holdings and Products Corporation dated February
28, 1995. (Incorporated by reference to Exhibit 4.30 to the Annual Report on Form 10-K for the
year ended December 31, 1994 of Products Corporation (the "Products Corporation 1994 10-K")).
*4.10 Amendment to the Financing Reimbursement Agreement by and between Holdings and Products
Corporation dated May 3, 1996.
4.11 Second Amended and Restated Credit Agreement dated as of December 22, 1994, between Pacific
Finance & Development Corp. and the Long-Term Credit Bank of Japan, Ltd. (the "Yen Credit
Agreement") (Incorporated by reference to Exhibit 4.32 to the Products Corporation 1994 10-K).
4.12 Credit Agreement, dated as of February 28, 1995 among Products Corporation, Chemical Bank,
Citibank N.A. and the lenders party thereto (the "Former Credit Agreement"). (Incorporated by
reference to Exhibit 4.33 to the Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1995 of Products Corporation (the "Products Corporation First Quarter 10-Q")).
4.13 First Amendment, dated as of February 28, 1995, with respect
to the Former Credit Agreement. (Incorporated by reference to
Exhibit 4.34 to the Products Corporation First Quarter 10-Q).
4.14 Second Amendment, dated as of February 28, 1995, with respect to the Former Credit Agreement.
(Incorporated by reference to Exhibit 4.35 to the Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1995 of Products Corporation).
4.15 Third Amendment, dated as of October 30, 1995, with respect to the Former Credit Agreement.
(Incorporated by reference to Exhibit 4.17 to the Registration Statement on Form S-1 of Revlon,
Inc. filed with the Securities and Exchange Commission on November 17, 1995 (File No. 33-99558)
(the "Revlon 1995 Form S-1").)
4.16 Amended and Restated Credit Agreement, dated as of January 24, 1996, among Products Corporation,
Chemical Bank, Citibank N.A., Chemical Securities Inc. and the lenders party thereto.
(Incorporated by reference to Exhibit 4.18 to the Amendment No. 3 to the Revlon 1995 Form S-1
filed with the Securities and Exchange Commission on February 5, 1996 (the "Revlon 1995 Amendment
No. 3").
*4.17 First Amendment and Consent Number 1 dated as of January 9, 1997 to the Credit Agreement.
10. MATERIAL CONTRACTS.
10.1 Purchase and Sale Agreement and Amendment thereto by and between Products Corporation and
Holdings, each dated as of February 18, 1993, relating to the Edison, New Jersey facility.
(Incorporated by reference to Exhibit 4.22 to the Products Corporation 1992 10-K).
10.2 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 the Revlon 1992 Amendment No. 1).
40
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.3 Real Property Asset Transfer Agreement, dated as of June 24, 1992, among Holdings, Revlon, Inc.
and Products Corporation. (Incorporated by reference to Exhibit 10.2 to the Revlon 1992 Amendment
No. 1).
10.4 Assumption Agreement relating to the Edison facility by and between Products Corporation and
Holdings, each dated as of February 18, 1993, relating to the Edison, New Jersey facility.
(Incorporated by reference to Exhibit 4.23 to the Products Corporation 1992 10-K).
10.5 Tax Sharing Agreement, dated as of June 24, 1992, among Mafco Holdings, Revlon, Inc., Products
Corporation and certain subsidiaries of Products Corporation (the "Tax Sharing Agreement").
(Incorporated by reference to Exhibit 10.5 to the Revlon 1992 Amendment No. 1).
10.6 First Amendment, dated as of February 28, 1995, to the Tax Sharing Agreement. (Incorporated by
reference to Exhibit 10.5 to the Products Corporation 1994 10-K).
*10.7 Second Amendment, dated as of January 1, 1997, to the Tax Sharing Agreement.
*10.8 Second Amended and Restated Operating Services Agreement by and among Holdings, Revlon, Inc. and
Products Corporation, as of January 1, 1996.
10.9 Employment Agreement dated as of January 1, 1996 between Products Corporation and Jerry W. Levin
(Incorporated by reference to Exhibit 10.10 to the Annual Report on Form 10-K for the year ended
December 31, 1995 of Products Corporation (the "Products Corporation 1995 10-K").
10.10 Employment Agreement dated as of January 1, 1996 between
Products Corporation and George Fellows (Incorporated by
reference to Exhibit 10.11 to the Products Corporation 1995
10-K).
10.11 Employment Agreement dated as of January 1, 1996 between Products Corporation and William J. Fox
(Incorporated by reference to Exhibit 10.12 to the Products Corporation 1995 10-K).
10.12 Employment Agreement dated as of January 1, 1996 between
RIROS Corporation and Carlos Colomer Casellas (Incorporated
by reference to Exhibit 10.13 to the Products Corporation
1995 10-K).
*10.13 Employment Agreement dated as of January 1, 1996 between Products Corporation and M. Katherine
Dwyer.
10.14 Revlon Employees' Savings and Investment Plan effective as of January 1, 1996 (Incorporated by
reference to Exhibit 10.15 to the Products Corporation 1995 10-K).
10.15 Revlon Employees' Retirement Plan as amended and restated December 19, 1994. (Incorporated by
reference to Exhibit 10.15 to the Products Corporation 1994 10-K).
10.16 Amended and Restated Revlon Pension Equalization Plan, effective January 1, 1996. (Incorporated
by reference to Exhibit 10.17 to the Revlon 1995 Amendment No. 4).
10.17 Executive Supplemental Medical Expense Plan Summary dated July 1991. (Incorporated by reference
to Exhibit 10.18 to the Revlon 1992 Form S-1).
10.18 Description of Post Retirement Life Insurance Program for Key Executives. (Incorporated by
reference to Exhibit 10.19 to the Revlon 1992 Form S-1).
10.19 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 Products Corporation
1992 10-K).
*10.20 Revlon Executive Bonus Plan effective January 1, 1997.
41
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.21 Revlon Executive Deferred Compensation Plan, amended as of
October 15, 1993. (Incorporated by reference to Exhibit 10.25
to the Products Corporation 1993 10-K).
10.22 Revlon Executive Severance Policy effective January 1, 1996. (Incorporated by reference to
Exhibit 10.23 to the Revlon 1995 Amendment No. 3).
*10.23 Revlon, Inc. 1996 Stock Plan, amended and restated as of December 17, 1996.
21. SUBSIDIARIES.
*21.1 Subsidiaries of the Registrant.
23. Consents of Experts and Counsel.
*23.1 Consent of KPMG Peat Marwick LLP.
24. POWERS OF ATTORNEY.
*24.1 Power of Attorney of Ronald O. Perelman.
*24.2 Power of Attorney of Donald G. Drapkin.
*24.3 Power of Attorney of Jerry W. Levin.
*24.4 Power of Attorney of Howard Gittis.
*24.5 Power of Attorney of Vernon E. Jordan, Jr. Esq.
*24.6 Power of Attorney of Henry A. Kissinger.
*24.7 Power of Attorney of Edward J. Landau, Esq.
*24.8 Power of Attorney of Linda G. Robinson.
*24.9 Power of Attorney of Terry Semel.
*24.10 Power of Attorney of Martha Stewart.
*24.11 Power of Attorney of Meyer Feldberg.
- --------------------
*Filed herewith.
(b) Reports on Form 8-K
Revlon, Inc. filed no reports on Form 8-K during the fiscal year ended
December 31, 1996.
42
REVLON, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
Independent Auditors' Report..............................................................................F-2
AUDITED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1996 and 1995..........................................F-3
Consolidated Statements of Operations for each of the years in the three-year
period ended December 31, 1996.....................................................................F-4
Consolidated Statements of Stockholders' Deficiency for each of the years in
the three-year period ended December 31, 1996.....................................................F-5
Consolidated Statements of Cash Flows for each of the years in the three-year
period ended December 31, 1996....................................................................F-6
Notes to Consolidated Financial Statements............................................................F-7
FINANCIAL STATEMENT SCHEDULE:
Schedule II-- Valuation and Qualifying Accounts.......................................................F-30
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Revlon, Inc.:
We have audited the accompanying consolidated balance sheets of Revlon, Inc.
and its subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, cash flows and stockholders' deficiency
for each of the years in the three-year period ended December 31, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Revlon, Inc. and
its subsidiaries as of December 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated finical 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, in 1994 the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits."
KPMG PEAT MARWICK LLP
New York, New York
January 28, 1997
F-2
REVLON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except per share data)
December 31, December 31,
ASSETS 1996 1995
---------- -----------
Current assets:
Cash and cash equivalents $ 38.6 $ 36.3
Trade receivables, less allowances of $24.9
and $23.7, respectively 426.3 363.1
Inventories 281.0 277.8
Prepaid expenses and other 74.5 62.4
---------- ----------
Total current assets 820.4 739.6
Property, plant and equipment, net 381.1 367.1
Other assets 139.2 142.9
Intangible assets related to businesses acquired, net 280.6 285.7
========== ===========
Total assets $ 1,621.3 $ 1,535.3
========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Short-term borrowings - third parties $ 27.1 $ 22.7
Current portion of long-term debt - third parties 8.8 9.2
Accounts payable 161.9 151.6
Accrued expenses and other 365.2 370.6
---------- ----------
Total current liabilities 563.0 554.1
Long-term debt - third parties 1,321.8 1,426.2
Long-term debt - affiliates 30.4 41.3
Other long-term liabilities 202.8 215.7
Stockholders' deficiency:
Preferred stock, par value $.01 per share, 20,000,000
shares authorized, 546 shares of Series A Preferred Stock
issued and outstanding 54.6 54.6
Class A Common Stock, par value $.01 per share; 350,000,000
shares authorized, 19,875,000 and 11,250,000 issued and
outstanding, respectively 0.2 0.1
Class B Common Stock, par value $.01 per share; 200,000,000
shares authorized, 31,250,000 issued and outstanding 0.3 0.3
Capital deficiency (233.2) (416.8)
Accumulated deficit since June 24, 1992 (300.4) (318.2)
Adjustment for minimum pension liability (12.4) (17.0)
Currency translation adjustment (5.8) (5.0)
---------- ----------
Total stockholders' deficiency (496.7) (702.0)
---------- ----------
Total liabilities and stockholders' deficiency $ 1,621.3 $ 1,535.3
========== ==========
See Notes to Consolidated Financial Statements.
F-3
REVLON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
Net Sales ...................................................... $ 2,167.0 $ 1,937.8 $ 1,732.5
Cost of sales .................................................. 725.7 652.1 597.3
------------ ------------ -------------
Gross profit .................................................. 1,441.3 1,285.7 1,135.2
Selling, general and administrative expenses ................... 1,241.1 1,139.1 1,026.8
------------ ------------ -------------
Operating income ............................................. 200.2 146.6 108.4
------------ ------------ -------------
Other expense (income):
Interest expense .............................................. 133.4 142.6 136.7
Interest and net investment income ............................ (3.4) (4.9) (6.3)
Amortization of debt issuance costs ........................... 8.3 11.0 8.4
Foreign currency losses, net .................................. 5.7 10.9 18.2
Miscellaneous, net ............................................ 6.3 1.8 2.6
------------ ------------ -------------
Other expenses, net .......................................... 150.3 161.4 159.6
------------ ------------ -------------
Income (loss) before income taxes .............................. 49.9 (14.8) (51.2)
Provision for income taxes ..................................... 25.5 25.4 22.8
------------ ------------ -------------
Income (loss) before extraordinary item and cumulative
effect of accounting change ................................... 24.4 (40.2) (74.0)
Extraordinary item -early extinguishment of debt ............... (6.6) -- --
Cumulative effect of accounting change:
Postemployment benefits, net of income tax benefit of $1.3 ... -- -- (28.8)
------------ ------------ -------------
Net income (loss) .............................................. $ 17.8 $ (40.2) $ (102.8)
============ ============ =============
Income (loss) per common share:
Income (loss) before extraordinary item and cumulative effect
of accounting change ......................................... $ 0.49 $ (0.95) $ (1.74)
Extraordinary item ............................................ (0.13) -- --
Cumulative effect of accounting change ........................ -- -- (0.68)
------------ ------------ -------------
Net income (loss) ............................................. $ 0.36 $ (0.95) $ (2.42)
============ ============ =============
Weighted average common shares outstanding .................... 49,687,500 42,500,000 42,500,000
============ ============ =============
See Notes to Consolidated Financial Statements.
