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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
- -- ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________________ TO __________________
COMMISSION FILE NUMBER 1-11178
REVLON, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3662955
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
625 MADISON AVENUE, NEW YORK, NEW YORK 10022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 527-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OR 12(G) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------------- ------------------------------------------------------
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 18, 1999, 19,986,771 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 REV HOLDINGS INC., 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 18, 1999) WAS APPROXIMATELY $132,690,000.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
Revlon, Inc. (and together with its subsidiaries, the "Company")
operates in a single segment with many different products, which include an
extensive array of glamorous, exciting and innovative cosmetics and skin care,
fragrance, personal care products ("consumer products"), and hair and nail care
products principally for use in and resale by professional salons
("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, ULTIMA II, JEANNE GATINEAU and
NATURAL HONEY in skin care; CHARLIE and FIRE & ICE in fragrances; FLEX,
OUTRAGEOUS, MITCHUM, COLORSTAY, COLORSILK, AFRICAN PRIDE, JEAN NATE, PLUSBELLE,
BOZZANO and COLORAMA in personal care products; and ROUX FANCI-FULL, REALISTIC,
CREME OF NATURE, 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 over 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 lip makeup and nail enamel
(which the Company has occupied for the past 22 years), with the number one and
two selling brands of lip makeup for 1998. Propelled by the success of its new
product launches and its existing product lines, the REVLON brand captured in
1996 and continued to hold in 1998 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
21.2% for 1998. The Company also has leading market positions in several
product categories in certain markets outside of the United States, including
in Argentina, Australia, Brazil, Canada, Mexico and South Africa.
In the United States, the self-select distribution channel includes
independent drug stores and chain drug stores (such as Walgreens, CVS, Eckerd
and Rite Aid), 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). Internationally, the self-select
distribution channel includes retailers such as Boots in the United Kingdom and
Western Europe, Shoppers Drug Mart in Canada and Wal-Mart worldwide. The
foregoing retailers, among others, sell the Company's products.
On November 6, 1998, Revlon Consumer Products Corporation (together
with its subsidiaries, "Products Corporation"), a wholly owned subsidiary of
the Company issued and sold in a private placement $250.0 million aggregate
principal amount of 9% Senior Notes due 2006 (the "9% Notes"), receiving net
proceeds of $247.2 million. Products Corporation intends to use $200.0 million
of the net proceeds from the sale of the 9% Notes to refinance Products
Corporation's 9 1/2% Senior Notes due 1999 (the "1999 Notes"), including
through open market purchases. Products Corporation intends to use the balance
of the net proceeds for general corporate purposes, including to temporarily
reduce indebtedness under the working capital lines under the Credit Agreement
(as hereinafter defined). Pending the refinancing of the 1999 Notes, such net
proceeds will be retained by Products Corporation and a portion of such
proceeds will be used to temporarily reduce indebtedness under the working
capital lines under the Credit Agreement and under other short-term facilities.
On February 24, 1999, substantially all of the 9% Notes were exchanged for
registered notes with substantially identical terms (the 9% Notes and the
registered exchange notes shall each be referred to as the "9% Notes").
2
During 1998, Products Corporation completed the disposition of its
approximately 85% equity interest in The Cosmetic Center, Inc. ("Cosmetic
Center"), along with certain amounts due from Cosmetic Center to Products
Corporation for working capital and inventory, to a newly formed limited
partnership controlled by an unrelated third party. Products Corporation
received a minority limited partnership interest in the limited partnership as
consideration for the disposition. As a result, the Company recorded a loss on
disposal of $47.7 million during 1998.
In the fourth quarter of 1998 the Company committed to a restructuring
plan to realign and reduce personnel, exit excess leased real estate, realign
and consolidate regional activities, reconfigure certain manufacturing
operations and exit certain product lines. As a result, the Company recognized
a net charge of $42.9 million comprised of $26.6 million of employee severance
and termination benefits for 720 people worldwide, $14.9 million of costs to
exit excess leased real estate primarily in the United States and $2.7 million
of other costs (included in cost of sales) incurred to exit certain product
lines outside the United States, partially offset by a gain of $1.3 million for
the sale of a factory outside the United States. In the third quarter of 1998
the Company recognized a gain of approximately $7.1 million for the sale of the
wigs and hairpieces portion of its business in the United States.
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 exclusively 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 and are therefore subject to some degree of variance.
BUSINESS STRATEGY
The Company's business strategy, which is intended to improve its
operating performance, is to:
o Strengthen and broaden core brands through globalization of marketing and
advertising, product development and manufacturing;
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 it competes and
enter new markets where the Company identifies opportunities for growth;
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; and
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.
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BRAND COSMETICS SKIN CARE FRAGRANCES PERSONAL CARE PROFESSIONAL
PRODUCTS PRODUCTS
- ----------------------------------------------------------------------------------------------------------------------
REVLON Revlon, ColorStay, Moon Drops, Charlie, Charlie Red, Flex, Outrageous, Revlon
Revlon Age Defying, Revlon Results, Charlie White, Aquamarine, Professional,
Super Lustrous, Eterna 27, Revlon Fire & Ice, Mitchum, Roux Fanci-full,
MoistureStay, Age Defying Jontue, Ciara Lady Mitchum, Realistic, Creme
Moon Drops, Hi & Dri, of Nature, Sensor
Line & Shine, ColorStay, Perm, Perfect
New Complexion, Colorsilk, Perm, Fermodyl,
Touch & Glow, African Pride, Perfect Touch,
Top Speed, Lashful, Frost & Glow, Salon Perfection,
Naturally Glamorous Revlon Shadings, Revlonissimo,
Custom Eyes, Timeliner, Jean Nate', Voila, Young
StreetWear, Roux Fanci-full, Color, Creative
Revlon Implements Realistic, Nail, Contours,
Creme of Nature, American Crew,
Herba Rich, R PRO,
Fabu-laxer True Cystem
ALMAY Almay, Time-Off, Sensitive Care, Almay
Amazing, One Coat, Oil Control,
Stay Smooth, Time-Off,
Almay Stay Clean Moisture
Balance,
Moisture Renew,
Almay Clear
Complexion Skin
Care
ULTIMA II Ultima II, Beautiful Glowtion, Vital
Nutrient, Wonderwear, Radiance,
The Nakeds, Full Interactives, CHR
Moisture
SIGNIFICANT Colorama(a), Jeanne Floid(a), Plusbelle(a), Colomer(a),
REGIONAL Juvena(a), Gatineau(a), Charlie Gold Bozzano(a), Intercosmo(a),
BRANDS Jeanne Gatineau(a), Natural Honey Juvena(a), Personal Bio
Cutex(a) Geniol(a), Point, Natural
Colorama(a), Wonder,
Llongueras(a), Llongueras(a)
Bain de Soleil(a),
ZP-11
- ----------------------------------------------------------------------------------------------------------------------
(a) 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
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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.
The Company markets several different lines of REVLON lip makeup
(which includes lipstick, lip gloss and liner). The Company's breakthrough
COLORSTAY lipcolor, which uses patented transfer-resistant technology that
provides long wear, is produced in approximately 50 shades. SUPER LUSTROUS
lipstick is produced in approximately 70 shades. MOON DROPS, a moisturizing
lipstick, is produced in approximately 50 shades. LINE & SHINE, which was
introduced in 1997, is a product that utilizes an innovative product form,
combining lipliner and lip gloss in one package, and is produced in
approximately 20 shades. MOISTURESTAY, which the Company introduced in March
1998, uses patent-pending technology to moisturize the lips even after the
color wears off, and is produced in approximately 40 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 approximately 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. TOP SPEED nail enamel, launched in 1997, is
produced in approximately 80 shades and contains a patented speed drying
polymer formula which sets in 90 seconds. REVLON has the number one position in
nail enamel in the United States self-select distribution channel. The Company
also sells CUTEX nail polish remover and nail care products in certain
countries outside the United States.
The Company sells face makeup, including foundation, powder, blush and
concealers, under such REVLON brand names as REVLON AGE DEFYING, which is
targeted for women in the over 35 age bracket; COLORSTAY, which uses
patent-pending transfer-resistant technology that provides long wear; and NEW
COMPLEXION, for consumers in the 18 to 34 age bracket.
The Company's eye makeup products include mascaras, eyeliners, eye
shadows and brow color. COLORSTAY eyecolor, mascara and brow color, LASHFUL
mascara, SOFTSTROKE eyeliners and REVLON CUSTOM EYES eye shadows are targeted
for women in the 18 to 49 age bracket.
The Company's ALMAY brand consists of a complete line of
hypo-allergenic, dermatologist-tested, fragrance-free cosmetics and skin care
products targeted for consumers who want "healthy looking skin" with "no fuss."
ALMAY products include lip makeup, nail color and nail care products, eye and
face makeup, skin care products, and sunscreen lotions and creams, including
ALMAY AMAZING LASH mascara, ALMAY AMAZING eye makeup, ALMAY AMAZING LASTING
makeup, ALMAY CLEAR COMPLEXION SKIN CARE and MAKEUP, ALMAY EASY-TO-WEAR
eyecolor, TIME-OFF makeup and skin care, ALMAY ONE COAT mascara and the ALMAY
AMAZING collection, which includes AMAZING LASTING lip makeup, which uses the
Company's patented transfer-resistant technology developed for COLORSTAY. In
1998, the Company expanded the ONE COAT brand to include ONE COAT NAIL COLOR,
ONE COAT GEL EYECOLOR, ONE COAT GEL EYE Pencil and ONE COAT LIP SHINE. The
Company introduced ALMAY'S patent-pending STAY SMOOTH ANTI-CHAP LIP lipcolor,
the first anti-chap lip makeup with SPF 25, in the first quarter of 1998. The
Company targets ALMAY for value-conscious consumers by offering benefits
comparable to higher priced products, such as Clinique, at affordable prices.
ALMAY was the fastest-growing major brand in 1998.
The Company's STREETWEAR brand consists of a line of nail enamels,
mascaras, lip and eye liners and lip glosses which are targeted for the young,
value-conscious consumer.
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. ULTIMA II'S products include lip makeup, eye
and face makeup and skin care products including GLOWTION, a line of skin
brighteners which combines skin care and color; FULL MOISTURE FOUNDATION; VITAL
RADIANCE skin care products; the BEAUTIFUL NUTRIENT collection, a complete line
of nourishing makeup that provides advanced nutrient protection against
dryness; THE NAKEDS makeup, a trend-setting line of makeup emphasizing neutral
colors; and WONDERWEAR. The WONDERWEAR collection includes a long-wearing
foundation that uses patented technology, cheek and eyecolor products that use
proprietary technology that provides long wear, and WONDERWEAR lipstick, which
uses patented transfer-resistant technology. In the U.S. the Company is
broadening the distribution of ULTIMA II into the self-select channel.
5
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 and are the number one brand in the United States self-select distribution
channel.
The Company also sells cosmetics in international markets under
regional brand names including COLORAMA in Brazil and JUVENA.
The Company's skin care products, including moisturizers, are sold
under brand names, including ETERNA 27, MOON DROPS, REVLON RESULTS, ALMAY
TIME-OFF REVITALIZER, CLEAR COMPLEXION and ULTIMA II VITAL RADIANCE, a skin
care collection introduced in 1997. In addition, the Company sells skin care
products in international markets under internationally recognized brand names
and under regional brands, including NATURAL HONEY and the Company's premium
priced JEANNE GATINEAU.
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 and FIRE & ICE and
line extensions such as CHARLIE RED and CHARLIE WHITE. The Company's CHARLIE
fragrance has been a market leader since the mid-1970's. In international
markets, the Company distributes under license certain brands, including
VERSACE and VAN GILS.
Personal Care Products. The Company sells a broad line of personal
care consumer products which complements its core cosmetics lines and enables
the Company to meet the consumer's broader beauty care needs. In the
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, BOZZANO, PLUSBELLE,
JUVENA, LLONGUERAS and NATURAL HONEY brands outside the United States; the
breakthrough, patent-pending COLORSTAY and the COLORSILK, REVLON SHADINGS,
FROST & GLOW and ROUX FANCI-FULL hair coloring lines throughout most of the
world; 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, including sunscreens, moisturizers and
anti-perspirants, under the ALMAY brand. The Company markets in 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's recent acquisition of AP Products Ltd. significantly enhanced the
Company's ability to service its ethnic consumers with the addition of the
AFRICAN PRIDE brand of hair care products sold primarily in the United States.
The Company intends to expand distribution of AFRICAN PRIDE products in various
international markets. The Company introduced SUPERLUSTRUOUS haircolor in the
fourth quarter of 1998, capitalizing on the SUPERLUSTRUOUS 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,
REVLONISSIMO, CREME OF NATURE, 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. Two acquisitions, CREATIVE NAIL, acquired in November 1995, and
AMERICAN Crew, acquired in April 1996, increase the Company's strength in the
exclusive distribution channel. Through CREATIVE NAIL, the Company sells nail
enhancement systems and nail color and treatment products and services for use
by the professional salon industry under the CREATIVE NAIL brand name. Through
AMERICAN CREW, the Company sells men's shampoos, conditioners, gels, and other
hair care products for use by professional salons under the AMERICAN CREW brand
name. The Company also sells retail hair care products under the LLONGUERAS,
PERSONAL BIO POINT, GENIOL, FIXPRAY and LANOFIL brands outside the United
States.
6
MARKETING
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, principally outside the U.S. 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's marketing emphasizes a uniform global image and product for its
portfolio of core brands, including REVLON, COLORSTAY, REVLON 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. 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 approximately 78 countries and approximately
19 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. 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, and permit consumers to test, the Company's products, thereby achieving
the benefits of an in-store demonstrator without the corresponding cost,
magazine inserts containing samples of the Company's newest products, trial
size products and "shade samplers," which are collections of trial size
products in different shades. Additionally, the Company has its own website
which features current product and promotional information.
Professional Products. Professional products are marketed through
educational seminars on their application and benefits, and through
advertising, displays and samples to communicate to professionals and consumers
the quality and performance characteristics of such products. The shift to
exclusive line distributors is intended to 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 research and development group is comprised of departments
specialized in the technologies critical to the Company's various product
categories as well as an advanced concepts department that promotes
inter-departmental cross-functional research on a wide range of technologies to
develop new and innovative products. The Company independently develops
substantially all of its new products. The Company also has entered into joint
research projects with major universities and commercial laboratories 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 researchers at the Edison facility are responsible for all of the
7
Company's new product research worldwide, performing research for new products,
ideas, concepts and packaging. The Company also has satellite research
facilities in Brazil, Spain, France and California.
The research and development group at the Edison facility also
performs extensive safety and quality tests on the Company's products,
including toxicology, microbiology and package testing. Additionally, quality
control testing is performed at each manufacturing facility.
As of December 31, 1998, 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 1998, 1997 and 1996, the Company spent
approximately $31.9 million, $29.7 million and $26.3 million, respectively, on
research and development activities.
MANUFACTURING AND RELATED OPERATIONS AND RAW MATERIALS
The Company is continuing to rationalize 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 the
Company 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 is devoted to
improving operating efficiencies.
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
and its Canadian 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 although the Company is in the process of
moving ULTIMA II production to its Phoenix, Arizona facility. Nail care
products for sale in salons worldwide are manufactured and distributed through
the Vista, California facility. Implements for sale throughout the world are
manufactured at the Company's Irvington, New Jersey 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 and Oxford facilities have been
ISO-9002 certified. ISO-9002 certification is an internationally recognized
standard for manufacturing facilities, which signifies that the manufacturing
facility has achieved and maintains certain performance and quality commitment
standards.
The Company manufactures its entire line of consumer products (except
implements) for sale in most of Europe at its Maesteg, South Wales facility.
Local production of cosmetics and personal care products currently takes place
at the Company's facilities in Spain, Canada, Venezuela, Mexico, New Zealand,
Brazil, Italy, Argentina, France and South Africa. The manufacture of
professional products for sale by retailers outside the United States is
centralized principally at the Company's facilities in Ireland, Spain, Italy
and Mexico. Production of color cosmetics for Japan and Mexico has been shifted
primarily to the United States while production of REVLON brand personal care
products for Argentina is centralized in Brazil. The Maestag and Ireland
facilities have 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 from most of the
Company's principal manufacturing facilities, and the timeliness and accuracy
of new product and promotion deliveries.
8
To promote the Company's understanding of and responsiveness to the needs of
its retail customers, the Company has dedicated teams assigned to significant
accounts, and has provided retail accounts with a 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 and has received several preferred vendor awards.
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 to outside
vendors for improvements to its management information systems were
approximately $11 million for 1998. 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.
The Company has also developed a comprehensive plan intended to
address Year 2000 issues. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Year 2000."
DISTRIBUTION
The Company's products are sold in approximately 175 countries and
territories. The Company's worldwide sales force had approximately 1,800 people
as of December 31, 1998, including dedicated sales forces 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. Net sales in the United States accounted for
approximately 59.4% of the Company's 1998 net sales, a majority of which were
made in the self-select 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, 1998, 14
licenses were in effect relating to 18 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 are sold directly and through
wholesalers to chain drug stores and mass volume retailers.
International. Net sales outside the United States accounted for
approximately 40.6% of the Company's 1998 net sales. The ten largest countries
in terms of these sales, which include, among others, Brazil, Spain, the United
Kingdom, Australia, South Africa and Canada, accounted for approximately 30% of
the Company's net sales in 1998, with Brazil accounting for approximately 5.4%
of the Company's net sales. The Company 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 Company also distributes outside the United
States through department stores and specialty stores such as perfumeries. The
Company'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 outside the United
States. At December 31, 1998, the Company actively sold its products through
wholly owned subsidiaries established in 26 countries outside of the United
States 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 markets where the Company identifies opportunities for growth.
In 1996 the Company established a subsidiary in China 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.
9
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 Emporium, American Drug Stores, Eckerds and
Rite Aid in the self-select distribution channel, J.C. Penney in the
demonstrator-assisted distribution channel, Sally's Beauty Company for
professional products, Boots in the United Kingdom and Western Europe and
Wal-Mart worldwide. Wal-Mart and its affiliates worldwide accounted for
approximately 10.1% of the Company's 1998 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 and Unilever N.V. in the self-select distribution channel; L'Oreal
S.A., Unilever N.V. and Estee Lauder, Inc. in the demonstrator-assisted
distribution channel; and L'Oreal S.A, Matrix Essentials, Inc., which is owned
by Bristol-Myers Squibb Company and Wella GmbH in professional products.
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, STREETWEAR, FLEX, PLUSBELLE, CUTEX (outside the
U.S.), AFRICAN PRIDE, MITCHUM, ETERNA 27, ULTIMA II, ALMAY, CHARLIE, JEAN
NATE, REVLON RESULTS, COLORAMA, FIRE & ICE, MOON DROPS, SUPER LUSTROUS and
WONDERWEAR for consumer products and REVLON, ROUX FANCI-FULL, REALISTIC,
FERMODYL, CREATIVE NAIL, AMERICAN CREW 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, COLORSTAY hair color, classic REVLON nail
enamel, TOP SPEED nail enamel, REVLON AGE DEFYING foundation and cosmetics, NEW
COMPLEXION makeup, WONDERWEAR foundation, WONDERWEAR lipstick, ALMAY TIME-OFF
skin care and makeup, ALMAY AMAZING cosmetics, ALMAY ONE COAT eye makeup and
cosmetics, ULTIMA II VITAL RADIANCE skin care products, OUTRAGEOUS shampoo 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.
10
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, Oxford, North Carolina and Jacksonville, Florida
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 segment. Certain geographic,
financial and other information of the Company is set forth in Note 19 of the
Notes to Consolidated Financial Statements of the Company.
EMPLOYEES
As of December 31, 1998, the Company employed the equivalent of
approximately 13,000 full-time persons (before the effect of the
restructuring). Approximately 2,000 of such employees in the United States are
covered by collective bargaining agreements. The Company believes that its
employee relations are satisfactory. Although the Company has experienced minor
work stoppages of limited duration in the past in the ordinary course of
business, such work stoppages have not had a material effect on the Company's
results of operations or financial condition.
11
ITEM 2. PROPERTIES
The following table sets forth as of December 31, 1998 the Company's
major manufacturing, research and warehouse/distribution facilities, all of
which are owned except where otherwise noted.
APPROXIMATE FLOOR SPACE
LOCATION USE SQ. FT.
- -------- --- ------
Oxford, North Carolina......Manufacturing, warehousing, distribution and office 1,012,000
Phoenix, Arizona............Manufacturing, warehousing, distribution and office 706,000
(partially leased)
Jacksonville, Florida.......Manufacturing, warehousing, distribution, research and 526,000
office
Edison, New Jersey..........Research and office (leased) 175,000
Irvington, New Jersey.......Manufacturing, warehousing and office 96,000
Sao Paulo, Brazil...........Manufacturing, warehousing, distribution, office and 435,000
research
Maesteg, South
Wales.......................Manufacturing,.distribution and office 316,000
Mississauga, Canada.........Manufacturing, warehousing, distribution and office 245,000
Santa Maria, Spain..........Manufacturing and warehousing 173,000
Caracas, Venezuela..........Manufacturing, distribution and office 145,000
Kempton Park, South Africa..Warehousing, distribution and office (leased) 127,000
Canberra, Australia.........Warehousing, distribution and office 125,000
Isando, South Africa........Manufacturing, warehousing, distribution and office 94,000
Buenos Aires, Argentina.....Manufacturing, warehousing, distribution and office 75,000
Bologna, Italy..............Manufacturing, warehousing, distribution and office 60,000
Dublin, Ireland.............Manufacturing, warehousing, distribution and office 32,500
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 approximately 57,000 square feet was sublet to affiliates of the
Company and approximately 27,000 square feet was sublet to an unaffiliated
third party as of December 31, 1998). 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.