F-4
REVLON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(DOLLARS IN MILLIONS)
CURRENCY
PREFERRED COMMON CAPITAL ACCUMULATED OTHER TRANSLATION
STOCK STOCK DEFICIENCY DEFICIT (a) ADJUSTMENTS ADJUSTMENT
--------------- -------- ------------ ------------- ------------- -------------
Balance, January 1, 1994 ........ $54.6 $0.4 $(416.8) $(175.2) $(4.4)
Net loss ....................... (102.8 )(b)
Adjustment for minimum pension
liability ..................... $(10.9)
Currency translation adjustment (1.4)
--------------- -------- ------------ ------------- ------------- -------------
Balance, December 31, 1994 ..... 54.6 0.4 (416.8) (278.0) (10.9) (5.8)
Net loss ....................... (40.2)
Adjustment for minimum pension
liability ..................... (6.1)
Currency translation adjustment 0.8
--------------- -------- ------------ ------------- ------------- -------------
Balance, December 31, 1995 ..... 54.6 0.4 (416.8) (318.2) (17.0) (5.0)
Net income ..................... 17.8
Net proceeds from initial
public offering ............... 0.1 187.7
Adjustment for minimum pension
liability ..................... 4.6
Currency translation adjustment (0.8)(d)
Acquisition of business ........ (4.1 )(c)
--------------- -------- ------------ ------------- ------------- -------------
Balance, December 31, 1996 ..... $54.6 $0.5 $(233.2) $(300.4) $(12.4) $(5.8)
=============== ======== ============ ============= ============= =============
- -----------
(a) Represents net loss since June 24, 1992, the effective date of the
transfer agreements referred to in Note 12.
(b) Includes cumulative effect of change to new accounting standard for
postemployment benefits as of January 1, 1994.
(c) Represents amounts paid to Revlon Holdings Inc. for the Tarlow
Advertising Division ("Tarlow"). See Note 12.
(d) Includes $2.1 of gains related to the Company's simplification of its
international corporate structure.
See Notes to Consolidated Financial Statements.
F-5
REVLON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
--------- --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................... $ 17.8 $ (40.2) $(102.8)
Adjustments to reconcile net income (loss) to net cash (used for)
provided by operating activities:
Depreciation and amortization ...................................... 90.9 88.4 78.8
Extraordinary item ................................................. 6.6 -- --
Gain on sale of business interests and certain fixed assets, net .. -- (2.2) --
Cumulative effect of accounting change ............................. -- -- 28.8
Change in assets and liabilities:
Increase in trade receivables ..................................... (67.5) (44.5) (22.1)
(Increase) decrease in inventories ................................ (5.5) (15.3) 14.1
(Increase) decrease in prepaid expenses and other current assets . (7.2) 4.5 19.1
Increase in accounts payable ...................................... 10.8 10.2 23.4
Decrease in accrued expenses and other current liabilities ....... (10.2) (12.2) (22.8)
Other, net ........................................................ (45.8) (40.4) (17.6)
--------- --------- ----------
Net cash used for operating activities .............................. (10.1) (51.7) (1.1)
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................ (58.0) (54.3) (52.5)
Proceeds from the sale of business interests and certain fixed
assets ............................................................. -- 3.0 4.6
Acquisition of businesses, net of cash acquired ..................... (7.1) (21.2) (3.1)
--------- --------- ----------
Net cash used for investing activities .............................. (65.1) (72.5) (51.0)
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings - third parties .... 5.8 (122.9) (5.8)
Proceeds from the issuance of long-term debt - third parties ........ 266.4 493.7 157.6
Repayment of long-term debt - third parties ......................... (366.6) (236.3) (197.8)
Net proceeds from initial public offering ........................... 187.8 -- --
Proceeds from the issuance of debt - affiliates ..................... 115.0 157.4 141.7
Repayment of debt - affiliates ...................................... (115.0) (151.0) (141.7)
Acquisition of business from affiliate .............................. (4.1) -- --
Payment of debt issuance costs ...................................... (10.9) (15.7) (3.0)
--------- --------- ----------
Net cash provided by (used for) financing activities ................ 78.4 125.2 (49.0)
--------- --------- ----------
Effect of exchange rate changes on cash ............................. (0.9) (0.1) 0.9
--------- --------- ----------
Net increase (decrease) in cash and cash equivalents ............... 2.3 0.9 (100.2)
Cash and cash equivalents at beginning of period ................... 36.3 35.4 135.6
--------- --------- ----------
Cash and cash equivalents at end of period ......................... $ 38.6 $ 36.3 $ 35.4
========= ========= ==========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest .......................................................... $ 139.0 $ 148.2 $ 138.5
Income taxes, net of refunds ...................................... 15.4 18.8 3.9
Supplemental schedule of noncash investing activities:
In connection with business acquisitions, liabilities were assumed
as follows:
Fair value of assets acquired ..................................... $ 9.7 $ 27.3 $ 3.3
Cash paid ......................................................... (7.2) (21.6) (3.1)
--------- --------- ----------
Liabilities assumed ............................................... $ 2.5 $ 5.7 $ 0.2
========= ========= ==========
See Notes to Consolidated Financial Statements.
F-6
REVLON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION:
Revlon, Inc. (the "Company") is a holding company, formed in April
1992, that conducts its business exclusively through its direct subsidiary,
Revlon Consumer Products Corporation and its subsidiaries ("Products
Corporation"). The Company operates in a single business segment with many
different products, which include an extensive array of glamorous, exciting and
innovative cosmetic and skin care, fragrance and personal care products, and
professional products (products for use in and resale by professional salons).
In the United States and increasingly in international markets, the Company's
products are sold principally in the self-select distribution channel. The
Company also sells certain products in the demonstrator-assisted distribution
channel, sells consumer and professional products to United States military
exchanges and commissaries, operates retail outlet stores and has a licensing
group. Outside the United States, the Company also sells consumer products
through department stores and specialty stores, such as perfumeries.
Products Corporation was formed in April 1992 and, on June 24, 1992,
succeeded to assets and liabilities of the cosmetic and skin care, fragrance
and personal care products business of its then parent company whose name was
changed from Revlon, Inc. to Revlon Holdings Inc. ("Holdings"). Certain
consumer products lines sold in demonstrator-assisted distribution channels
considered not integral to the Company's business and which historically had
not been profitable (the "Retained Brands") and certain other assets and
liabilities are retained by Holdings. Unless the context otherwise requires,
all references to the Company mean Revlon, Inc. and its subsidiaries. Through
December 31, 1996, the Company has essentially had no business operations of
its own and its only material asset has been all of the outstanding capital
stock of Products Corporation. As such its net income (loss) has historically
consisted predominantly of its equity in the net income (loss) of Products
Corporation and in 1996 included $0.8 in expenses incidental to being a public
holding company and the Company has had no cash flows of its own.
The Consolidated Financial Statements of the Company presented herein
relate to the business to which the Company succeeded and include the assets,
liabilities and results of operations of such business. Assets, liabilities,
revenues, other income, costs and expenses which were identifiable specifically
to the Company are included herein and those identifiable specifically to the
retained and divested businesses of Holdings have been excluded. Amounts which
were not identifiable specifically to either the Company or Holdings are
included herein to the extent applicable to the Company pursuant to a method of
allocation generally based on the respective proportion of the business of the
Company to the applicable total of the businesses of the Company and Holdings.
The operating results of the Retained Brands and divested businesses of
Holdings have not been reflected in the Consolidated Financial Statements of
the Company. Management of the Company believes that the basis of allocation
and presentation is reasonable.
Although the Retained Brands were not transferred to the Company when
the cosmetic and skin care, fragrance and personal care products business of
Holdings was transferred to Products Corporation, Products Corporation's bank
lenders required that all assets and liabilities relating to such Retained
Brands existing on the date of transfer (June 24, 1992), other than the brand
names themselves and certain other intangible assets, be transferred to
Products Corporation. Any assets and liabilities that had not been disposed of
or satisfied by December 31 of the applicable year have been reflected in the
Company's consolidated financial position as of such dates. However, any new
assets or liabilities generated by such Retained Brands since the transfer date
and any income or loss associated with inventory that has been transferred to
Products Corporation relating to such Retained Brands have been and will be for
the account of Holdings. In addition, 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, 1996 and 1995, the amounts reflected in the Company's
Consolidated Balance Sheets aggregated a net liability of $23.6 and $31.2,
respectively, of which $5.2 and $6.8, respectively, are included in accrued
expenses and other and $18.4 and $24.4, respectively, are included in other
long-term liabilities, respectively.
F-7
The Consolidated Financial Statements include the accounts of the
Company and its subsidiaries after elimination of all material intercompany
balances and transactions. Further, the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities, the
disclosure of liabilities and the reporting of revenues and expenses to prepare
these financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
The Company is an indirect majority owned subsidiary of MacAndrews &
Forbes Holdings Inc. ("MacAndrews Holdings"), a corporation wholly owned
through Mafco Holdings Inc. ("Mafco Holdings" and, together with MacAndrews
Holdings, "MacAndrews & Forbes") by Ronald O. Perelman.
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.
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:
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 50
years; machinery and equipment, 3 to 17 years; and office furniture and
fixtures, 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.
INTANGIBLE ASSETS RELATED TO BUSINESSES ACQUIRED:
Intangible assets related to businesses acquired principally represent
goodwill, which is being amortized on a straight-line basis over 40 years. The
Company evaluates, when circumstances warrant, the recoverability of its
intangible assets on the basis of undiscounted cash flow projections and
through the use of various other measures, which include, among other things, a
review of its image, market share and business plans. Accumulated amortization
aggregated $94.2 and $84.2 at December 31, 1996 and 1995, respectively.
REVENUE RECOGNITION:
The Company recognizes net sales upon shipment of merchandise. Net
sales comprise gross revenues less expected returns, trade discounts and
customer allowances. Cost of sales is reduced for the estimated net realizable
value of expected returns.
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."
The Company is included in the affiliated group of which Mafco
Holdings is the common parent, and the Company's federal taxable income and
loss will be included in such group's consolidated tax return filed by Mafco
Holdings. The Company also may be included in certain state and local tax
returns of Mafco Holdings or its subsidiaries. For all periods presented,
federal, state and local income taxes are provided as if the Company filed its
own income tax returns. On June 24, 1992, Holdings, the Company and certain of
its subsidiaries and Mafco Holdings entered into a tax sharing agreement which
is described in Note 9.
F-8
PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS:
The Company sponsors pension and other retirement plans in various
forms covering substantially all employees who meet eligibility requirements.
For plans in the United States, the minimum amount required pursuant to the
Employee Retirement Income Security Act, as amended, is contributed annually.
Various subsidiaries outside the United States have retirement plans under
which funds are deposited with trustees or reserves are provided.
Effective January 1, 1994, the Company adopted SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." SFAS No. 112 requires the
Company to accrue for benefits such as severance, disability and health
insurance provided to former employees prior to their retirement, if estimable.
The cumulative effect of this change was an after-tax charge of $28.8
principally for severance related to benefits previously recorded on an as and
when paid basis. Such benefits generally are vested and accumulate over
employees' service periods. Effective January 1, 1994, the Company accounts for
such benefits on a terminal basis in accordance with the provisions of SFAS No.
5, "Accounting for Contingencies," as amended by SFAS No. 112, which requires
companies to accrue for postemployment benefits when it is probable that a
liability has been incurred and the amount of such liability can be reasonably
estimated, which is generally when an employee is terminated. The Company does
not believe such liabilities can be reasonably estimated prior to termination.