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.
12
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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MacAndrews & Forbes Holdings Inc. ("MacAndrews Holdings"), which is
indirectly wholly owned by Ronald O. Perelman, through REV Holdings Inc. ("REV
Holdings"), beneficially owns 11,250,000 shares of the Company's Class A Common
Stock (representing 56.3% 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 approximately 83.0% of the outstanding shares of the
Company's Common Stock and have approximately 97.4% of the combined voting
power of the outstanding shares of the Company's Common Stock. The remaining
8,736,771 shares of Class A Common Stock outstanding at February 18, 1999 are
owned by the public. As of February 18, 1999, there were 643 holders of record
of Class A Common Stock. No dividends were declared or paid during 1998 or
1997. The terms of the Credit Agreement, the 1999 Notes, the Notes (as
hereinafter defined) and the 9% 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 years ended December 31, 1998 and 1997.
1998 QUARTERLY STOCK PRICES (1)
----------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
----------- ---------- --------- -----------
High... $51 13/16 $56 1/16 $54 1/2 $27 13/16
Low.... 33 5/8 47 9/16 30 7/8 12 1/2
1997 QUARTERLY STOCK PRICES (1)
-------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------- ----------- --------- ----------
High... $42 3/8 $51 13/16 $54 1/8 $49
Low.... 29 5/8 33 1/4 45 3/8 33 1/8
(1) Represents the closing price per share on the New York Stock
Exchange (NYSE), which is the exchange on which shares of the Company's Class A
Common Stock are listed. The Company's symbol is REV.
13
ITEM 6. SELECTED FINANCIAL DATA
The Consolidated Statements of Operations Data for each of the years
in the four-year period ended December 31, 1998 and the Balance Sheet Data as
of December 31, 1998, 1997 and 1996 are derived from the Consolidated Financial
Statements of the Company, which have been audited by KPMG LLP, independent
certified public accountants. The Consolidated Statements of Operations Data
for the year ended December 31, 1994 and the Balance Sheet Data as of December
31, 1995 and 1994 are derived from unaudited consolidated financial statements
for such periods, which have been restated to reflect the Company's retail and
outlet store business as discontinued operations. 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,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Net sales ................................ $ 2,252.2 $ 2,238.6 $ 2,092.1 $1,867.3 $ 1,674.0
Operating income ......................... 124.6(a) 214.9(b) 199.2 147.5 108.1
(Loss) income from continuing operations (27.3) 57.8 24.4 (37.2) (73.0)
Basic (loss) income from continuing
operations per common share ............. $ (0.53) $ 1.13 $ 0.49 $ (0.88) $ (1.72)
============ ============ ============ ============ ============
Diluted (loss) income from continuing
operations per common share ............. $ (0.53) $ 1.13 $ 0.49 $ (0.88) $ (1.72)
============ ============ ============ ============ ============
Weighted average number of
common shares outstanding: (c)
Basic .................................. 51,217,997 51,131,440 49,687,500 42,500,000 42,500,000
============ ============ ============ ============ ============
Dilutive ............................... 51,217,997 51,544,318 49,818,792 42,500,000 42,500,000
============ ============ ============ ============ ============
DECEMBER 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
BALANCE SHEET DATA:
Total assets . ............................ $1,830.0 $1,756.0 $1,617.3 $1,532.6 $1,414.3
Long-term debt, including current portion 1,660.0 1,425.2 1,361.0 1,476.7 1,330.4
Total stockholder's deficiency ............ (648.0) (458.5) (497.1) (702.3) (656.2)
(a) Includes non-recurring charges, net, of $35.8 million. See Note 4 to the
Consolidated Financial Statements.
(b) Includes non-recurring charges, net, of $3.6 million. See Note 4 to the
Consolidated Financial Statements.
(c) Represents the weighted average number of 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 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 has a licensing group.
RESULTS OF OPERATIONS
The following table sets forth the Company's net sales for each of the
last three years:
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
Net sales:
United States ....... $1,338.5 $1,300.2 $1,182.3
International ....... 913.7 938.4 909.8
---------- ---------- ----------
$2,252.2 $2,238.6 $2,092.1
========== ========== ==========
The following table sets forth certain statements of operations data
as a percentage of net sales for each of the last three years:
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997 1996
------- ------- -------
Cost of sales* .............................. 34.0% 33.2% 32.9%
Gross profit ................................ 66.0 66.8 67.1
Selling, general and administrative expenses
("SG&A").................................... 59.0 57.1 57.6
Business consolidation costs and other, net . 1.5 0.1 --
Operating income ............................ 5.5 9.6 9.5
* 1998 includes $2.7 (0.1% of net sales) for charges related to
restructuring.
15
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
NET SALES
Net sales were $2,252.2 and $2,238.6 for 1998 and 1997, respectively,
an increase of $13.6, or 0.6% (or 2.7% on a constant U.S. dollar basis).
United States. Net sales in the United States were $1,338.5 for 1998
compared to $1,300.2 for 1997, an increase of $38.3, or 2.9%. The increase in
net sales in 1998 reflects improvements in net sales of products in the
Company's ALMAY and ULTIMA franchises and expansion of certain of the Company's
professional product lines including an acquisition. For the first half of
1998, net sales for the Company's REVLON franchise increased as compared to the
first half of 1997 as a result of continued consumer acceptance of new product
offerings and general improvement in consumer demand for the Company's color
cosmetics. Beginning in the third quarter of 1998, such sales were adversely
affected by a slowdown in the rate of growth in the mass market color cosmetics
category and a leveling of market share. Additionally, net sales for 1998 were
impacted by reduced purchases by some retailers, particularly chain drugstores,
resulting from improved inventory management through systems upgrades and
inventory reductions following several recent business combinations. The
Company expects retail inventory balancing and reductions to continue to affect
sales in 1999.
REVLON brand color cosmetics continued as the number one brand in
dollar market share in the U.S. self-select distribution channel. New product
introductions (including, in 1998, certain products launched during 1997)
generated incremental net sales in 1998, principally as a result of launches of
TOP SPEED nail enamel, MOISTURESTAY lip makeup, products in the NEW COMPLEXION
line, COLORSTAY shampoo, ALMAY STAY SMOOTH lip makeup, products in the ALMAY
AMAZING collection, products in the ALMAY ONE COAT collection, products in the
ULTIMA II BEAUTIFUL NUTRIENT and ULTIMA II FULL MOISTURE lipcolor lines and
ULTIMA II GLOWTION skin brighteners.
International. Net sales outside the United States were $913.7 for
1998 compared to $938.4 for 1997, a decrease of $24.7, or 2.6%, on a reported
basis (an increase of 2.4% on a constant U.S. dollar basis). The increase in
net sales for 1998 on a constant dollar basis reflects the benefits of
increased distribution, including acquisitions, and successful new product
introductions in several markets including MOISTURESTAY lip makeup and TOP
SPEED nail enamel. The decrease in net sales for 1998 on a reported basis
reflects the unfavorable effect on sales of a stronger U.S. dollar against most
foreign currencies and unfavorable economic conditions in several international
markets. These unfavorable economic conditions restrained consumer and trade
demand outside the U.S., particularly in South America and the Far East, as
well as Russia and other developing economies. Sales outside the United States
are divided into three geographic regions. In Europe, which is comprised of
Europe, the Middle East and Africa, net sales decreased by 2.6% on a reported
basis to $406.9 for 1998 as compared to 1997 (an increase of 0.5% on a constant
U.S. dollar basis). In the Western Hemisphere, which is comprised of Canada,
Mexico, Central America, South America and Puerto Rico, net sales increased by
4.8% on a reported basis to $363.3 for 1998 as compared to 1997 (an increase of
9.5% on a constant U.S. dollar basis). The Company's operations in Brazil are
significant. In Brazil, net sales were $122.5 on a reported basis for 1998
compared to $130.9 for 1997, a decrease of $8.4, or 6.4% (an increase of 0.5%
on a constant U.S. dollar basis). On a reported basis, net sales in Brazil were
adversely affected by the stronger U.S. dollar against the Brazilian real. In
the Far East, net sales decreased by 17.5% on a reported basis to $143.5 for
1998 as compared to 1997 (a decrease of 7.4% on a constant U.S. dollar basis).
Net sales outside the United States, including without limitation in Brazil,
were, and may continue to be, adversely impacted by generally weak economic
conditions, political and economic uncertainties, including without limitation
currency fluctuations, and competitive activities in certain markets.
16
Cost of sales
As a percentage of net sales, cost of sales was 34.0% for 1998
compared to 33.2% for 1997. The increase in cost of sales as a percentage of
net sales for 1998 compared to 1997 is due to changes in product mix, the
effect of weaker local currencies on the cost of imported purchases, the effect
of lower net sales in the second half of 1998 and the inclusion of $2.7 of
other costs incurred to exit certain product lines outside the United States in
connection with the restructuring charge in the fourth quarter of 1998. These
factors were partially offset by the benefits of more efficient global
production and purchasing.
SG&A expenses
As a percentage of net sales, SG&A expenses were 59.0% for 1998
compared to 57.1% for 1997. SG&A expenses other than advertising and
consumer-directed promotion expenses, as a percentage of net sales, were 40.2%
for 1998 compared to 39.3% for 1997. The increase in SG&A expenses other than
advertising and consumer-directed promotion expenses as a percentage of net
sales was due primarily to the effects of lower than expected sales. The
Company's advertising and consumer-directed promotion expenditures were
incurred to support existing product lines, new product launches and increased
distribution. Advertising and consumer-directed promotion expenses as a
percentage of net sales were 18.8%, or $422.9, for 1998 compared to 17.8%, or
$397.4, for 1997.
Business consolidation costs and other, net
In the fourth quarter of 1998 the Company committed to a restructuring
plan to realign and reduce personnel, exit excess leased real estate, realign
and consolidate regional activities, reconfigure certain manufacturing
operations and exit certain product lines. As a result, the Company recognized
a net charge of $42.9 comprised of $26.6 of employee severance and termination
benefits for 720 sales, marketing, administrative, factory and distribution
employees worldwide, $14.9 of costs to exit excess leased real estate primarily
in the United States and $2.7 of other costs described above in cost of sales,
partially offset by a gain of $1.3 for the sale of a factory outside the United
States.
In the third quarter of 1998 the Company recognized a gain of
approximately $7.1 for the sale of the wigs and hairpieces portion of its
business in the United States.
In 1997 the Company incurred business consolidation costs of $20.6 in
connection with the implementation of its business strategy to rationalize
factory operations. These costs primarily included severance for 415 factory
and administrative employees and other costs related to the rationalization of
certain factory and warehouse operations worldwide. Such costs were partially
offset by an approximately $12.7 settlement of a claim and related gains of
approximately $4.3 for the sales of certain factory operations outside the
United States.
Operating income
As a result of the foregoing, operating income decreased by $90.3, or
42.0%, to $124.6 for 1998 from $214.9 for 1997.
17
Other expenses/income
Interest expense was $137.9 for 1998 compared to $133.7 for 1997. The
increase in interest expense for 1998 as compared to 1997 is due to higher
average outstanding borrowings partially offset by lower interest rates.
Foreign currency losses, net, were $4.6 for 1998 compared to $6.4 for
1997. The foreign currency losses for 1998 were comprised primarily of losses
in several markets in Latin America. The losses in 1997 were comprised
primarily of losses in several markets in Europe and the Far East.
Provision for income taxes
The provision for income taxes was $5.0 and $9.3 for 1998 and 1997,
respectively. The decrease was primarily attributable to lower taxable income
outside the United States in 1998.
Discontinued operations
During 1998, the Company completed the disposition of its
approximately 85% equity interest in Cosmetic Center. In connection with such
transaction, the Company recorded a loss on disposal of $47.7 during 1998.
(Loss) income from discontinued operations was $(16.5) (excluding the $47.7
loss on disposal) and $0.7 for 1998 and 1997, respectively. The 1997 period
includes a $6.0 non-recurring gain resulting from the merger of Prestige
Fragrance & Cosmetics, Inc., then a wholly owned subsidiary of the Company,
with and into Cosmetic Center on April 25, 1997, partially offset by related
business consolidation costs of $4.0. The 1998 period includes the Company's
share of a non-recurring charge of $10.5 taken by Cosmetic Center primarily
related to inventory and severance.
Extraordinary items
The extraordinary item of $51.7 in 1998 resulted primarily from the
write-off of deferred financing costs and payment of call premiums associated
with the redemption of the 9 3/8% Senior Notes and the 10 1/2% Senior
Subordinated Notes. The extraordinary item in 1997 resulted from the write-off
of deferred financing costs associated with the extinguishment of borrowings
under the 1996 Credit Agreement (as hereinafter defined) prior to maturity with
proceeds from the Credit Agreement, and costs of approximately $6.3 in
connection with the redemption of Products Corporation's 10 7/8% Sinking Fund
Debentures due 2010 (the "Sinking Fund Debentures").
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
NET SALES
Net sales were $2,238.6 and $2,092.1 for 1997 and 1996, respectively,
an increase of $146.5, or 7.0% or 9.5% on a constant U.S. dollar basis,
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 and the further development
of new international markets.
United States. Net sales in the United States increased to $1,300.2
for 1997 from $1,182.3 for 1996, an increase of $117.9, or 10.0%. Net sales
improved for 1997, primarily as a result of continued consumer acceptance of
new product offerings and general improvement in consumer demand for the
Company's color cosmetics. These results were partially offset by a decline in
the Company's fragrance business caused by downward trends in the mass
fragrance industry and the Company's strategy to de-emphasize new fragrance
products. Even though consumer sell-through for the REVLON and ALMAY brands, as
described below in more detail, has increased significantly, the Company's
sales to its customers have been during 1997 and may continue to be impacted by
retail inventory balancing and reductions resulting from consolidation in the
chain drugstore industry in the U.S.
REVLON brand color cosmetics continued as the number one brand in
dollar market share in the self-select distribution channel with a share of
21.6% for 1997 versus 21.4% for 1996. Market share, which is subject to a
number
18
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 1997, certain products launched during
1996) generated incremental net sales in 1997, principally as a result of
launches of products in the COLORSTAY collection, including COLORSTAY eye
makeup and face products such as powder and blush, COLORSTAY haircolor,
launched in the third quarter of 1997, TOP SPEED nail enamel, launched in the
third quarter of 1997, and launches of REVLON AGE DEFYING line extensions, the
STREETWEAR collection, NEW COMPLEXION face makeup, LINE & SHINE lip makeup and
launches of products in the ALMAY AMAZING collection, including lip makeup, eye
makeup, face makeup and concealer, ALMAY ONE COAT, and ALMAY TIME-OFF
REVITALIZER.
International. Net sales outside the United States increased to $938.4
for 1997 from $909.8 for 1996, an increase of $28.6, or 3.1% on a reported
basis or 8.8% on a constant U.S. dollar basis. Net sales improved for 1997,
principally as a result of increased distribution into the expanding
self-select distribution channel, successful new product introductions,
including the continued roll-out of the COLORSTAY cosmetics collection and the
further development of new international markets. This was partially offset by
the Company's decision to exit the unprofitable demonstrator-assisted channel
in Japan in the second half of 1996, unfavorable economic conditions in several
international markets, and, on a reported basis, the unfavorable effect on
sales of a stronger U.S. dollar against certain foreign currencies, primarily
the Spanish peseta, the Italian lira and several other European currencies, the
Australian dollar, the South African rand and the Japanese yen. New products
such as COLORSTAY haircolor and STREETWEAR were introduced in select
international markets in the second half of 1997. Sales outside the United
States were divided into the following geographic areas: Europe, which is
comprised of Europe, the Middle East and Africa (in which net sales increased
by 3.4% on a reported basis to $417.9 for 1997 as compared to 1996 or an
increase of 11.3% on a constant U.S. dollar basis); the Western Hemisphere,
which is comprised of Canada, Mexico, Central America, South America and Puerto
Rico (in which net sales increased by 11.1% on a reported basis to $346.6 for
1997 as compared to 1996 or an increase of 14.5% on a constant U.S. dollar
basis); and the Far East (in which net sales decreased by 10.3% on a reported
basis to $173.9 for 1997 as compared to 1996 or a decrease of 5.5% on a
constant U.S. dollar basis). Excluding in both periods the effect of the
Company's strategy of exiting the demonstrator-assisted distribution channel in
Japan, Far East net sales on a constant U.S. dollar basis for 1997 would have
been at approximately the same level as those in 1996.
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 $130.9, $16.0 and
$7.7, respectively, for 1997 compared to $132.7, $25.1 and $20.0, respectively,
for 1996. Results of operations in Brazil for 1997 were adversely impacted by
competitive activity affecting the Company's toiletries business.
Cost of sales
As a percentage of net sales, cost of sales was 33.2% for 1997
compared to 32.9% for 1996. The increase in cost of sales as a percentage of
net sales included factors which enhanced overall operating income, including
increased sales of the Company's higher cost, enhanced-performance,
technology-based products and increased export sales and other factors
including 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. These factors were partially offset by the
benefits of improved overhead absorption against higher production volumes and
more efficient global production and purchasing.
SG&A expenses
As a percentage of net sales, SG&A expenses were 57.1% for 1997, an
improvement from 57.6% for 1996. SG&A expenses other than advertising and
consumer-directed promotion expenses, as a percentage of net sales, improved to
39.3% for 1997 compared with 40.6% for 1996, primarily as a result of reduced
general and administrative expenses, improved productivity and lower
distribution costs in 1997 compared with those in 1996. In accordance with its
business strategy, the Company increased advertising and consumer-directed
promotion expenditures in 1997 compared with 1996 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 outside the
United States. Advertising and consumer-directed promotion expenses increased
by 11.8% to $397.4, or 17.8% of net sales,
19
for 1997 from $355.5, or 17.0% of net sales, for 1996.
Business consolidation costs and other, net
Business consolidation costs and other, net, in 1997 include
severance, writedowns of certain assets to their estimated net realizable value
and other related costs to rationalize factory operations in certain operations
in accordance with the Company's business strategy, partially offset by related
gains for the sales of certain factory operations and an approximately $12.7
settlement of a claim in the second quarter of 1997. These business
consolidations are intended to lower the Company's operating costs and increase
efficiency in the future.
Operating income
As a result of the foregoing, operating income increased by $15.7, or
7.9%, to $214.9 for 1997 from $199.2 for 1996.
Other expenses/income
Interest expense was $133.7 for 1997 compared to $133.4 for 1996. The
slight increase in interest expense in 1997 is due to higher average
outstanding borrowings, partially offset by lower interest rates.
Foreign currency losses, net, were $6.4 for 1997 compared to $5.7 for
1996. The increase in foreign currency losses for 1997 as compared to 1996
resulted primarily from a non-recurring gain recognized in 1996 in connection
with the Company's simplification of its international corporate structure and
from the strengthening of the U.S. dollar versus currencies in the Far East and
most European currencies, partially offset by the stabilization of the
Venezuelan bolivar and Mexican peso versus the devaluations which occurred
during 1996.
Provision for income taxes
The provision for income taxes was $9.3 and $25.5 for 1997 and 1996,
respectively. The decrease was primarily attributable to lower taxable income
with respect to operations outside the United States, partially as a result of
the implementation of tax planning, including the utilization of net operating
loss carryforwards with respect to operations outside the United States, and
benefits from net operating loss carryforwards domestically.
Discontinued operations
Income from discontinued operations was $0.7 and $0.4 for 1997 and
1996, respectively. The 1997 period includes a $6.0 non-recurring gain
resulting from the merger of Prestige Fragrance & Cosmetics, Inc., then a
wholly owned subsidiary of Products Corporation, with and into Cosmetic Center
on April 25, 1997, partially offset by related business consolidation costs of
$4.0 and operating losses of Cosmetic Center.
Extraordinary items
The extraordinary item in 1997 resulted from the write-off in the
second quarter of 1997 of deferred financing costs associated with the early
extinguishment of borrowings under the 1996 Credit Agreement prior to maturity
with proceeds from the Credit Agreement, and costs of approximately $6.3 in
connection with the redemption of Products Corporation's Sinking Fund
Debentures. The extraordinary item in 1996 resulted from the write-off in the
first quarter of 1996 of deferred financing costs associated with the early
extinguishment of borrowings under the credit agreement in effect at that time
(the "1995 Credit Agreement") prior to maturity with the net proceeds from the
Company's initial public equity offering (the "Revlon IPO") and proceeds from
the 1996 Credit Agreement.
20
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash (used for) provided by operating activities was $(51.5), $8.7
and $(10.3) for 1998, 1997 and 1996, respectively. The increase in net cash
used for operating activities for 1998 compared with cash provided in 1997
resulted primarily from lower operating income and increased cash used for
business consolidation costs and other, net in 1998. The increase in net cash
provided by operating activities for 1997 compared with net cash used in 1996
resulted primarily from higher operating income and improved working capital
management in 1997, partially offset by increased spending on merchandise
display units in connection with the Company's expansion into the self-select
distribution channel.