RESEARCH AND DEVELOPMENT:
Research and development expenditures are expensed as incurred. The
amounts charged against earnings in 1996, 1995 and 1994 were $26.3, $22.3 and
$19.7, respectively.
FOREIGN CURRENCY TRANSLATION:
Assets and liabilities of foreign operations are generally translated
into United States 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-highly
inflationary economies are recorded as a component of stockholders' deficiency.
Foreign subsidiaries and branches operating in highly inflationary economies
translate nonmonetary assets and liabilities at historical rates and include
translation adjustments in the results of operations.
INCOME (LOSS) PER SHARE AND SUPPLEMENTAL FINANCIAL DATA:
Income (loss) per share is calculated assuming that 42,500,000 shares
of Common Stock (as defined below) had been outstanding for the periods
presented prior to the consummation of the Company's initial public equity
offering on March 5, 1996 (the "Offering"), as a result of the conversion of
the outstanding shares of the Company's common stock into approximately .1215
of a share of its newly created Class A Common Stock, par value $.01 per share
(the "Class A Common Stock") (totaling 11,250,000 shares of Class A Common
Stock), and approximately .3376 of a share of its newly created Class B Common
Stock, par value $.01 per share (totaling 31,250,000 shares of Class B Common
Stock) (collectively with the Class A Common Stock, the "Common Stock"), upon
consummation of the Company's Offering. Basic income (loss) per share is
presented as dilution thereof from common stock equivalents amounts to less
than three percent.
The following supplemental financial data give effect to 51,125,000
shares of common stock outstanding after the Offering and the application of
the net proceeds from the Offering to repay debt and reduce interest expense by
an estimated $2.6 as if such transactions had occurred at the beginning of the
period presented.
YEAR ENDED
DECEMBER 31, 1996
-----------------
Supplemental financial data:
Income before extraordinary item ..... $27.0
Income before extraordinary item
per share .......................... $0.53
F-9
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 is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock. See Note 11.
DERIVATIVE FINANCIAL INSTRUMENTS:
Derivative financial instruments are utilized by the Company to reduce
interest rate and foreign exchange risks. The Company maintains a control
environment which includes policies and procedures for risk assessment and the
approval, reporting and monitoring of derivative financial instrument
activities. The Company does not hold or issue derivative financial instruments
for trading purposes.
The differentials to be received or paid under interest rate contracts
designated as hedges are recognized in income over the life of the contracts as
adjustments to interest expense. Gains and losses on terminations of interest
rate contracts designated as hedges are deferred and amortized into interest
expense over the remaining life of the original contracts. Unrealized gains and
losses on outstanding contracts designated as hedges are not recognized.
Gains and losses on contracts to hedge identifiable foreign currency
commitments are deferred and accounted for as part of the related foreign
currency transaction. Gains and losses on all other forward exchange contracts
are included in income currently. Transaction gains and losses have not been
material.
2. INVENTORIES
DECEMBER 31,
-----------------
1996 1995
-------- -------
Raw materials and supplies $ 76.6 $ 84.8
Work-in-process ........... 19.4 27.9
Finished goods ............ 185.0 165.1
-------- -------
$281.0 $277.8
======== =======
F-10
3. PREPAID EXPENSES AND OTHER
DECEMBER 31,
----------------
1996 1995
------- -------
Prepaid expenses $43.1 $36.5
Other ........... 31.4 25.9
------- -------
$74.5 $62.4
======= =======
4. PROPERTY, PLANT AND EQUIPMENT, NET
DECEMBER 31,
--------------------
1996 1995
--------- ---------
Land and improvements ........ $ 37.5 $ 39.4
Buildings and improvements .. 207.6 203.2
Machinery and equipment ..... 194.9 192.8
Office furniture and fixtures 59.4 47.8
Leasehold improvements ....... 37.5 33.6
Construction-in-progress .... 43.7 41.4
--------- ---------
580.6 558.2
Accumulated depreciation .... (199.5) (191.1)
--------- ---------
$ 381.1 $ 367.1
========= =========
Depreciation expense for the years ended December 31, 1996, 1995 and
1994 was $39.1, $38.6 and $34.7, respectively.
5. ACCRUED EXPENSES AND OTHER
DECEMBER 31,
------------------
1996 1995
-------- --------
Advertising and promotional costs and accrual for sales
returns ............................................... $136.4 $127.8
Compensation and related benefits ...................... 95.5 100.7
Interest ............................................... 36.7 37.9
Taxes, other than federal income taxes ................. 35.0 33.8
Restructuring costs .................................... 6.9 15.2
Net liabilities assumed from Holdings .................. 5.2 6.8
Other .................................................. 49.5 48.4
-------- --------
$365.2 $370.6
======== ========
6. SHORT-TERM BORROWINGS
Products Corporation maintained short-term bank lines of credit at
December 31, 1996 and 1995 aggregating approximately $72.7 and $69.0,
respectively, of which approximately $27.1 and $22.7 were outstanding at
December 31, 1996 and 1995, respectively. Compensating balances at December 31,
1996 and 1995 were approximately $7.4 and $7.2, respectively. Interest rates on
amounts borrowed under such short-term lines at December 31, 1996 and 1995
varied from 2.2% to 12.1% and 2.0% to 13.4%, respectively.
F-11
7. LONG-TERM DEBT
DECEMBER 31,
---------------------
1996 1995
---------- ---------
Working capital lines (a) ......................... $ 187.2 $ 277.5
Bank mortgage loan agreement due 1997 (b) ........ 41.7 52.4
9 1/2% Senior Notes due 1999 (c) .................. 200.0 200.0
9 3/8% Senior Notes due 2001 (d) .................. 260.0 260.0
10 1/2% Senior Subordinated Notes due 2003 (e) ... 555.0 555.0
10 7/8% Sinking Fund Debentures due 2010 (f) ..... 79.6 79.2
Advances from Holdings (g) ........................ 30.4 41.3
Other mortgages and notes payable (8.6%-13.0%) due
through 2001 ..................................... 7.1 11.3
---------- ---------
1,361.0 1,476.7
Less current portion .............................. (8.8) (9.2)
---------- ---------
$1,352.2 $1,467.5
========== =========
(a) The credit agreement in effect at December 31, 1995 (the "Former
Credit Agreement"), which was subsequently amended, provided up to $500.0
comprised of three senior secured facilities: a $100.0 term loan facility, a
$225.0 revolving credit facility and a $175.0 multi-currency facility. Products
Corporation complied with each of the financial covenants contained in the
Former Credit Agreement, as of and for the defined measurement periods ended
December 31, 1995. The Former Credit Agreement was scheduled to expire on June
30, 1997.
In connection with repayments of indebtedness under the Former Credit
Agreement in 1996, the commitments thereunder were extinguished, representing
an early extinguishment of a portion of such facilities. Consequently, in 1996,
the Company recognized a loss of approximately $6.6 representing the then
unamortized debt issuance costs, which have been reported in the Consolidated
Statements of Operations as an extraordinary item.
Loans that were outstanding under the Former Credit Agreement's
revolving credit facility and term loan facility bore interest initially at a
rate equal to, at Products Corporation's option, either (A) the alternate base
rate, defined to mean the highest of (i) the prime rate, (ii) the secondary
market rate for certificates of deposit plus 1% and (iii) the federal funds
rate plus 1/2%; in each case plus 2 1/2% or (B) the Eurodollar Rate plus 3
1/2%. The multi-currency facility bore interest at a rate equal to the
Eurocurrency Rate, the local lender rate or the alternate base rate, in each
case plus 3 1/2%.
In January 1996, Products Corporation entered into a credit agreement
(the "Credit Agreement"), which became effective upon consummation of the
Offering on March 5, 1996. The Credit Agreement includes, among other things,
(i) an extension of the term of the facilities from June 30, 1997 to December
31, 2000 (subject to earlier termination in certain circumstances), (ii) a
reduction of the interest rates, (iii) an increase in the amount of the credit
facilities from $500.0 to $600.0 (subject to reduction as described below) and
(iv) the release of security interests in assets of certain foreign
subsidiaries of Products Corporation which were then pledged.
The Credit Agreement is comprised of four senior secured facilities: a
$130.0 term loan facility (the "Term Loan Facility"), a $220.0 multi-currency
facility (the "Multi-Currency Facility"), a $200.0 revolving acquisition
facility (the "Acquisition Facility") and a $50.0 standby letter of credit
facility (the "Special LC Facility" and together with the Term Loan Facility,
the Multi-Currency Facility and the Acquisition Facility, the "Credit
Facilities"). The Multi-Currency Facility is available (i) to Products
Corporation, in revolving credit loans denominated in U.S. dollars (the
"Revolving Credit Loans"), (ii) to Products Corporation, in standby and
commercial letters of credit denominated in U.S. dollars (the "Operating
Letters of Credit") 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"). The Credit Facilities (other than loans in foreign
currencies) bear interest at a rate equal to, at Products Corporation's option,
either (A) the Alternate Base Rate plus 1.5% (or 2.5% for Local Loans); or (B)
the Eurodollar Rate plus 2.5%. Loans in foreign currencies bear interest at a
rate equal to the Eurocurrency Rate or, in the case of Local Loans, the local
lender rate, in each case plus 2.5%. The applicable margin is reduced (or
increased, but not above 2% for Alternate Base Rate Loans not constituting
Local Loans and 3% for
F-12
other loans) in the event Products Corporation attains (or fails to attain)
certain leverage ratios. Products Corporation pays the Lender a commitment fee
of 1/2 of 1% of the unused portion of the Credit Facilities. Products
Corporation also paid certain facility and other fees to the lenders and
agents upon closing of the Credit Agreement. Prior to its termination date,
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 Holdings (or certain of its subsidiaries), Products Corporation or
any of its subsidiaries (and $25.0 with respect to certain specified
dispositions), subject to certain limited exceptions, (ii) certain proceeds
from the sales of collateral security granted to the lenders, (iii) the net
proceeds from the issuance by Holdings, Products Corporation or any of its
subsidiaries of certain additional debt, (iv) 50% of the excess cash flow of
Products Corporation and its subsidiaries and (v) certain scheduled reductions
in the case of the Term Loan Facility, which commence on January 31, 1997 in
the amount of $1.0 annually over the remaining life of the Credit Agreement,
and the Acquisition Facility, which will commence on December 31, 1997 in the
amount of $20.0, $50.0 in 1998, $60.0 in 1999 and $70.0 in 2000. In addition,
the Credit Agreement requires that the net proceeds from any sale of equity
securities of any parent of Products Corporation which has the assets of
Products Corporation or certain of its subsidiaries as its only substantial
assets be contributed to Products Corporation (except to the extent that such
proceeds are applied to repay or refinance the Senior Secured Discount Notes
due 1998 (the "Senior Secured Discount Notes") of Revlon Worldwide Corporation
or are deposited with the trustee under the indenture covering such notes) and
that Products Corporation use 50% of such proceeds, in certain circumstances,
to reduce commitments under the Credit Agreement. The Credit Agreement will
terminate on December 31, 2000 (subject to earlier termination on March 31,
1999 if Products Corporation has not refinanced its 9 1/2% Senior Notes due
1999 (the "1999 Senior Notes") before March 31, 1999 or if an alternative plan
for the refinancing of the 1999 Senior Notes has not been approved by the
majority lenders prior to March 15, 1999). As of December 31, 1996, Products
Corporation had approximately $130.0 outstanding under the Term Loan Facility,
$57.2 outstanding under the Multi-Currency Facility, none outstanding under
the Acquisition Facility and $33.5 outstanding under the Special LC Facility.