Net cash used for investing activities was $91.0, $84.3 and $61.8 for
1998, 1997 and 1996, respectively. Net cash used for investing activities for
1998 and 1997 includes cash paid in connection with acquisitions of businesses
and capital expenditures, partially offset by the proceeds from the sale of the
wigs and hairpieces portion of the Company's business in the United States in
1998 and from the sale of certain assets in 1998 and 1997. Net cash used for
investing activities for 1998, 1997 and 1996 included capital expenditures of
$60.8, $52.3 and $54.7, respectively, and $57.6, $40.5 and $7.1, respectively,
used for acquisitions.
Net cash provided by financing activities was $159.1, $84.9 and $77.9
for 1998, 1997 and 1996, respectively. Net cash provided by financing
activities for 1998 included proceeds from the issuance of the 9% Notes, the
8 1/8% Notes (as hereinafter defined) and the 8 5/8% Notes (as hereinafter
defined) and cash drawn under the Credit Agreement, partially offset by the
payment of fees and expenses related to the issuance of the 9% Notes, the
8 1/8% Notes and the 8 5/8% Notes, the redemption of the Senior Subordinated
Notes (as hereinafter defined), the Senior Notes (as hereinafter defined), and
the repayment of borrowings under the Company's Japanese yen-denominated credit
agreement (the "Yen Credit Agreement"). During 1998, 1997 and 1996, net cash
used by discontinued operations was $17.3, $3.4 and $2.7, respectively. Net
cash provided by financing activities for 1997 included cash drawn under the
1996 Credit Agreement and the Credit Agreement, partially offset by the
repayment of borrowings under the 1996 Credit Agreement, the payment of fees
and expenses related to entering into the Credit Agreement, the repayment of
borrowings under the Yen Credit Agreement and the redemption of the Sinking
Fund Debentures. Net cash provided by financing activities for 1996 included
the net proceeds from the Revlon IPO, cash drawn under the 1995 Credit
Agreement and under the 1996 Credit Agreement, partially offset by the
repayment of borrowings under the 1995 Credit Agreement, the payment of fees
and expenses related to the 1996 Credit Agreement and the repayment of
borrowings under the Yen Credit Agreement.
On November 6, 1998, Products Corporation issued and sold $250.0
aggregate principal amount of the 9% Notes in a private placement, receiving
net proceeds of $247.2. Products Corporation intends to use $200.0 of the net
proceeds from the sale of the 9% Notes to refinance the 1999 Notes, including
through open market purchases. Products Corporation intends to use the balance
of the net proceeds for general corporate purposes, including to temporarily
reduce indebtedness under the working capital lines under the Credit Agreement.
Pending the refinancing of the 1999 Notes, such net proceeds will be retained
by Products Corporation and a portion of such proceeds will be used to
temporarily reduce indebtedness under the working capital lines under the
Credit Agreement and under other short-term facilities. On February 24, 1999,
substantially all of the 9% Notes were exchanged for registered notes with
substantially identical terms.
On February 2, 1998, Revlon Escrow Corp., an affiliate of Products
Corporation, issued and sold in a private placement $650.0 aggregate principal
amount of 8 5/8% Senior Subordinated Notes due 2008 (the "8 5/8% Notes") and
$250.0 aggregate principal amount of 8 1/8% Senior Notes due 2006 (the "8 1/8%
Notes" and, together with the 8 5/8% Notes, the "Notes"), with the net proceeds
of approximately $886 deposited into escrow. The proceeds from the sale of the
Notes were used to finance the redemption by Products Corporation of $555.0
aggregate principal amount of its 10 1/2% Senior Subordinated Notes due 2003
(the "Senior Subordinated Notes") and $260.0 aggregate principal amount of its
9 3/8% Senior Notes due 2001 (the "Senior Notes"). Products Corporation
delivered a redemption notice to the holders of the Senior Subordinated Notes
for the redemption of the Senior Subordinated Notes on March 4, 1998, at which
time Products Corporation assumed the obligations under the 8 5/8% Notes and
the related indenture (the "8 5/8% Notes Assumption"), and to the holders of
the Senior Notes for the redemption of the Senior Notes on April 1, 1998, at
which time Products Corporation assumed the obligations under the 8 1/8% Notes
and the related indenture (the "8 1/8% Notes Assumption" and, together with the
8 5/8% Notes Assumption, the "Assumption"). In connection
21
with the redemptions of the Senior Subordinated Notes and the Senior Notes, the
Company recorded an extraordinary loss of $51.7 during 1998 resulting primarily
from the write-off of deferred financing costs and payment of call premiums on
the Senior Subordinated Notes and the Senior Notes. On May 7, 1998,
substantially all of the Notes were exchanged for registered notes with
substantially identical terms (the Notes and the registered exchange notes
shall each be referred to as the "Notes").
In May 1997, Products Corporation entered into a credit agreement (the
"Credit Agreement") with a syndicate of lenders, whose individual members
change from time to time. The proceeds of loans made under the Credit Agreement
were used for the purpose of repaying the loans outstanding under the credit
agreement in effect at that time (the "1996 Credit Agreement") and to redeem
Products Corporation's Sinking Fund Debentures and were and will be used for
general corporate purposes and, in the case of the Acquisition Facility (as
hereinafter defined), the financing of acquisitions. The Credit Agreement
provides up to $749.0 and is comprised of five senior secured facilities:
$199.0 in two term loan facilities (the "Term Loan Facilities"), a $300.0
multi-currency facility (the "Multi-Currency Facility"), a $200.0 revolving
acquisition facility, which may be increased to $400.0 under certain
circumstances with the consent of a majority of the lenders (the "Acquisition
Facility"), and a $50.0 special standby letter of credit facility (the "Special
LC Facility"). At December 31, 1998, the Company had approximately $199.0
outstanding under the Term Loan Facilities, $9.7 outstanding under the
Multi-Currency Facility, $63.5 outstanding under the Acquisition Facility and
$29.0 of issued but undrawn letters of credit under the Special LC Facility. In
connection with the issuance of the 9% Notes, Products Corporation amended the
Credit Agreement to provide that it can retain the net proceeds of such
issuance which exceed the amount of the 1999 Notes refinanced plus related
costs and expenses. Additionally, Products Corporation agreed that until the
1999 Notes are refinanced, $200.0 of the Multi-Currency Facility available
under the Credit Agreement (reduced by the amount of 1999 Notes actually
repurchased or refinanced), which would otherwise be available for working
capital purposes, will be used solely to refinance the 1999 Notes. In December
1998, Products Corporation amended the Credit Agreement to modify the terms of
certain of the financial ratios and tests to account for, among other things,
the expected charges in connection with the Company's restructuring effort. In
addition, the amendment increased the applicable margin and provides that
Products Corporation may use the proceeds of the Acquisition Facility for
general corporate purposes as well as for acquisitions.
A subsidiary of Products Corporation is the borrower under the Yen
Credit Agreement, which had a principal balance of approximately (Yen)1.5
billion as of December 31, 1998 (approximately $13.6 U.S. dollar equivalent as
of December 31, 1998) (after giving effect to the repayment described below).
Approximately (Yen)539 million (approximately $4.2 U.S. dollar equivalent) was
paid in March 1998, approximately (Yen)539 million (approximately $4.7 U.S.
dollar equivalent as of December 31, 1998) is due in each of March 1999 and
2000 and approximately (Yen)474 million (approximately $4.2 U.S. dollar
equivalent as of December 31, 1998) is due on December 31, 2000. On December
10, 1998, in connection with the disposition of the stock of Cosmetic Center,
which had served as collateral under the Yen Credit Agreement, Products
Corporation repaid (Yen)2.22 billion (approximately $19.0 U.S. dollar
equivalent as of December 10, 1998) principal amount.
Products Corporation made an optional sinking fund payment of $13.5
and redeemed all of the outstanding $85.0 principal amount Sinking Fund
Debentures during 1997 with the proceeds of borrowings under the Credit
Agreement. $9.0 aggregate principal amount of previously purchased Sinking Fund
Debentures were used for the mandatory sinking fund payment due July 15, 1997.
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, 1998.
The Company's principal sources of funds are expected to be cash flow
generated from operations and borrowings under the Credit Agreement,
refinancings and other existing working capital lines. The Credit Agreement,
the 1999 Notes, the Notes and the 9% Notes contain certain provisions that by
their terms limit Products Corporation's and/or its subsidiaries' ability to,
among other things, incur additional debt. The Company's principal uses of
funds are expected to be the payment of operating expenses, working capital and
capital expenditure requirements, expenses in connection with the Company's
restructuring referred to above and debt service payments (including purchase
and repayment of the 1999 Notes).
22
The Company estimates that capital expenditures for 1999 will be
approximately $60, including upgrades to the Company's management information
systems. The Company estimates that cash payments related to the 1998
restructuring charge will be approximately $35, of which approximately $22 will
be paid in 1999. Pursuant to a tax sharing agreement (see "Certain
Relationships and Related Transactions - Tax Sharing Agreement"), Revlon, Inc.
may be required to make tax sharing payments to Mafco Holdings Inc. as if
Revlon, Inc. were filing separate income tax returns, except that no payments
are required by Revlon, Inc. if and to the extent that Products Corporation is
prohibited under the Credit Agreement from making tax sharing payments to
Revlon, Inc. The Credit Agreement prohibits Products Corporation from making
any tax sharing payments other than in respect of state and local income taxes.
Revlon, Inc. currently anticipates that, as a result of net operating tax
losses and prohibitions under the Credit Agreement, no cash federal tax
payments or cash payments in lieu of taxes pursuant to the tax sharing
agreement will be required for 1999.
As of December 31, 1997, Products Corporation was party to a series of
interest rate swap agreements 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 LIBOR 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.
Products Corporation terminated these agreements in January 1998 and realized a
gain of approximately $1.6, which was recognized upon repayment of the hedged
indebtedness and is included in the 1998 extraordinary item for the early
extinguishment of debt.
Products Corporation enters into forward foreign exchange contracts
and option contracts from time to time to hedge certain cash flows denominated
in foreign currencies. Products Corporation had forward foreign exchange
contracts denominated in various currencies of approximately $197.5 and $90.1
(U.S. dollar equivalent) outstanding at December 31, 1998 and 1997,
respectively, and option contracts of approximately $51.0 and $94.9 outstanding
at December 31, 1998 and 1997, respectively. Such contracts are entered into to
hedge transactions predominantly occurring within twelve months. If Products
Corporation had terminated these contracts on December 31, 1998 and 1997 or the
contracts then outstanding 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
(including refinancing the 1999 Notes). 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. 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, or seeking capital contributions or
loans from affiliates of the Company or issuing additional shares of capital
stock of Revlon, Inc. Revlon, Inc., as a holding company, will be dependent on
the earnings and cash flow of, and dividends and distributions from, Products
Corporation to pay its expenses and to pay any cash dividend or distribution of
the Class A Common Stock that may be authorized by the Board of Directors of
Revlon, Inc. There can be no assurance that any of such actions could be
effected, that they would enable the Company to continue to satisfy its capital
requirements or that they would be permitted under the terms of the Company's
various debt instruments then in effect. The terms of the Credit Agreement, the
1999 Notes, the Notes and the 9% Notes generally restrict Products Corporation
from paying dividends or making distributions, except that Products Corporation
is permitted to pay dividends and make distributions to Revlon, Inc., among
other things, to enable Revlon, Inc. to pay expenses incidental to being a
public holding company, including, among other things, professional fees such
as legal and accounting, regulatory fees such as Securities and Exchange
Commission (the "Commission") filing fees and other miscellaneous expenses
related to being a public holding company and to pay dividends or make
distributions in certain circumstances to finance the purchase by Revlon, Inc.
of its Class A Common Stock in connection with the delivery of such Class A
Common Stock to grantees under the Revlon, Inc. Amended and Restated 1996 Stock
Plan, provided that the aggregate amount of such dividends and
23
distributions taken together with any purchases of Revlon, Inc. common stock on
the open market to satisfy matching obligations under the excess savings plan
may not exceed $6.0 per annum.
YEAR 2000
Commencing in 1997, the Company undertook a business process
enhancement program to substantially upgrade management information technology
systems in order to provide comprehensive order processing, production and
accounting support for the Company's business. The Company also developed a
comprehensive plan to address Year 2000 issues. The Year 2000 plan addresses
three main areas: (a) information technology systems; (b) non-information
technology systems (including factory equipment, building systems and other
embedded systems); and (c) business partner readiness (including without
limitation customers, inventory and non-inventory suppliers, service suppliers,
banks, insurance companies and tax and other governmental agencies). To oversee
the process, the Company has established a Steering Committee comprised of
senior executives of the Company.
In connection with and as part of the Company's business process
enhancement program, certain information technology systems have been and will
continue to be upgraded to be Year 2000 compliant. In addition, as part of its
Year 2000 plan, the Company has identified potential deficiencies related to
Year 2000 in certain of its information technology systems, both hardware and
software, and is in the process of addressing them through upgrades and other
remediation. The Company currently expects to complete upgrade and remediation
and testing of its information systems by the third quarter of 1999. In respect
of non-information technology systems with date sensitive operating controls,
the Company is in the process of identifying those items which may require
remediation or replacement, and has commenced an upgrade and remediation
program for systems identified as Year 2000 non-compliant. The Company expects
to complete remediation or replacement and testing of these by the third
quarter of 1999. The Company has identified and contacted and continues to
identify and contact key suppliers, both inventory and non-inventory, key
customers and other strategic business partners, such as banks, pension trust
managers and marketing data suppliers, either by soliciting written responses
to questionnaires and/or by meeting with certain of such third parties. The
parties from whom the Company has received responses to date generally have
indicated that their systems are or will be Year 2000 compliant. The Company
currently expects to gain a better understanding of the Year 2000 readiness of
third party business partners by early 1999.
The Company does not expect that incremental out-of-pocket costs of
its Year 2000 program (which do not include costs incurred in connection with
the Company's comprehensive business process enhancement program) will be
material. These costs are expected to continue to be incurred through fiscal
1999 and include the cost of third party consultants, remediation of existing
computer software and replacement and remediation of embedded systems.
The Company believes that at the current time it is difficult to
identify specifically the most reasonably likely worst case Year 2000 scenario.
As with all manufacturers and distributors of products such as those sold by
the Company, a reasonable worst case scenario would be the result of failures
of third parties (including, without limitation, governmental entities and
entities with which the Company has no direct involvement, as well as the
Company's suppliers of goods and services and customers) that continue for more
than a brief period in various geographic areas where the Company's products
are produced or sold at retail or in areas from which the Company's raw
materials and components are sourced. In connection with functions that
represent a particular Year 2000 risk, including the production, warehousing
and distribution of products and the supply of raw materials and components,
the Company is considering various contingency plans. Continuing failures in
key geographic areas in the United States and in certain European, South
American and Asian countries that limit the Company's ability to produce
products, its customers' ability to purchase and pay for the Company's products
and/or consumers' ability to shop, would be likely to have a material adverse
effect on the Company's results of operations, although it would be expected
that at least part of any lost sales eventually would be recouped. The extent
of such deferred or lost revenue cannot be estimated at this time.
The Company's Year 2000 efforts are ongoing and its overall plan, as
well as the consideration of contingency plans, will continue to evolve as new
information becomes available. While the Company currently anticipates
continuity of its business activities, that continuity will be dependent upon
its ability, and the ability of third parties upon which the Company relies
directly, or indirectly, to be Year 2000 compliant. There can be no
24
assurance that the Company and such third parties will eliminate potential Year
2000 issues in a timely manner or as to the ultimate cost to the Company of
doing so.
EURO CONVERSION
As part of the European Economic and Monetary Union, a single currency
(the "Euro") will replace the national currencies of the principal European
countries (other than the United Kingdom) in which the Company conducts business
and manufacturing. The conversion rates between the Euro and the participating
nations' currencies were fixed as of January 1, 1999, with the participating
national currencies being removed from circulation between January 1, 2002 and
June 30, 2002 and replaced by Euro notes and coinage. During the transition
period from January 1, 1999 through December 31, 2001, public and private
entities as well as individuals may pay for goods and services using checks,
drafts, or wire transfers denominated either in the Euro or the participating
country's national currency. Under the regulations governing the transition to
a single currency, there is a "no compulsion, no prohibition" rule which states
that no one is obliged to use the Euro before July 2002. In keeping with this
rule, the Company expects to either continue using the national currencies or
the Euro for invoicing or payments. Based upon the information currently
available, the Company does not expect that the transition to the Euro will
have a material adverse effect on the business or consolidated financial
condition of the Company.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K for the year ended December 31, 1998
as well as other public documents of the Company contain 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 expectations and
estimates as to introduction of new products and expansion into markets, future
financial performance, including growth in net sales and earnings, the effect
on sales of retail inventory balancing and reductions, the effect on sales of
political and/or economic conditions in international markets, the Company's
estimate of restructuring activities, costs and benefits, cash flow from
operations, information systems upgrades, the Company's plan to address the
Year 2000 issue, the costs associated with the Year 2000 issue and the results
of Year 2000 non-compliance by the Company or by one or more of the Company's
customers, suppliers or other strategic business partners, capital
expenditures, the Company's qualitative and quantitative estimates as to market
risk, the Company's expectations about the transition to the Euro, the
availability of funds from currently available credit facilities and
refinancings of indebtedness, and capital contributions or loans from
affiliates or the sale of assets or operations or additional shares of Revlon,
Inc. Statements that are not historical facts, including statements about the
Company's beliefs and expectations, are forward-looking statements.
Forward-looking statements can be identified by, among other things, the use of
forward-looking language, such as "believe," "expects," "may," "will,"
"should," "seeks," "plans," "scheduled to," "anticipates" or "intends" or the
negative of those terms, or other variations of those terms or comparable
language, or by discussions of strategy or intentions. Forward-looking
statements speak only as of the date they are made, and the Company undertakes
no obligation to update them. A number of important factors could cause actual
results to differ materially from those contained in any forward-looking
statement. In addition to factors that may be described in the Company's
filings with the Commission, including this filing, the following factors,
among others, could cause the Company's actual results to differ materially
from those expressed in any forward-looking statements made by the Company: (i)
difficulties or delays in developing and introducing new products or failure of
customers to accept new product offerings; (ii) 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
into certain markets 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) the inability to refinance indebtedness, secure capital
contributions or loans from affiliates or sell assets or operations or
additional shares of Revlon, Inc.; (vi) effects of and changes in political
and/or economic conditions, including inflation and monetary conditions, and in
trade, monetary, fiscal and tax policies in international markets, including
but not limited to Brazil; (vii) actions by competitors, including business
combinations, technological breakthroughs, new products offerings and marketing
and promotional successes; (viii) combinations among significant customers or
the loss, insolvency or failure to pay debts by a significant customer or
customers; (ix) lower than expected sales as a result of a longer than expected
25
duration of retail inventory balancing and reductions; (x) difficulties, delays
or unanticipated costs or less than expected benefits resulting from the
Company's restructuring activities; (xi) interest rate or foreign exchange rate
changes affecting the Company's market sensitive financial instruments; (xii)
difficulties, delays or unanticipated costs associated with the transition to
the Euro; and (xiii) difficulties, delays or unanticipated costs in achieving
Year 2000 compliance or unanticipated consequences from non-compliance by the
Company or one or more of the Company's customers, suppliers or other strategic
business partners.
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The effect of adopting
the statement and the date of such adoption by the Company have not yet been
determined.
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, Venezuela and Mexico, that have experienced
hyperinflation in the past three years. The Company's operations in Brazil were
accounted for as operating in a hyperinflationary economy until June 30, 1997.
Effective July 1, 1997, Brazil was considered a non-hyperinflationary economy.
The impact of accounting for Brazil as a non-hyperinflationary economy was not
material to the Company's operating results. Effective January 1997, Mexico was
considered a hyperinflationary economy for accounting purposes. Effective
January 1, 1999, it will no longer be considered a hyperinflationary economy.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
The Company has exposure to changing interest rates, primarily in the
United States. The Company's policy is to manage interest rate risk through the
use of a combination of fixed and floating rate debt. The Company from time to
time makes use of derivative financial instruments to adjust its fixed and
floating rate ratio. The table below provides information about the Company's
indebtedness that is sensitive to changes in interest rates. The table presents
cash flows with respect to principal on indebtedness and related weighted
average interest rates by expected maturity dates. Weighted average variable
rates are based on implied forward rates in the yield curve at December 31,
1998. The information is presented in U.S. dollar equivalents, which is the
Company's reporting currency.
Exchange Rate Sensitivity
The Company manufactures and sells its products in a number of
countries throughout the world and, as a result, is exposed to movements in
foreign currency exchange rates. In addition, a portion of the Company's
borrowings are denominated in foreign currencies, which are also subject to
market risk associated with exchange rate movement (See "Financial Condition,
Liquidity and Capital Resources"). The Company's policy is to hedge major net
foreign currency cash exposures generally through foreign exchange forward and
option contracts. The contracts are entered into with major financial
institutions to minimize counterparty risk. These contracts generally have a
duration of less than twelve months and are primarily against the U.S. dollar.
In addition, the Company enters into foreign currency swaps to hedge
intercompany financing transactions. The table below provides information about
the Company's foreign exchange financial instruments by functional currency and
presents such information in U.S. dollar equivalents. For foreign currency
forward exchange agreements and option contracts, the table presents the gross
notional amounts and weighted average exchange rates by contractual maturity
dates. The
26
fair value of foreign currency options and forward exchange contracts is the
estimated amount the Company would receive (pay) to terminate the agreements.