The Credit Facilities, subject to certain exceptions and limitations,
are supported by guarantees from Holdings and certain of its subsidiaries, the
Company and the domestic subsidiaries of Products Corporation. The obligations
of Products Corporation under the Credit Facilities and the obligations under
the aforementioned guarantees are secured, subject to certain limitations, by
(i) mortgages on Holdings' Edison, New Jersey and Products Corporation's
Phoenix, Arizona facilities; (ii) the capital stock of Products Corporation and
its domestic subsidiaries and 66% of the capital stock of its first tier
foreign subsidiaries and the capital stock of certain subsidiaries of Holdings;
(iii) domestic intellectual property and certain other domestic intangibles of
(x) Products Corporation and its domestic subsidiaries and (y) certain
subsidiaries of Holdings; (iv) domestic inventory and accounts receivable of
(x) Products Corporation and its domestic subsidiaries and (y) certain
subsidiaries of Holdings; 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 personal property
referred to above may be shared from time to time with specified types of other
obligations incurred or guaranteed by Products Corporation that were not
included in the Former Credit Agreement, such as interest rate hedging
obligations, working capital lines and the yen credit agreement (as defined
below).
The Credit Agreement contains various restrictive covenants
prohibiting Products Corporation and its subsidiaries from, among other things,
(i) incurring additional indebtedness, with certain exceptions, (ii) making
dividend, tax sharing (see Note 9 "Income Taxes") and other payments or loans
to the Company or other affiliates, with certain exceptions, including among
others, permitting Products Corporation to pay dividends and make distributions
to the Company, among other things, to enable the Company to pay expenses
incidental to being a public holding company, including, among other things,
professional fees such as legal and accounting, regulatory fees such as
Securities and Exchange Commission ("Commission") filing fees and other
miscellaneous expenses related to being a public holding company, and to pay
dividends or make distributions up to $5.0 per annum in certain circumstances
to finance the purchase by the Company of its common stock in connection with
the delivery of such common stock to grantees under any stock option plan,
(iii) creating liens or other encumbrances on their assets or revenues,
granting negative pledges or selling or transferring any of their assets except
in the ordinary course of business, all subject to certain limited exceptions,
(iv) with certain exceptions, engaging in merger or acquisition transactions,
(v) prepaying indebtedness, 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 certain financial covenants including,
F-13
among other things, covenants requiring Products Corporation and its
subsidiaries to maintain minimum consolidated adjusted net worth, minimum
EBITDA (defined as earnings before interest, taxes, depreciation and
amortization and certain other charges), minimum interest coverage, and
covenants which limit the amount of total indebtedness of Products Corporation
and the amount of capital expenditures.
In January 1997, the Credit Agreement was amended to, among other
things, (i) permit the merger of Prestige Fragrance & Cosmetics, Inc. ("PFC"),
a wholly owned subsidiary of Products Corporation, into The Cosmetic Center,
Inc. ("Cosmetic Center") and to generally exclude Cosmetic Center (as the
survivor of the merger) from the definition of "subsidiary" under the Credit
Agreement, (ii) increase the amount of permitted dividends and distributions to
finance the purchase by the Company if its common stock in connection with the
delivery of such common stock to grantees under any stock option plan to $6.0
per annum, and (iii) permit Products Corporation to purchase capital stock of
the Company for purposes of making matching contributions under a proposed
Non-Qualified Excess Savings Plan for Key Executives.
(b) The Pacific Finance & Development Corp., a subsidiary of the
Company, is the borrower under a yen denominated credit agreement (the "Yen
Credit Agreement"), which had a principal balance of approximately Y4.8
billion as of December 31, 1996 (approximately $41.7 U.S. dollar equivalent as
of December 31, 1996). In accordance with the terms of the Yen Credit
Agreement, approximately Y2.7 billion (approximately $26.9 U.S. dollar
equivalent) was paid in January 1995 and approximately Y539 million
(approximately $5.2 U.S. dollar equivalent) was paid in January 1996. A payment
of approximately Y539 million (approximately $4.6 U.S. dollar equivalent
as of December 31, 1996) was paid in January 1997. The balance of the Yen
Credit Agreement of approximately Y4.3 billion (approximately $37.1 U.S.
dollar equivalent as of December 31, 1996) is currently due on December 31,
1997. The Company is currently renegotiating an extension of the term of the
Yen Credit Agreement. In the event that such extension is not obtained, the
Company is able and intends to refinance the Yen Credit Agreement under
existing long-term credit facilities. Accordingly, the Company's obligation
under the Yen Credit Agreement has been classified as long-term as of December
31, 1996. The applicable interest rate at December 31, 1996 under the Yen
Credit Agreement was the Euro-Yen rate plus 2.5% which approximated 3.1%. The
interest rate at December 31, 1995, applicable to the remaining balance, was
the Euro-Yen rate plus 3.5%, which approximated 4.1%.
(c) The 1999 Senior Notes are senior unsecured obligations of Products
Corporation and rank pari passu in right of payment to all existing and future
Senior Debt (as defined in the indenture relating to the 1999 Senior Notes (the
"1999 Senior Note Indenture")). The 1999 Senior Notes bear interest at 9 1/2%
per annum. Interest is payable on June 1 and December 1.
The 1999 Senior Notes may not be redeemed prior to maturity. Upon a
Change of Control (as defined in the 1999 Senior Note Indenture) and subject to
certain conditions, each holder of 1999 Senior Notes will have the right to
require Products Corporation to repurchase all or a portion of such holder's
1999 Senior Notes at 101% of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of repurchase. In addition, under certain
circumstances in the event of an Asset Disposition (as defined in the 1999
Senior Note Indenture), Products Corporation will be obligated to make offers
to purchase the 1999 Senior Notes.
The 1999 Senior Note Indenture contains various restrictive covenants
that, among other things, limit (i) the issuance of additional debt and
redeemable stock by Products Corporation, (ii) the issuance of debt and
preferred stock by Products Corporation's subsidiaries, (iii) the incurrence of
liens on the assets of Products Corporation and its subsidiaries which do not
equally and ratably secure the 1999 Senior Notes, (iv) the payment of dividends
on and redemption of capital stock of Products Corporation and its subsidiaries
and the redemption of certain subordinated obligations of Products Corporation,
except that the 1999 Senior Note Indenture permits Products Corporation to pay
dividends and make distributions to the Company, among other things, to enable
the Company to pay expenses incidental to being a public holding company,
including, among other things, professional fees such as legal and accounting,
regulatory fees such as Commission filing fees and other miscellaneous expenses
related to being a public holding company, and to pay dividends or make
distributions up to $5.0 per annum in certain circumstances to finance the
purchase by the Company of its Class A Common Stock in connection with the
delivery of such Class A Common Stock to grantees under any stock option plan,
(v) the sale of assets and subsidiary stock, (vi) transactions with affiliates
and (vii) consolidations, mergers and transfers of all or substantially all of
Products Corporation's assets. The 1999
F-14
Senior Note 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 9 3/8% Senior Notes due 2001 (the "Senior Notes") are senior
unsecured obligations of Products Corporation and rank pari passu in right of
payment to all existing and future Senior Debt (as defined in the indenture
relating to the Senior Notes (the "Senior Note Indenture")). The Senior Notes
bear interest of 9 3/8% per annum. Interest is payable on April 1 and October
1.
The Senior Notes may be redeemed at the option of Products Corporation
in whole or in part at any time on or after April 1, 1998 at the redemption
prices set forth therein, plus accrued and unpaid interest, if any, to the date
of redemption. Upon a Change of Control (as defined in the Senior Note
Indenture), Products Corporation will have the option to redeem the Senior
Notes in whole or in part at a redemption price equal to the principal amount
thereof plus the Applicable Premium (as defined in the Senior Note Indenture),
plus accrued and unpaid interest, if any, to the date of redemption, and,
subject to certain conditions, each holder of Senior Notes will have the right
to require Products Corporation to repurchase all or a portion of such holder's
Senior Notes at 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of repurchase. In addition, under certain
circumstances in the event of an Asset Disposition (as defined in the Senior
Note Indenture), Products Corporation will be obligated to make offers to
purchase the Senior Notes.
The Senior Note Indenture contains various restrictive covenants that,
among other things, limit (i) the issuance of additional indebtedness and
redeemable stock by Products Corporation, (ii) the issuance of indebtedness and
preferred stock by Products Corporation's subsidiaries, (iii) the incurrence of
liens on the assets of Products Corporation and its subsidiaries which do not
equally and ratably secure the Senior Notes, (iv) the payment of dividends on
capital stock of Products Corporation and its subsidiaries and the redemption
of capital stock and certain subordinated obligations of Products Corporation,
except that the Senior Note Indenture permits Products Corporation to pay
dividends and make distributions to the Company, among other things, to enable
the Company to pay expenses incidental to being a public holding company,
including, among other things, professional fees such as legal and accounting,
regulatory fees such as Commission filing fees and other miscellaneous expenses
related to being a public holding company, and to pay dividends or make
distributions up to $5.0 per annum in certain circumstances to finance the
purchase by the Company of its Class A Common Stock in connection with the
delivery of such Class A Common Stock to grantees under any stock option plan,
(v) the sale of assets and subsidiary stock, (vi) transactions with affiliates
and (vii) consolidations, mergers and transfers of all or substantially all of
Products Corporation's assets. The Senior Note Indenture also prohibits certain
restrictions on distributions from subsidiaries of Products Corporation. All of
these limitations and prohibitions, however, are subject to a number of
important qualifications.
(e) The Senior Subordinated Notes are unsecured obligations of
Products Corporation and are subordinated in right of payment to all existing
and future Senior Debt (as defined in the indenture relating to the Senior
Subordinated Notes (the "Senior Subordinated Note Indenture")). The Senior
Subordinated Notes bear interest of 10 1/2% per annum. Interest is payable on
February 15 and August 15.
The Senior Subordinated Notes may be redeemed at the option of
Products Corporation in whole or in part at any time on or after February 15,
1998 at the redemption prices set forth therein, plus accrued and unpaid
interest, if any, to the date of redemption. Upon a Change of Control (as
defined in the Senior Subordinated Note Indenture), Products Corporation will
have the option to redeem the Senior Subordinated Notes in whole or in part at
a redemption price equal to the principal amount thereof plus the Applicable
Premium (as defined in the Senior Subordinated Note Indenture), plus accrued
and unpaid interest, if any, to the date of redemption, and, subject to certain
conditions, each holder of Senior Subordinated Notes will have the right to
require Products Corporation to repurchase all or a portion of such holder's
Senior Subordinated Notes at 101% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the date of repurchase. In addition, under
certain circumstances in the event of an Asset Disposition (as defined in the
Senior Subordinated Note Indenture), Products Corporation will be obligated to
make offers to purchase the Senior Subordinated Notes.
The Senior Subordinated Note Indenture contains various restrictive
covenants that, among other things, limit (i) the issuance of additional
indebtedness and redeemable stock by Products Corporation, (ii) the issuance of
indebtedness and preferred stock by Products Corporation's subsidiaries, (iii)
the incurrence of liens on the assets of
F-15
Products Corporation and its subsidiaries to secure debt other than Senior
Debt (as defined in the Senior Subordinated Note Indenture) or debt of a
subsidiary, unless the Senior Subordinated Notes are equally and ratably
secured, (iv) the payment of dividends on capital stock of Products
Corporation and its subsidiaries and the redemption of capital stock and
certain subordinated obligations of Products Corporation, except that the
Senior Subordinated Note Indenture permits Products Corporation to pay
dividends and make distributions to the Company, among other things, to enable
the Company to pay expenses incidental to being a public holding company,
including, among other things, professional fees such as legal and accounting,
regulatory fees such as Commission filing fees and other miscellaneous
expenses related to being a public holding company, and to pay dividends or
make distributions up $5.0 per annum in certain circumstances to finance the
purchase by the Company of its Class A Common Stock in connection with the
delivery of such Class A Common Stock to grantees under any stock option plan,
(v) the sale of assets and subsidiary stock, (vi) transactions with affiliates
and (vii) consolidations, mergers and transfers of all or substantially all of
Products Corporation's assets. The Senior Subordinated Note Indenture also
prohibits certain restrictions on distributions from subsidiaries of Products
Corporation. All of these limitations and prohibitions, however, are subject
to a number of important qualifications.