The Company does not hold or issue financial instruments for trading
purposes.
AVERAGE EXPECTED MATURITY DATE FOR YEAR ENDED DECEMBER 31, FAIR VALUE
CONTRACTUAL ----------------------------------------------------------------- DEC. 31,
RATE (a) 1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
------------- ------- ------ ------- -------- ------ ------------ --------- ------------
DEBT (US DOLLAR EQUIVALENT IN MILLIONS)
Short-term variable rate
(various currencies)........ $ 27.8 $ 27.8 $ 27.8
Average interest rate...... 6.7%
Long-term fixed rate ($US)... 200.0 $1,149.1 1,349.1 1,286.0
Average interest rate...... 9.5% 8.6%
Long-term variable rate
($US)....................... 1.0 $1.0 $39.5 $227.6 269.1 269.1
Average interest rate...... 7.9% 7.9% 7.9% 8.0%
Long-term variable rate
(various currencies)........ 5.0 9.3 0.3 3.1 0.1 17.8 17.8
Average interest rate........ 3.8% 3.9% 7.3% 7.7% 7.3%
FORWARD AND OPTION CONTRACTS
(b)
British Pound
Forward contracts........... 0.60 55.0 55.0 --
Option contracts........... 0.60 8.5 8.5 --
Canadian Dollar
Forward contracts........... 1.53 41.2 41.2 0.1
Option contracts............ 1.56 17.5 17.5 (0.2)
Japanese Yen
Forward contracts........... 118.39 36.4 36.4 (1.5)
Option contracts............ 116.28 4.8 4.8 0.1
French Franc
Forward contracts........... 5.60 17.7 17.7 --
South African Rand
Forward contracts........... 6.40 11.2 11.2 (0.2)
Netherland Guilder
Forward contracts........... 1.88 9.5 9.5 --
Hong Kong Dollar
Forward contracts........... 7.82 6.1 6.1 --
Australian Dollar
Forward contracts........... 1.61 9.9 9.9 0.1
Option contracts............ 1.64 10.9 10.9 --
German Deutschemark
Forward contracts........... 1.65 4.8 4.8 --
Option contracts............ 1.67 9.3 9.3 --
New Zealand Dollar
Forward contracts........... 1.92 4.6 4.6 (0.1)
Switzerland Franc
Forward contracts........... 1.34 1.1 1.1 --
(a) Stated in units of local currency per U.S. dollar.
(b) Maturity amounts for forward and option contracts are stated in contract
notional amounts.
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.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the
Directors and executive officers of the Company. Each Director holds office
until his successor is duly elected and qualified or until his resignation or
removal, if earlier.
NAME POSITION
- ---- --------
Ronald O. Perelman Chairman of the Board, Chairman of the Executive
Committee of the Board and Director
George Fellows President, Chief Executive Officer and Director
Irwin Engelman Vice Chairman, Chief Administrative Officer and
Director
M. Katherine Dwyer Senior Vice President
Frank J. Gehrmann Executive Vice President and Chief Financial Officer
Wade H. Nichols III Executive Vice President and General Counsel
D. Eric Pogue Senior Vice President, Human Resources
Donald G. Drapkin Director
Meyer Feldberg Director
William J. Fox Director
Howard Gittis Director
Morton L. Janklow Director
Vernon E. Jordan Director
Henry A. Kissinger Director
Edward J. Landau Director
Jerry W. Levin Director
Linda Gosden Robinson Director
Terry Semel Director
Martha Stewart Director
The name, age (as of February 18, 1999), principal occupation for the
last five years and selected biographical information for each of the Directors
and executive officers of the Company are set forth below.
Mr. Perelman (56) has been Chairman of the Board of Directors of the
Company and of the Company's wholly owned subsidiary Products Corporation since
June 1998, Chairman of the Executive Committee of the
28
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 until November
1995. Mr. Perelman has been Chairman of the Board and Chief Executive Officer
of Mafco Holdings Inc. ("Mafco Holdings" and, collectively with MacAndrews
Holdings, "MacAndrews & Forbes") and MacAndrews Holdings and various of its
affiliates since 1980. Mr. Perelman is also Chairman of the Executive
Committees of the Boards of Directors of M&F Worldwide Corp. ("M&F Worldwide")
and Panavision Inc. ("Panavision"), and Chairman of the Board of Meridian
Sports Incorporated ("Meridian"). Mr. Perelman is also a Director of the
following corporations which file reports pursuant to the Securities Exchange
Act of 1934, as amended (the "Exchange Act"): Golden State Bancorp Inc.
("Golden State"), Golden State Holdings Inc. ("Golden State Holdings"), M&F
Worldwide, Meridian, Panavision and REV Holdings. (On December 27, 1996, Marvel
Entertainment Group, Inc. ("Marvel"), Marvel Holdings Inc. ("Marvel Holdings"),
Marvel (Parent) Holdings Inc. ("Marvel Parent") and Marvel III Holdings Inc.
("Marvel III"), of which Mr. Perelman was a Director on such date, filed
voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code.)
Mr. Fellows (56) 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 September 1994. Mr. Fellows
was Senior Executive Vice President of the Company and of Products Corporation
and President and Chief Operating Officer of Products Corporation's Consumer
Group from February 1993 until 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. Mr. Fellows is also a
Director of VF Corporation, which files reports pursuant to the Exchange Act.
Mr. Engelman (64) has been Vice Chairman, Chief Administrative Officer
and a Director of the Company since November 1998. Mr. Engelman has been Vice
Chairman and Chief Administrative Officer of Products Corporation since
November 1998 and a Director of Products Corporation since 1993. Mr. Engelman
has been Executive Vice President, Chief Financial Officer and a Director of
MacAndrews & Forbes and various of its affiliates since 1992. He was Executive
Vice President, Chief Financial Officer and Director of GAF Corporation from
1990 to 1992, Director, President and Chief Operating Officer of Citytrust
Bancorp Inc. from 1988 to 1990, Executive Vice President of the Blackstone
Group LP from 1987 to 1988 and Director, Executive Vice President and Chief
Financial Officer of General Foods Corporation for more than five years prior
to 1987. Mr. Engelman is also a Director of California Federal Bank, A Federal
Savings Bank, which files reports pursuant to the Exchange Act. (On December
27, 1996, Marvel III, Marvel Parent and Marvel Holdings, of which Mr. Engelman
was an executive officer on such date, filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code.)
Ms. Dwyer (49) was appointed President of Products Corporation's
United States Consumer Products business in January 1998. Ms. Dwyer was elected
Senior Vice President of the Company and of Products Corporation in December
1996. Prior to December 1996, she served in various appointed senior executive
positions for the Company and for Products Corporation, including President of
Products Corporation's United States Cosmetics unit from November 1995 to
December 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 Vice President, Marketing, of Clairol, a division of
Bristol-Myers Squibb Company. Prior to 1991, she served in various senior
positions for Victoria Creations, Avon Products Inc., Cosmair, Inc. and The
Gillette Company. Ms. Dwyer is a Director of WestPoint Stevens Inc. and Reebok
International Ltd., each of which files reports pursuant to the Exchange Act.
Mr. Gehrmann (44) was elected as Executive Vice President and Chief
Financial Officer of the Company and of Products Corporation in January 1998.
From January 1997 until January 1998 he had been Vice President of the Company
and of Products Corporation. Prior to January 1997 he served in various
appointed senior executive positions for the Company and for Products
Corporation, including Executive Vice President and Chief Financial Officer of
Products Corporation's Operating Groups from August 1996 to January 1998,
Executive Vice President and Chief Financial Officer of Products Corporation's
Worldwide Consumer Products business from January 1995
29
to August 1996, and Executive Vice President and Chief Financial Officer of
Products Corporation's Revlon North America unit from September 1993 to January
1994. From 1983 through September 1993, Mr. Gehrmann held positions of
increasing responsibility in the financial organizations of Mennen Corporation
and the Colgate-Palmolive Company, which acquired Mennen Corporation in 1992.
Prior to 1983, Mr. Gehrmann served as a certified public accountant at the
international auditing firm of Ernst & Young.
Mr. Nichols (56) has been Executive Vice President and General Counsel
of the Company and of Products Corporation since January 1998 and served as
Senior Vice President and General Counsel of the Company and Products
Corporation from their respective formations in 1992 until January 1998. Mr.
Nichols has been Vice President of MacAndrews Holdings since 1988.
Mr. Pogue (50) was elected Senior Vice President, Human Resources of
the Company and of Products Corporation in November 1998. He was Vice
President, Human Resources, U.S. Operations for Products Corporation from July
1997 until November 1998. From December 1994 until July 1997 he was Vice
President, Human Resources and Administration of Marvel. From September 1992 to
November 1994 he was President of Next Phase Ventures, an independent
consulting and venture capital business. From 1988 to 1992 he was Vice
President of Philip Morris Companies, Inc. Prior to 1988 he held various
positions in human resource management.
Mr. Drapkin (50) has been a Director of the Company and of Products
Corporation since their respective formations in 1992. He has been Vice
Chairman of the Board of MacAndrews & Forbes and various of its affiliates
since 1987. Mr. Drapkin was a partner in the law firm of Skadden, Arps, Slate,
Meagher & Flom for more than five years prior to 1987. Mr. Drapkin is also a
Director of the following corporations which file reports pursuant to the
Exchange Act: Algos Pharmaceutical Corporation, Anthracite Capital, Inc.,
BlackRock Asset Investors, Cardio Technologies, Inc., The Molson Companies
Limited, Playboy Enterprises, Inc., VIMRx Pharmaceuticals Inc. and Weider
Nutrition International, Inc. (On December 27, 1996, Marvel, Marvel Holdings,
Marvel Parent and Marvel III, of which Mr. Drapkin was a Director on such date,
filed voluntary petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code.)
Professor Feldberg (56) has been a Director of the Company since
February 1997. Professor Feldberg has been the Dean of Columbia Business
School, New York City, for more than the past five years. Professor Feldberg is
also a Director of the following corporations which file reports pursuant to
the Exchange Act: Federated Department Stores, Inc., PRIMEDIA Inc. and Paine
Webber Group, Inc. (33 directorships within such fund complex).
Mr. Fox (42) has been a Director of the Company since November 1995
and of Products Corporation since September 1994. Mr. Fox has been Chairman of
the Board, President, Chief Executive Officer and Director of AKI, Inc. and
President, Chief Executive Officer and Director of AKI Holding Corp., New York
City-based consumer product sampling system companies, since February 1999. Mr.