(f) Holdings' 10 7/8% Sinking Fund Debentures due 2010 (face value of
$85.0, net of repurchases) (the "Sinking Fund Debentures") are redeemable, in
whole or in part, at 101.96% of the principal amount for the year beginning
July 15, 1996, decreasing evenly each year on July 15, to par by July 15, 2000.
Mandatory sinking fund redemptions of $9.0 per year commenced in 1991. Optional
sinking fund redemptions of up to an additional $13.5 per year may be made
annually and may be applied to reduce any subsequent mandatory sinking fund
redemption. Interest is payable on January 15 and July 15. Holdings purchased
$115.0 of the Sinking Fund Debentures in the open market prior to 1985, $9.0 of
which had been used in each of the years 1991 through 1996 to satisfy sinking
fund payment obligations and approximately $61.0 of which is creditable to
future sinking fund requirements. The indenture relating to the Sinking Fund
Debentures contains various restrictive covenants prohibiting Products
Corporation and its subsidiaries from (i) incurring indebtedness in excess of
5% of the consolidated net tangible assets, where such indebtedness is secured
by any manufacturing plant in the United States owned or leased by Products
Corporation, the book value of which exceeds 2% of the consolidated net
tangible assets of Products Corporation, unless the Sinking Fund Debentures are
equally and ratably secured, (ii) entering into certain sale and leaseback
transactions or (iii) consolidating or merging with or into, or selling or
transferring all or substantially all of their properties and assets to,
another corporation, unless certain conditions are satisfied.
(g) During 1992, Holdings made an advance of $25.0 to Products
Corporation. This advance was evidenced by a noninterest-bearing demand note
payable by Products Corporation, the payment of which was subordinated to the
obligations of Products Corporation under the credit agreement in effect at
that time. Holdings agreed not to demand payment under the note so long as any
indebtedness remained outstanding under the credit agreement in effect at that
time. In February 1995, the $13.3 in notes due to Products Corporation under
the Financing Reimbursement Agreement, referred to in Note 12, was offset
against the $25.0 note and Holdings agreed not to demand payment under the
resulting $11.7 note so long as indebtedness remains outstanding under the
Credit Agreement. In October 1993, Products Corporation borrowed from Holdings
approximately $23.2 (as adjusted and subject to further adjustment for certain
expenses) representing amounts received by Holdings from an escrow account
relating to divestiture by Holdings of certain of its predecessor businesses.
In July 1995, Products Corporation borrowed from Holdings approximately $0.8,
representing certain amounts received by Holdings relating to an arbitration
arising out of the sale by Holdings of certain of its businesses. In 1995,
Products Corporation borrowed from Holdings approximately $5.6, representing
certain amounts received by Holdings from the sale by Holdings of certain of
its businesses. In June 1996, $10.9 in notes due to Products Corporation under
the Financing Reimbursement Agreement from Holdings was offset against the
$11.7 demand note (referred to above) payable by Products Corporation to
Holdings. In accordance with the Credit Agreement, such amounts, as adjusted,
are evidenced by noninterest-bearing promissory notes payable to Holdings that
are subordinated to Products Corporation's obligations under the Credit
Agreement.
Products Corporation borrows funds from its affiliates from time to
time to supplement its working capital borrowings at interest rates more
favorable to Products Corporation than the rate under the Credit Agreement. No
such borrowings were outstanding at December 31, 1996 or 1995.
The aggregate amounts of long-term debt maturities and sinking fund
requirements (at December 31, 1996), in the years 1997 through 2001 are $8.8,
$40.6, $201.2, $214.9 and $260.9, respectively, and $634.6 thereafter.
F-16
8. FINANCIAL INSTRUMENTS
As of December 31, 1996, Products Corporation was party to a series of
interest rate swap agreements (which expire at various dates through December
2001) totaling a notional amount of $225.0 in which Products Corporation agreed
to pay on such notional amount a variable interest rate equal to the six month
London Inter-Bank Offered Rate (5.6875% per annum at January 24, 1997) to its
counterparties and the counterparties agreed to pay on such notional amounts
fixed interest rates averaging approximately 6.03% per annum. Products
Corporation entered into these agreements in 1993 and 1994 (and in the first
quarter of 1996 extended a portion equal to a notional amount of $125.0 through
December 2001) to convert the interest rate on $225.0 of fixed-rate
indebtedness to a variable rate. If Products Corporation had terminated these
agreements, which Products Corporation considers to be held for other than
trading purposes, on December 31, 1996, a loss of approximately $3.5 would have
been realized. Certain other swap agreements were terminated in 1993 for a gain
of $14.0. The amortization of the realized gain on these agreements for 1996
and 1995 was approximately $3.2 in each of the years. The remaining unamortized
gain, which is being amortized over the original lives of the agreements, is
$3.1 as of December 31, 1996. Although cash flow from the presently outstanding
agreements was positive for 1996, future positive or negative cash flows from
these agreements will depend upon the trend of short-term interest rates during
the remaining lives of such agreements. In the event of nonperformance by the
counterparties at any time during the remaining lives of the agreements,
Products Corporation could lose some or all of any possible future positive
cash flows from these agreements. However, Products Corporation does not
anticipate nonperformance by such counterparties, although no assurances can be
given.
Products Corporation enters into forward foreign exchange contracts
from time to time to hedge certain cash flows denominated in foreign
currencies. At December 31, 1996, Products Corporation had forward foreign
exchange contracts denominated in various currencies, predominantly the U.K.
pound of approximately $62.0 (U.S. dollar equivalent). If Products Corporation
had terminated these contracts on December 31, 1996, no material gain or loss
would have been realized. Products Corporation had similar contracts
outstanding at December 31, 1995 in the amount of $8.0 (U.S. dollar
equivalent).
The fair value of the Company's long-term debt is estimated based on
the quoted market prices for the same issues or on the current rates offered to
the Company for debt of the same remaining maturities. The estimated fair value
of long-term debt at December 31, 1996 was approximately $37.3 more than the
carrying value of $1,361.0. Because considerable judgment is required in
interpreting market data to develop estimates of fair value, the estimates are
not necessarily indicative of the amounts that could be realized or would be
paid in a current market exchange. The effect of using different market
assumptions or estimation methodologies may be material to the estimated fair
value amounts.
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 $40.9 were outstanding at
December 31, 1996. Included in this amount are $26.4 in standby letters of
credit which support Products Corporation's self-insurance programs. See Note
12. The estimated liability under such programs is accrued by Products
Corporation.
The carrying amounts of cash and cash equivalents, trade receivables,
accounts payable and short-term borrowings approximate their fair values.
F-17
9. INCOME TAXES
In June 1992, Holdings, the Company and certain of its subsidiaries,
and Mafco Holdings entered into a tax sharing agreement (as subsequently
amended, the "Tax Sharing Agreement"), pursuant to which Mafco Holdings has
agreed to indemnify the Company 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 the Company or its subsidiaries) is the
common parent for taxable periods beginning on or after January 1, 1992 during
which the Company or a subsidiary of the Company is a member of such group.
Pursuant to the Tax Sharing Agreement, for all taxable periods beginning on or
after January 1, 1992, the Company will pay to Holdings amounts equal to the
taxes that the Company 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 the Company), except that the Company will not be entitled to
carry back any losses to taxable periods ending prior to January 1, 1992. No
payments are required by the Company if and to the extent that Products
Corporation is prohibited under the Credit Agreement from making tax sharing
payments to the Company. The Credit Agreement prohibits Products Corporation
from making any cash tax sharing payments other than in respect of state and
local income taxes. Since the payments to be made by the Company under the Tax
Sharing Agreement will be determined by the amount of taxes that the Company
would otherwise have to pay if it were to file separate federal, state or local
income tax returns, the Tax Sharing Agreement will benefit Mafco Holdings to
the extent Mafco Holdings can offset the taxable income generated by the
Company against losses and tax credits generated by Mafco Holdings and its
other subsidiaries. As a result of net operating tax losses and prohibitions
under the Credit Agreement, no federal tax payments or payments in lieu of
taxes pursuant to the Tax Sharing Agreement were required for 1996, 1995 or
1994.
Pursuant to the asset transfer agreement referred to in Note 12,
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 income (loss) before income taxes and the applicable
provision (benefit) for income taxes are as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- --------- ---------
Income (loss) before income taxes:
Domestic ....................................... $ 9.4 $(38.4) $(68.0)
Foreign ........................................ 40.5 23.6 16.8
------- --------- ---------
$49.9 $(14.8) $(51.2)
======= ========= =========
Provision (benefit) for income taxes:
Federal ........................................ $ -- $ -- $ --
State and local ................................ 1.2 3.4 2.8
Foreign ........................................ 24.3 22.0 20.0
------- --------- ---------
$25.5 $ 25.4 $ 22.8
======= ========= =========
Current ........................................ $22.7 $ 37.1 $ 40.5
Deferred ....................................... 6.6 3.0 1.4
Benefits of operating loss carryforwards ...... (4.7) (15.4) (18.1)
Carryforward utilization applied to goodwill .. 1.0 0.8 --
Effect of enacted change of tax rates ......... (0.1) (0.1) --
Beginning-of-year valuation allowance
adjustment .................................... -- -- (1.0)
------- --------- ---------
$25.5 $ 25.4 $ 22.8
======= ========= =========
F-18
The effective tax rate on income (loss) before income taxes is
reconciled to the applicable statutory federal income tax rate as follows:
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- --------- ---------
Statutory federal income tax rate ....................... 35.0% (35.0)% (35.0)%
State and local taxes, net of federal income tax benefit 1.6 14.9 3.6
Foreign and U.S. tax effects attributable to operations
outside the U.S. ....................................... 36.2 92.8 27.6
Nondeductible amortization expense ...................... 5.9 16.8 4.8
U.S. loss without benefit ............................... -- 82.1 43.5
Change in valuation allowance ........................... (24.2) -- --
Other ................................................... (3.4) -- --
-------- --------- ---------
Effective rate .......................................... 51.1% 171.6% 44.5%
======== ========= =========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996 and 1995 are presented below:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
Deferred tax assets:
Accounts receivable, principally due to doubtful
accounts ........................................ $ 3.9 $ 3.7
Inventories ...................................... 12.5 12.8
Net operating loss carryforwards ................. 269.5 270.3
Restructuring and related reserves ............... 10.2 13.4
Employee benefits ................................ 31.7 36.3
State and local taxes ............................ 12.8 12.8
Self-insurance ................................... 3.6 3.9
Advertising, sales discounts and returns and
coupon redemptions .............................. 23.6 19.1
Other ............................................ 23.9 19.7
--------- ---------
Total gross deferred tax assets ................. 391.7 392.0
Less valuation allowance ........................ (347.3) (357.2)
--------- ---------
Net deferred tax assets ......................... 44.4 34.8
Deferred tax liabilities:
Plant, equipment and other assets ................ (43.0) (34.6)
Inventories ...................................... (0.2) (0.2)
Other ............................................ (7.2) (6.3)
--------- ---------
Total gross deferred tax liabilities ............ (50.4) (41.1)
--------- ---------
Net deferred tax liability ...................... $ (6.0) $ (6.3)
========= =========
The valuation allowance for deferred tax assets at January 1, 1996 was
$357.2. The valuation allowance decreased by $9.9 during the year ended
December 31, 1996 and increased by $19.2 during the year ended December 31,
1995.
During 1996, 1995 and 1994, certain of the Company's foreign
operations generated taxable income as to which the related tax liability was
offset by the utilization of operating loss carryforwards generated in prior
years. Accordingly, credits of $4.7, $15.4 and $18.1 representing the reduction
of current foreign taxes payable for the years ended December 31, 1996, 1995
and 1994, respectively, have been recognized in the Consolidated Statements of
Operations. Certain other foreign operations generated losses during the years
1996, 1995 and 1994 for which the potential tax benefit was reduced by a
valuation allowance as it is more likely than not that such benefit will not be
realized. At December 31, 1996, the Company had foreign tax loss carryforwards
of approximately $332.2 which expire in future years as follows: 1997-$53.3;
1998-$30.0; 1999-$33.0; 2000-$12.1; 2001 and beyond-$30.4; unlimited-$173.4.
The Company will receive a benefit only to the extent it has taxable income
during the carryforward periods in the applicable foreign jurisdictions.
F-19
Appropriate United States 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 aggregated approximately $16.1 at December 31, 1996, excluding those
amounts which, if remitted in the near future, would not result in significant
additional taxes under tax statutes currently in effect.
10. POSTRETIREMENT BENEFITS
PENSIONS:
The Company uses a September 30 date for measurement of plan
obligations and assets.
The following tables reconcile the funded status of all of the
Company's significant pension plans with the respective amounts recognized in
the Consolidated Balance Sheets at the dates indicated:
DECEMBER 31, 1996
---------------------------------------
OVERFUNDED UNDERFUNDED
PLANS PLANS TOTAL
------------ ------------- ----------
Actuarial present value of benefit obligation:
Accumulated benefit obligation as of Septmber 30, 1996,
includes vested benefits of $286.9 ..................... $(163.7) $(131.4) $(295.1)
============ ============= ==========
Projected benefit obligation as of September 30, 1996
for service rendered to date ........................... $(198.1) $(141.4) $(339.5)
Fair value of plan assets as of September 30, 1996 ...... 173.3 81.6 254.9
------------ ------------- ----------
Plan assets less than projected benefit obligation ...... (24.8) (59.8) (84.6)
Amounts contributed to plans during fourth quarter 1996 . 0.2 0.5 0.7
Unrecognized net (assets) obligation ..................... (1.5) 0.2 (1.3)
Unrecognized prior service cost .......................... 5.2 3.9 9.1
Unrecognized net loss .................................... 20.2 20.5 40.7
Adjustment to recognize additional minimum liability .... -- (15.3) (15.3)
------------ ------------- ----------
Accrued pension cost ................................. $ (0.7) $ (50.0) $ (50.7)
============ ============= ==========
DECEMBER 31, 1995
---------------------------------------
OVERFUNDED UNDERFUNDED
PLANS PLANS TOTAL
------------ ------------- ----------
Actuarial present value of benefit obligation:
Accumulated benefit obligation as of Septmber 30, 1995,
includes vested benefits of $269.1 ..................... $(18.8) $(257.2) $(276.0)
============ ============= ==========
Projected benefit obligation as of September 30, 1995
for service rendered to date ........................... $(21.9) $(294.1) $(316.0)
Fair value of plan assets as of September 30, 1995 ...... 26.3 185.0 211.3
------------ ------------- ----------
Plan assets in excess of (less than) projected
benefit obligation .................................... 4.4 (109.1) (104.7)
Amounts contributed to plans during fourth quarter 1995 . 0.2 0.9 1.1
Unrecognized net (assets) obligation ..................... (1.3) 0.2 (1.1)
Unrecognized prior service cost .......................... 0.3 9.9 10.2
Unrecognized net loss .................................... 1.9 45.2 47.1
Adjustment to recognize additional minimum liability .... -- (19.9) (19.9)
------------ ------------- ----------
Prepaid (accrued) pension cost ....................... $ 5.5 $ (72.8) $ (67.3)
============ ============= ==========
F-20
The weighted-average discount rate assumed was 7.75% for 1996 and 1995
for domestic plans. For foreign plans, the weighted-average discount rate was
7.9% and 7.6% for 1996 and 1995, respectively. The rate of future compensation
increases was 5.25% for 1996 and 1995 for domestic plans and was a
weighted-average of 5.05% and 4.81% for 1996 and 1995, respectively, for
foreign plans. The expected long-term rate of return on assets was 9.0% for
1996 and 1995 for domestic plans and a weighted-average of 10.4% for 1996 and
1995 for foreign plans.
Plan assets consist primarily of common stock, mutual funds and fixed
income securities, which are stated at fair market value and cash equivalents
which are stated at cost, which approximates fair market value.
In accordance with the provisions of SFAS No. 87, "Employers'
Accounting for Pensions," the Company recorded an additional liability to the
extent that, for certain U.S. plans, the unfunded accumulated benefit
obligation exceeded recorded liabilities. At December 31, 1996, the additional
liability was recognized by recording an intangible asset to the extent of
unrecognized prior service costs of $1.8, a due from affiliates of $1.1 and a
charge to stockholders' deficiency of $12.4. At December 31, 1995, the
additional liability was recognized by recording an intangible asset to the
extent of unrecognized prior service costs of $1.6, a due from affiliates of
$1.3, and a charge to stockholders' deficiency of $17.0.
Net periodic pension cost for the pension plans consisted of the
following components:
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
Service cost-benefits earned during the period $ 10.6 $ 8.2 $ 9.1
Interest cost on projected benefit obligation . 24.3 21.7 20.8
Actual (return) loss on plan assets ............ (30.4) (27.3) 2.7
Net amortization and deferrals ................. 15.1 13.4 (14.4)
-------- -------- --------
19.6 16.0 18.2
Portion allocated to Holdings .................. (0.3) (0.3) (0.3)
-------- -------- --------
Net periodic pension cost of the Company ...... $ 19.3 $ 15.7 $ 17.9
======== ======== ========
A substantial portion of the Company's employees in the United States
are covered by defined benefit retirement plans. To the extent that aggregate
pension costs could be identified as relating to the Company or to Holdings,
such costs have been so apportioned. The components of the net periodic pension
cost applicable solely to the Company are not presented as it is not practical
to segregate such information between Holdings and the Company. In 1996 and
1995, there was a settlement loss of $0.3 and $0.1, respectively, and a
curtailment loss of $1.0 and $0.1, respectively, resulting from workforce
reductions.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS:
During 1996, 1995 and 1994, the Company sponsored an unfunded retiree
benefit plan, which provides death benefits payable to beneficiaries of certain
key employees. Participation in this plan is limited to participants enrolled
as of December 31, 1993. Net periodic postretirement benefit cost for each of
the years ended December 31, 1996, 1995 and 1994 was $0.7 which consists
primarily of interest on the accumulated postretirement benefit obligation. The
Company's date of measurement of Plan obligations is September 30. At December
31, 1996 and 1995, the portion of accumulated benefit obligation attributable
to retirees was $6.9 and $6.7, respectively, and to other fully eligible
participants, $1.3 and $1.0, respectively. The amount of unrecognized gain at
December 31, 1996 and 1995 was $1.2 and $1.7, respectively. At December 31,
1996 and 1995, the accrued postretirement benefit obligation recorded on the
Company's Consolidated Balance Sheets was $9.4. Of these amounts, $2.0 and $2.2
was attributable to Holdings and was recorded as a receivable from affiliates
at December 31, 1996 and 1995, respectively. The weighted average discount rate
used in determining the accumulated postretirement benefit obligation at
September 30, 1996 and 1995 was 7.75%.
F-21
11. STOCK COMPENSATION PLAN
At December 31, 1996, the Company has a stock-based compensation plan
(the "Plan"), which is described below. The Company applies APB Opinion No. 25
and related Interpretations in accounting for the Plan. Under APB Opinion No.
25, because the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
cost has been recognized. Had compensation cost for the Company's Plan been
determined consistent with SFAS No. 123, the Company's net income and net
income per share for 1996 of $17.8 and $.36, respectively, would have been
reduced to the pro forma amounts of $14.6 and $.29, respectively. The effects
of applying SFAS No. 123 in this pro forma disclosure are not necessarily
indicative of future amounts.
Under the Plan, the Company may grant options to its employees for up
to an aggregate of 5.0 million shares of Class A Common Stock. Non-qualified
options granted under the 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. Options granted in
1996 to certain executive officers will not vest as to any portion until the
third anniversary of the grant date and will thereupon become 100% vested,
except that upon termination of employment by the Company other than for
"cause", death or "disability" under the applicable employment agreement, such
options will vest with respect to 25% of the shares subject thereto (if the
termination is between the first and second anniversaries of the grant) and 50%
of the shares subject thereto (if the termination is between the second and
third anniversaries of the grant). All other initial option grants will vest
25% each year beginning on the first anniversary of the date of grant and will
become 100% vested on the fourth anniversary of the date of grant. The fair
value of each option grant is estimated on the date of the grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for option grants in 1996: no dividend yield; expected
volatility of 31%; risk-free interest rate of 5.99%; and an expected average
life of seven years for the Plan's options. At December 31, 1996 there were no
options exercisable under the Plan.
A summary of the status of the Plan as of December 31, 1996 and
changes during the year then ended is presented below:
SHARES WEIGHTED AVERAGE
(000) EXERCISE PRICE
--------- ----------------
Outstanding at beginning of year -- --
Granted .......................... 1,010.2 $24.33
Exercised ........................ -- --
Forfeited ........................ (119.1) 24.00
---------
Outstanding at end of year ...... 891.1 24.37
=========
The weighted average fair value of each option granted during 1996
approximated $11.00.
The following table summarizes information about the Plan's options
outstanding at December 31, 1996:
WEIGHTED
RANGE NUMBER AVERAGE WEIGHTED
OF OUTSTANDING YEARS AVERAGE
EXERCISE PRICES (000) REMAINING EXERCISE PRICE
- ----------------- ------------- ----------- --------------
$24.00 to $29.88 855.1 9.16 $24.06
31.00 to 33.88 .. 36.0 9.79 31.88
-------------
24.00 to 33.88 .. 891.1 9.19 24.37
=============
F-22
12. RELATED PARTY TRANSACTIONS
TRANSFER AGREEMENTS
In June 1992, the Company and Products Corporation entered into an asset
transfer agreement with Holdings and certain of its wholly owned subsidiaries
(the "Asset Transfer Agreement"), and the Company 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"). Holdings retained certain small brands that
historically had not been profitable ("Retained Brands"). Holdings agreed to
indemnify the Company and Products Corporation against losses arising from the
Excluded Liabilities, and the Company and Products Corporation agreed to
indemnify Holdings against losses arising from the liabilities assumed by
Products Corporation. The amounts reimbursed by Holdings to the Company for the
Excluded Liabilities for 1996, 1995 and 1994 were $1.4, $4.0 and $7.4,
respectively.
BENEFIT PLANS ASSUMPTION AGREEMENT
Holdings, Products Corporation and the Company entered into a benefit
plans assumption agreement dated as of July 1, 1992 pursuant to which Products
Corporation assumed all rights, liabilities and obligations under all of
Holdings' benefit plans, arrangements and agreements, including obligations
under the Revlon Employees' Retirement Plan and the Revlon Employees' Savings
and Investment Plan. Products Corporation was substituted for Holdings as
sponsor of all such plans theretofore sponsored by Holdings.
OPERATING SERVICES AGREEMENT
In June 1992, the Company, Products Corporation and Holdings entered
into an operating services agreement (as amended and restated, and as
subsequently amended, the "Operating Services Agreement") pursuant to which
Products Corporation manufactures, markets, distributes, warehouses and
administers, including the collection of accounts receivable, the Retained
Brands for Holdings. Pursuant to the Operating Services Agreement, Products
Corporation is reimbursed an amount equal to all of its and the Company's
direct and indirect costs incurred in connection with furnishing such services,
net of the amounts collected by Products Corporation with respect to the
Retained Brands, payable quarterly. The net amounts reimbursed by Holdings to
the Company for such direct and indirect costs for 1996, 1995 and 1994 were
$5.1, $8.6 and $11.5, respectively. Holdings also pays Products Corporation a
fee equal to 5% of the net sales of the Retained Brands, payable quarterly. The
fees paid by Holdings to Products Corporation pursuant to the Operating
Services Agreement for services with respect to the Retained Brands for 1996,
1995 and 1994 were approximately $0.6, $1.7 and $1.9, respectively.
REIMBURSEMENT AGREEMENTS
The Company, Products Corporation and MacAndrews Holdings have entered
into reimbursement agreements (the "Reimbursement Agreements") pursuant to
which (i) MacAndrews Holdings is obligated to provide certain professional and
administrative services, including employees, to the Company and its
subsidiaries, including Products Corporation, and purchase services from third
party providers, such as insurance and legal and accounting services, on behalf
of the Company 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 purchase services from third
party providers, such as insurance and legal and accounting services, on behalf
of MacAndrews Holdings 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. The Company reimburses MacAndrews Holdings for the allocable costs of
the services purchased for or provided to the Company and for reasonable
out-of-pocket expenses incurred in connection with the provision of such
services. MacAndrews Holdings reimburses the Company for the allocable costs of
the services purchased for or provided to MacAndrews Holdings and for the
reasonable out-of-pocket expenses incurred in connection with the purchase or
provision of such services. In addition, in connection with certain insurance
coverage provided by MacAndrews Holdings, Products Corporation obtained letters
of credit under the
F-23
Special LC Facility (which aggregated approximately $26.4 as of December 31,
1996) to support certain self-funded risks of MacAndrews Holdings and its
affiliates, including the Company, associated with such insurance coverage.
The costs of such letters of credit are allocated among, and paid by, the
affiliates of MacAndrews Holdings, including the Company, which participate in
the insurance coverage to which the letters of credit relate. The Company
expects that these self-funded risks will be paid in the ordinary course and,
therefore, it is unlikely that such letters of credit will be drawn upon.
MacAndrews Holdings has agreed to indemnify the Company to the extent amounts
are drawn under any of such letters of credit with respect to claims for which
the Company is not responsible. The net amounts reimbursed by MacAndrews
Holdings to the Company for the services provided under the Reimbursement
Agreements for 1996, 1995 and 1994 were $2.2, $3.0 and $1.6, respectively.
Each of the Company 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. The Company does not intend to request services under the
Reimbursement Agreements unless their costs would be at least as favorable to
the Company as could be obtained from unaffiliated third parties.
TAX SHARING AGREEMENT
The Company, for federal income tax purposes, is included in the
affiliated group of which Mafco Holdings is the common parent, and the
Company's federal taxable income and loss is included in such group's
consolidated tax return filed by Mafco Holdings. The Company also may be
included in certain state and local tax returns of Mafco Holdings or its
subsidiaries. In June 1992, Holdings, the Company and certain of its
subsidiaries, and Mafco Holdings entered into the Tax Sharing Agreement
pursuant to which Mafco Holdings has agreed to indemnify the Company 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 the
Company or its subsidiaries) is the common parent for taxable periods beginning
on or after January 1, 1992 during which the Company or a subsidiary of the
Company is a member of such group. Pursuant to the Tax Sharing Agreement, for
all taxable periods beginning on or after January 1, 1992, the Company will pay
to Holdings amounts equal to the taxes that the Company 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 the Company),
except that the Company will not be entitled to carry back any losses to
taxable periods ending prior to January 1, 1992. No payments are required by
the Company if and to the extent Products Corporation is prohibited under the
Credit Agreement from making cash tax sharing payments to the Company. The
Credit Agreement prohibits Products Corporation from making such cash tax
sharing payments other than in respect of state and local income taxes. Since
the payments to be made by the Company under the Tax Sharing Agreement will be
determined by the amount of taxes that the Company would otherwise have to pay
if it were to file separate federal, state or local income tax returns, the Tax
Sharing Agreement will benefit Mafco Holdings to the extent Mafco Holdings can
offset the taxable income generated by the Company against losses and tax
credits generated by Mafco Holdings and its other subsidiaries. There were no
cash payments by the Company pursuant to the Tax Sharing Agreement for 1996,
1995 or 1994.
F-24
FINANCING REIMBURSEMENT AGREEMENT
Holdings and Products Corporation entered into a financing
reimbursement agreement (the "Financing Reimbursement Agreement") in 1992
pursuant to which Holdings agreed to reimburse Products Corporation for
Holdings' allocable portion of (i) the debt issuance cost and advisory fees
related to the capital restructuring of Holdings, and (ii) interest expense
attributable to the higher cost of funds paid by Products Corporation under the
credit agreement in effect at that time as a result of additional borrowings
for the benefit of Holdings in connection with the assumption of certain
liabilities by Products Corporation under the Asset Transfer Agreement and the
repurchase of Old Senior Subordinated Notes from affiliates. The amount of
interest to be reimbursed by Holdings for 1994 was approximately $0.8 and was
evidenced by noninterest-bearing promissory notes originally due and payable on
June 30, 1995. In February 1995, the $13.3 in notes then payable by Holdings to
Products Corporation under the Financing Reimbursement Agreement was offset
against a $25.0 note payable by Products Corporation to Holdings and Holdings
agreed not to demand payment under the resulting $11.7 note payable by Products
Corporation so long as any indebtedness remained outstanding under the Former
Credit Agreement. In February 1995, the Financing Reimbursement Agreement was
amended and extended to provide that Holdings would reimburse Products
Corporation for a portion of the debt issuance costs and advisory fees related
to the Former Credit Agreement (which portion was approximately $4.7 and was
evidenced by a noninterest-bearing promissory note payable on June 30, 1996)
and 1 1/2 % per annum of the average balance outstanding under the Former
Credit Agreement and the average balance outstanding under working capital
borrowings from affiliates through June 30, 1996 and such amounts were
evidenced by a noninterest-bearing promissory note payable on June 30, 1996.
The amount of interest to be reimbursed by Holdings for 1995 was approximately
$4.2. As of December 31, 1995, the aggregate amount of notes payable by
Holdings under the Financing Reimbursement Agreement was $8.9. In June 1996,
$10.9 in notes due to Products Corporation, which included $2.0 of interest
reimbursement in 1996, under the Financing Reimbursement Agreement from
Holdings was offset against a $11.7 demand note payable by Products Corporation
to Holdings. The Financing Reimbursement Agreement expired on June 30, 1996.
REGISTRATION RIGHTS AGREEMENT
Prior to the consummation of the Offering, the Company and Revlon
Worldwide Corporation("Revlon Worldwide"), the direct parent of the Company,
entered into the Registration Rights Agreement pursuant to which Revlon
Worldwide and certain transferees of Common Stock held by Revlon Worldwide
(the "Holders") have the right to require the Company to register all or part
of the Class A Common Stock owned by such Holders and the Class A Common Stock
issuable upon conversion of the Class B Common Stock owned by such Holders
under the Securities Act (a "Demand Registration"); provided that the Company
may postpone giving effect to a Demand Registration up to a period of 30 days
if the Company believes such registration might have a material adverse effect
on any plan or proposal by the Company with respect to any financing,
acquisition, recapitalization, reorganization or other material transaction,
or the Company 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 the Company. In addition, the Holders have the right
to participate in registrations by the Company 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. The Company will pay any
expenses incurred in connection with a Piggyback Registration, except for
underwriting discounts, commissions and expenses attributable to the shares of
Class A Common Stock sold by such Holders.
OTHER
Pursuant to a lease dated April 2, 1993 (the "Edison Lease"),
Holdings leases 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 are not to exceed $2.0 per year. Pursuant to an assumption
agreement dated February 18, 1993, Holdings agreed to assume all costs and
expenses of the ownership and operation of the Edison facility as of January
1, 1993, other than (i) the operating expenses for which Products Corporation
is responsible under the Edison Lease and (ii) environmental claims and
compliance costs relating to matters which occurred prior to January 1, 1993
up to an amount not to exceed $8.0 (the amount of such claims and costs for
which Products Corporation is responsible, the "Environmental Limit"). In
addition, pursuant to such assumption agreement, Products Corporation agreed
to indemnify Holdings for environmental claims and
F-25
compliance costs relating to matters which occurred prior to January 1, 1993
up to an amount not to exceed the Environmental Limit and Holdings agreed to
indemnify Products Corporation for environmental claims and compliance costs
relating to matters which occurred prior to January 1, 1993 in excess of the
Environmental Limit and all such claims and costs relating to matters
occurring on or after January 1, 1993. Pursuant to an occupancy agreement,
during 1996 and 1995 the Company rented a portion of the administration
building located at the Edison facility and space for a retail store of the
Company. The Company provides certain administrative services, including
accounting, for Holdings with respect to the Edison facility pursuant to which
the Company pays on behalf of Holdings costs associated with the Edison
facility and is reimbursed by Holdings for such costs, less the amount owed by
Products Corporation to Holdings pursuant to the Edison Lease and the
occupancy agreement. The net amount reimbursed by Holdings to the Company for
such costs with respect to the Edison facility for 1996, 1995 and 1994 was
$1.1, $1.2 and $2.1, respectively.
In the fourth quarter of 1996, Products Corporation and certain of
its subsidiaries purchased an inactive subsidiary from an affiliate for net
cash consideration of approximately $3.0 in a series of transactions in which
the Company expects to realize foreign tax benefits in future years.
Effective January 1, 1996, Products Corporation acquired from
Holdings substantially all of the assets of Tarlow in consideration for the
assumption of substantially all of the liabilities and obligations of Tarlow.
Net liabilities assumed were approximately $3.4. The assets acquired and
liabilities assumed were accounted for at historical cost in a manner similar
to that of a pooling of interests and, accordingly, prior period financial
statements have been restated as if the acquisition took place at the
beginning of the earliest period. Products Corporation paid $4.1 to Holdings
which was accounted for as an increase in capital deficiency. A nationally
recognized investment banking firm rendered its written opinion that the terms
of the purchase are fair from a financial standpoint to Products Corporation.
Effective January 1, 1994, Products Corporation sold the inventory,
contracts, dedicated tools, dies and molds, intellectual property and a
license agreement relating to the NEW ESSENTIALS brand to Holdings for $2.2
(representing the net book value of such brand which Products Corporation
believes approximated its fair market value at the time of sale), and the
Operating Services Agreement was amended to include NEW ESSENTIALS as a
"Retained Brand."
During 1996, 1995 and 1994, Products Corporation leased certain
facilities to MacAndrews & Forbes or its affiliates pursuant to occupancy
agreements and leases including space at Products Corporation's New York
headquarters and at Products Corporation's offices in London and Tokyo. The
rent paid by MacAndrews & Forbes or its affiliates to Products Corporation for
1996, 1995 and 1994 was $4.6, $5.3 and $4.1, respectively.
In July 1995, Products Corporation borrowed from Holdings
approximately $0.8, representing certain amounts received by Holdings relating
to an arbitration arising out of the sale by Holdings of certain of its
businesses. In 1995, Products Corporation borrowed from Holdings approximately
$5.6, representing certain amounts received by Holdings from the sale by
Holdings of certain of its businesses. Such amounts are evidenced by
noninterest-bearing promissory notes. Holdings agreed not to demand payment
under such notes so long as any indebtedness remains outstanding under the
Credit Agreement.
The Credit Agreement is supported by, among other things, guarantees
from Holdings and certain of its subsidiaries. The obligations under such
guarantees are secured by, among other things, (i) the capital stock and
certain assets of certain subsidiaries of Holdings and (ii) a mortgage on
Holdings' Edison, New Jersey facility.
Products Corporation borrows funds from its affiliates from time to
time to supplement its working capital borrowings. No such borrowings were
outstanding as of December 31, 1996, 1995 or 1994. The interest rates for such
borrowings are more favorable to Products Corporation than interest rates
under the Credit Agreement and, for borrowings occurring prior to the
execution of the Credit Agreement, the credit facility in effect at the time
of such borrowing. The amount of interest paid by the Company for such
borrowings for 1996, 1995 and 1994 was $0.5, $1.2 and $1.1, respectively.
In November 1993, Products Corporation assigned to Holdings a lease
for warehouse space in New Jersey (the "N.J. Warehouse") between Products
Corporation and a trust established for the benefit of certain family members
of the Chairman of the Executive Committee. The N.J. Warehouse had become
vacant as a result of divestitures and
F-26
restructuring of Products Corporation. The lease has annual lease payments of
approximately $2.3 and terminates on June 30, 2005. In consideration for
Holdings assuming all liabilities and obligations under the lease, Products
Corporation paid Holdings $7.5 (for which a liability was previously recorded)
in three installments of $2.5 each in January 1994, January 1995 and January
1996. A nationally recognized investment banking firm rendered its written
opinion that the terms of the lease transfer were fair from a financial
standpoint to Products Corporation. During 1996, 1995 and 1994, Products
Corporation paid certain costs associated with the N.J. Warehouse on behalf of
Holdings and was reimbursed by Holdings for such amounts. The amounts
reimbursed by Holdings to the Company for such costs were $0.2, $0.2 and $0.3
for 1996, 1995 and 1994, respectively.
During 1996, 1995 and 1994, the Company used an airplane which was
owned by a corporation of which Messrs. Gittis, Drapkin and Levin were the
sole stockholders. The Company paid approximately $0.2, $0.4 and $0.5 for the
usage of the airplane for 1996, 1995 and 1994, respectively. As of December
31, 1996, Mr. Levin no longer holds an ownership interest in the corporation
that owned the airplane.
Consolidated Cigar, an affiliate of the Company, assembles lipstick
cases for Products Corporation. Products Corporation paid approximately $1.0,
$1.0 and $0.6 for such services for 1996, 1995 and 1994, respectively.
During 1994, the Company was retained by an affiliate, Meridian, to
act as licensing agent for Meridian's trademarks. The Company will receive a
percentage of any royalties generated by such licenses. No royalties were
earned by Meridian for 1994, 1995 or 1996. However, Meridian paid the Company
approximately $0.1 in 1994 for reimbursement of expenses incurred in
connection with such licensing activities.
In January 1995, the Company agreed to license certain of its
trademarks to Guthy-Renker Corporation ("Guthy-Renker"), a corporation in
which an affiliate of MacAndrews & Forbes held a 37.5% equity interest, to be
used by Guthy-Renker in connection with the marketing and sale of hair
extensions and hair pieces. The amount paid by Guthy-Renker to the Company
pursuant to such license for 1995 was less than $0.1. In connection with this
licensing arrangement, Guthy-Renker agreed to use the Company as its exclusive
supplier of hair extensions and hair pieces. Guthy-Renker purchased $1.1 of
wigs from the Company during 1995. The Company terminated the license with
Guthy-Renker during 1995.
13. COMMITMENTS AND CONTINGENCIES
The Company currently leases manufacturing, executive, including
research and development, and sales facilities and various types of equipment
under operating lease agreements. Rental expense was $51.7, $49.3 and $51.0
for the years ended December 31, 1996, 1995 and 1994, respectively. Minimum
rental commitments under all noncancelable leases, including those pertaining
to idled facilities and the Edison research and development facility, with
remaining lease terms in excess of one year from December 31, 1996 aggregated
$230.0; such commitments for each of the five years subsequent to December 31,
1996 are $37.9, $36.4, $31.2, $28.6 and $25.6, respectively. Such amounts
exclude the minimum rentals to be received in the future under noncancelable
subleases of $16.1.
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.
F-27
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations:
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
----------- --------- --------- ---------
Net sales ................................ $ 464.3 $517.9 $571.1 $613.7
Gross profit ............................. 311.4 347.2 378.1 404.6
(Loss) income before extraordinary item . (29.1) 1.5 21.1 30.9
Net (loss) income ........................ (35.7)(a) 1.5 21.1 30.9
Income (loss) per common share:
Income (loss) before extraordinary item (0.64) 0.03 0.41 0.60
Extraordinary item ...................... (0.15) -- -- --
----------- --------- --------- ---------
Net (loss) income ....................... $ (0.79) $ 0.03 $ 0.41 $ 0.60
=========== ========= ========= =========
YEAR ENDED DECEMBER 31, 1995(b)
------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
Net sales ................... $412.2 $452.6 $514.6 $558.4
Gross profit ................ 270.6 299.1 346.8 369.2
Net (loss) income ........... (33.4) (14.0) 3.4 3.8
Net (loss) income per share (0.79) (0.33) 0.08 0.09
(a) Includes a charge of $6.6 resulting from the write-off of
deferred financing costs associated with the extinguishment of the Former
Credit Agreement prior to maturity.
(b) Effective January 1, 1996, Products Corporation acquired from
Holdings substantially all of the assets of Tarlow in consideration for the
assumption of substantially all of the liabilities and obligations of Tarlow.
Net liabilities assumed were approximately $3.4. The assets acquired and
liabilities assumed were accounted for at historical cost in a manner similar
to that of a pooling of interests and, accordingly, prior period financial
statements presented have been restated as if the acquisition took place at
the beginning of the earliest period. Products Corporation paid $4.1 to
Holdings which was accounted for as an increase to capital deficiency.
15. GEOGRAPHIC SEGMENTS
The Company operates in a single business segment. The Company has
operations based in 26 foreign countries 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. The Company enters into
forward foreign exchange contracts to hedge certain cash flows denominated in
foreign currency. In addition, the Company's operations in Brazil (which
accounted for approximately 6.1% of the Company's net sales for 1996) are
subject to hyperinflationary conditions. There can be no assurance as to the
future effect of changes in social, political and economic conditions on the
Company's business or financial condition. During 1996, one customer accounted
for approximately 10.1% of the Company's consolidated net sales. Information
related to the Company's geographic segments for each of the years in the
three-year period ended December 31, 1996 with respect to operating results,
and as of December 31, 1996 and 1995 with respect to identifiable assets, is
presented below.
Operating profit (loss), as presented below, is operating income, net
foreign currency translation (gains) losses and identifiable miscellaneous
income and expense; it excludes general corporate income and expenses, net
interest and investment income and expense, including amortization of debt
issuance costs, and income taxes. Export sales, including those to affiliates,
are not significant. Export sales to non-affiliates and related operating
profits are reflected in their geographic area of origin.
F-28
Identifiable assets, as presented below, are those assets used in
each geographic area. Corporate assets are principally cash and cash
equivalents, certain property and equipment and nonoperating assets.
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
GEOGRAPHIC AREAS
Net sales:
United States .................................... $1,282.2 $1,155.8 $ 1,019.8
Europe, Middle East and Africa ................... 404.1 357.1 320.7
Latin America, Canada and Puerto Rico ............ 297.2 259.5 253.4
Far East, Australia and other areas of the world 183.5 165.4 138.6
---------- ---------- ----------
$2,167.0 $1,937.8 $1,732.5
========== ========== ==========
Operating profit (loss):
United States .................................... $ 163.9 $ 121.7 $ 85.7
Europe, Middle East and Africa ................... 9.9 7.6 16.2
Latin America, Canada and Puerto Rico ............ 23.3 14.9 18.3
Far East, Australia and other areas of the world 7.5 7.8 (3.7)
---------- ---------- ----------
204.6 152.0 116.5
Unallocated expenses (income):
Interest expense ................................. 133.4 142.6 136.7
Interest and net investment income ............... (3.4) (4.9) (6.3)
Amortization of debt issuance costs .............. 8.3 11.0 8.4
Corporate expenses and miscellaneous, net ....... 16.4 18.1 28.9
---------- ---------- ----------
Income (loss) before income taxes ................ $ 49.9 $ (14.8) $ (51.2)
========== ========== ==========
DECEMBER 31,
---------------------
1996 1995
---------- ---------
Identifiable assets:
United States .................................... $ 944.1 $ 897.6
Europe, Middle East and Africa ................... 287.6 268.3
Latin America, Canada and Puerto Rico ............ 198.7 167.8
Far East, Australia and other areas of the world 130.6 127.0
Corporate ........................................ 60.3 74.6
---------- ---------
$1,621.3 $1,535.3
========== =========
SKIN CARE,
PERSONAL CARE
COSMETICS AND
AND FRAGRANCES PROFESSIONAL TOTAL
-------------- --------------- ----------
CLASSES OF SIMILAR PRODUCTS (UNAUDITED):
1996 ................................... $1,263.9 $903.1 $ 2,167.0
% of net sales ......................... 58% 42% 100%
1995 ................................... $1,075.2 $862.6 $ 1,937.8
% of net sales ......................... 55% 45% 100%
1994 ................................... $ 884.8 $847.7 $ 1,732.5
% of net sales ......................... 51% 49% 100%
16. PENDING ACQUISITION
On November 27, 1996, Products Corporation and PFC entered into an
Agreement and Plan of Merger with Cosmetic Center pursuant to which PFC will
merge with and into Cosmetic Center, with Cosmetic Center surviving the merger
(the "Merger"). In the Merger, Products Corporation would receive newly issued
common stock of Cosmetic Center constituting between 74% and 84% of the
outstanding common stock. The Merger is subject to a number of significant
conditions, including obtaining financing for Cosmetic Center and approval of
the transaction by Cosmetic Center stockholders, among other conditions.
F-29
SCHEDULE II
REVLON, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN MILLIONS)
BA.ANCE AT CHARGED TO BALANCE
BEGINNING COST AND OTHER AT END
OF YEAR EXPENSES DEDUCTIONS OF YEAR
------------ ------------ ------------ ---------
YEAR ENDED DECEMBER 31, 1996:
Applied against asset accounts:
Allowance for doubtful accounts ...... $13.6 $ 7.1 $ (7.8)(1) $12.9
Allowance for volume and early payment
discounts ............................ $10.1 $43.8 $(41.9)(2) $12.0
YEAR ENDED DECEMBER 31, 1995:
Applied against asset accounts:
Allowance for doubtful accounts ...... $11.1 $ 5.5 $ (3.0)(1) $13.6
Allowance for volume and early payment
discounts ............................ $10.6 $33.3 $(33.8)(2) $10.1
YEAR ENDED DECEMBER 31, 1994:
Applied against asset accounts:
Allowance for doubtful accounts ...... $14.6 $ 4.6 $ (8.1)(1) $11.1
Allowance for volume and early payment
discounts ............................ $ 9.7 $26.0 $(25.1)(2) $10.6
- ------------
Notes:
(1) Doubtful accounts written off, less recoveries, reclassifications and
foreign currency translation adjustments.
(2) Discounts taken, reclassifications and foreign currency translation
adjustments.
F-30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Revlon, Inc.
(Registrant)
By: /s/ George Fellows By: /s/ William J. Fox By: /s/ Lawrence E. Kreider
---------------------------------------- ---------------------------------------- ----------------------------------------
George Fellows William J. Fox Lawrence E. Kreider
President, Senior Executive Vice Senior Vice
Chief Executive Officer President, President,
and Director Chief Financial Officer Controller and
and Director Chief Accounting Officer
Dated: February 14, 1997
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
February 14, 1997 and in the capacities indicated.
Signature Title
* Chairman of the Executive Committee of the Board and
- ----------------------------------- Director
(Ronald O. Perelman)
* Chairman of the Board and Director
- -----------------------------------
(Jerry W. Levin)
/s/ George Fellows President, Chief Executive Officer and Director
- -----------------------------------
(George Fellows)
/s/ William J. Fox Senior Executive Vice President, Chief Financial
- ----------------------------------- Officer and Director
(William J. Fox)
* Director
- -----------------------------------
(Donald G. Drapkin)
* Director
- -----------------------------------
(Howard Gittis)
* Director
- -----------------------------------
(Edward J. Landau)
* Director
- -----------------------------------
(Vernon E. Jordan)
* Director
- -----------------------------------
(Henry A. Kissinger)
* Director
- -----------------------------------
(Meyer Feldberg)
* Director
- -----------------------------------
(Linda G. Robinson)
* Director
- -----------------------------------
(Terry Semel)
* Director
- -----------------------------------
(Martha Stewart)
o Robert K. Kretzman, by signing his name hereto, does hereby sign this report
on behalf of the directors of the registrant after whose typed names asterisks
appear, pursuant to powers of attorney duly executed by such Directors and
filed with the Securities and Exchange Commission.
By: /s/ Robert K. Kretzman
Robert K. Kretzman
Attorney-in-fact