Fox was Senior Executive Vice President of the Company and of Products
Corporation from January 1997 until January 1999, was Chief Financial Officer
of the Company and of Products Corporation from their respective formations in
1992 until January 1998 and was also Executive Vice President of the Company
and of Products Corporation from their respective formations in 1992 until
January 1997. He was Senior Vice President of MacAndrews Holdings from August
1990 until January 1999. 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 also the Vice Chairman of the Board and a
Director of The Hain Food Group, Inc. and a Director of AKI, Inc. and AKI
Holding Corp., each of which files reports pursuant to the Exchange Act.
Mr. Gittis (65) has been a Director of the Company and of Products
Corporation since their respective formations in 1992. He has been Vice
Chairman of the Board of MacAndrews & Forbes and various of its affiliates
since 1985. Mr. Gittis is also a Director of the following corporations which
file reports pursuant to the Exchange Act: Golden State, Golden State Holdings,
Jones Apparel Group, Inc., Loral Space & Communications Ltd., M&F Worldwide,
Panavision, REV Holdings, Rutherford-Moran Oil Corporation and Sunbeam
Corporation.
30
Mr. Janklow (68) has been a Director of the Company since July 1997.
He has been of counsel to Janklow, Newborn & Ashley and Senior Partner of
Janklow & Nesbit Associates, a New York City-based literary agency, since 1989
and Chairman of the Board and Chief Executive Officer of Morton L. Janklow
Associates, Inc., New York City since 1977. Mr. Janklow is also trustee of the
Managed Accounts Services Portfolio Trust/Pace.
Mr. Jordan (63) 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 also 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, Callaway Golf Corporation, Chancellor Media Corporation, 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.
Dr. Kissinger (75) 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., a New York City-based 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 also
a Director of Continental Grain Company, Freeport-McMoran Copper and Gold,
Inc., Gulfstream Aerospace Corporation and Hollinger International Inc., all of
which file reports pursuant to the Exchange Act.
Mr. Landau (69) has been a Director of the Company since June 1996.
Mr. Landau has been a Senior Partner in the law firm of Wolf, Block, Schorr and
Solis-Cohen LLP (previously Lowenthal, Landau, Fischer & Bring, P.C.) for more
than the past five years. He has been a Director of Products Corporation since
June 1992. Mr. Landau is also a Director of Offitbank Investment Fund, Inc.,
which files reports pursuant to the Exchange Act.
Mr. Levin (54) has been a Director of the Company since its formation
in 1992 and was a Director of Products Corporation from its formation in 1992
until November 1998. Mr. Levin has been President and Chief Executive Officer
and a Director of Sunbeam Corporation since June 1998. Mr. Levin was Chairman
and Chief Executive Officer of The Coleman Company, Inc. ("Coleman") from 1997
until April 1998. Mr. Levin was Chairman of the Board of the Company and of
Products Corporation from November 1995 until June 1998, Chief Executive
Officer of the Company and of Products Corporation from their respective
formations in 1992 until 1997 and President of the Company and of Products
Corporation from their respective formations in 1992 until November 1995. Mr.
Levin has been Executive Vice President of MacAndrews Holdings since March
1989. For 15 years prior to joining MacAndrews Holdings, he held various senior
executive positions with The Pillsbury Company. Mr. Levin is also a Director of
the following corporations which file reports pursuant to the Exchange Act:
Coleman, Ecolab, Inc., Meridian, Sunbeam Corporation and U.S. Bancorp, Inc.
Ms. Robinson (46) has been a Director of the Company since June 1996.
Ms. Robinson has been Chairman of the Board and Chief Executive Officer of
Robinson Lerer & Montgomery, LLC, a New York City strategic communications
consulting firm, since May 1996. For more than five years prior to May 1996 she
was Chairman of the Board and Chief Executive Officer of Robinson Lerer Sawyer
Miller Group, or its predecessors. Ms. Robinson is also a Director of VIMRx
Pharmaceuticals Inc., which files reports pursuant to the Exchange Act, and is
a trustee of Mt. Sinai - New York University Medical Center and Health System
and a Director of the New York University School of Medicine Foundation Board.
Mr. Semel (55) has been a Director of the Company since June 1996. Mr.
Semel has been Chairman of the Board and Co-Chief Executive Officer of the
Warner Bros. Division of Time Warner Entertainment LP ("Warner Brothers"), Los
Angeles, since March 1994 and of Warner Music Group, Los Angeles, since
November 1995. For more than ten years prior to that he was President of Warner
Brothers or its predecessor, Warner Bros. Inc. Mr. Semel is also a Director of
Polo Ralph Lauren Corporation, which files reports pursuant to the Exchange
Act.
Ms. Stewart (57) has been a Director of the Company since June 1996.
Ms. Stewart is the Chairman of the Board and Chief Executive Officer of Martha
Stewart Living Omnimedia, LLC, New York City. She has been an
31
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
Fellows. The Executive Committee may exercise all of the powers and authority
of the Board, except as otherwise provided under the Delaware General
Corporation Law. The Executive Committee also serves as the Company's
nominating committee for Board membership. The Audit Committee, consisting of
Mr. Landau, Professor Feldberg and Ms. Robinson, makes recommendations to the
Board of Directors regarding the engagement of the Company's independent
auditors for ratification by the Company's stockholders, reviews the plan,
scope and results of the audit, and 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 Compensation Committee, consisting of Messrs. Gittis,
Drapkin, Janklow and Semel, makes recommendations to the Board of Directors
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 pursuant to the Revlon, Inc.
1996 Stock Plan, as amended and restated as of December 17, 1996 (the "Stock
Plan"), and administers such plan.
During 1998, the Board of Directors held four meetings and acted three
times by unanimous written consent, the Executive Committee acted four times by
unanimous written consent, the Audit Committee held eight meetings and the
Compensation Committee held one meeting and acted fourteen times by unanimous
written consent. During 1998, all Directors (other than Mr. Janklow) attended
75% or more of the meetings of the Board of Directors and of the Committees of
which they were members.
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 quarterly installments, and a fee of $1,000 for each
meeting of the Board of Directors or any committee thereof they attend.
32
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information for the years indicated
concerning the compensation awarded to, earned by or paid to the persons who
served as Chief Executive Officer of the Company during 1998 and the four most
highly paid executive officers, other than the Chief Executive Officer, who
served as executive officers of the Company as of December 31, 1998
(collectively, the "Named Executive Officers"), for services rendered in all
capacities to the Company and its subsidiaries during such periods.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION (A)
LONG-TERM
COMPENSATION
AWARDS
OTHER ANNUAL SECURITIES
NAME AND PRINCIPAL SALARY BONUS COMPENSATION UNDERLYING ALL OTHER
POSITION YEAR ($) ($) ($) OPTIONS COMPENSATION ($)
-------- ---- ---- ---- ---- ------- ----------------
George Fellows 1998 1,800,000 115,000 88,549 170,000 33,181
President and Chief 1997 1,250,000 1,250,000 22,191 170,000 30,917
Executive Officer (b) 1996 1,025,000 870,000 15,242 120,000 4,500
M. Katherine Dwyer 1998 875,000 420,000 9,651 75,000 21,585
Senior Vice President (c) 1997 500,000 800,000 5,948 125,000 18,377
1996 500,000 326,100 90,029 45,000 4,500
Frank Gehrmann 1998 427,500 80,200 3,343 30,000 17,297
Executive Vice President
and Chief Financial
Officer (d)
Wade H. Nichols III 1998 555,000 83,600 19,457 40,000 33,195
Executive Vice President 1997 525,000 274,600 24,215 30,000 23,089
and General Counsel (e) 1996 500,000 263,100 6,465 30,000 5,953
William J. Fox 1998 907,500 805,625 58,041 100,000 71,590
Senior Executive Vice 1997 825,000 772,300 55,159 50,000 71,590
President (f) 1996 750,000 598,600 50,143 50,000 56,290
(a) The amounts shown in Annual Compensation for 1998, 1997 and 1996 reflect
salary, bonus and other annual compensation (including perquisites and
other personal benefits valued in excess of $50,000) and amounts
reimbursed for payment of taxes awarded to, earned by or paid to the
persons listed for services rendered to the Company and its subsidiaries.
Products Corporation has a bonus plan (the "Executive Bonus Plan") in
which executives participate (including the Chief Executive Officer and
the other Named Executive Officers other than Mr. Fox (see "--Employment
Agreements and Termination of Employment Arrangements")). The Executive
Bonus Plan provides for payment of cash compensation upon the achievement
of predetermined corporate and/or business unit and individual performance
goals during the calendar year established pursuant to the Executive Bonus
Plan or by the Compensation Committee. Mr. Gehrmann's compensation is
reported for 1998 only because he did not serve as an executive officer of
the Company prior to 1998.
33
(b) The amount shown for Mr. Fellows under Other Annual Compensation for 1998
includes $18,020 in respect of personal use of a Company-provided
automobile and $15,445 in respect of membership fees and related expenses
for personal use of a health and country club and payments in respect of
gross ups for taxes on imputed income arising out of personal use of a
Company-provided automobile and Company-provided air travel and for taxes
on imputed income arising out of premiums paid or reimbursed in respect of
life insurance. The amount shown under All Other Compensation for 1998
reflects $13,381 in respect of life insurance premiums, $4,800 in respect
of matching contributions under the Revlon Employees' Savings, Profit
Sharing and Investment Plan (the "401(k) Plan") and $15,000 in respect of
matching contributions under the Revlon Excess Savings Plan for Key
Employees (the "Excess Plan"). The amounts shown under Other Annual
Compensation for 1997 and 1996 reflect 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 in respect of life insurance. The amount shown
under All Other Compensation for 1997 reflects $11,117 in respect of life
insurance premiums, $4,800 in respect of matching contributions under the
401(k) Plan and $15,000 in respect of matching contributions under the
Excess Plan. The amount shown under All Other Compensation for 1996
reflects matching contributions under the 401(k) Plan.
(c) The amounts shown for Ms. Dwyer under Other Annual Compensation for 1998,
1997 and 1996 reflect payments in respect of gross ups for taxes on
imputed income arising out of personal use of a Company-provided
automobile and payments in respect of gross ups for taxes on imputed
income arising out of premiums paid or reimbursed in respect of life
insurance, and for 1996 reflects $57,264 in expense reimbursements. The
amounts shown under Bonus for 1998 and 1997 include an additional payment
of $300,000 in each year pursuant to her employment agreement. The amount
shown under All Other Compensation for 1998 reflects $1,785 in respect of
life insurance premiums, $4,800 in respect of matching contributions under
the 401(k) Plan and $15,000 in respect of matching contributions under the
Excess Plan. The amount shown under All Other Compensation for 1997
reflects $2,720 in respect of life insurance premiums, $4,800 in respect
of matching contributions under the 401(k) Plan and $10,857 in respect of
matching contributions under the Excess Plan. The amount shown under All
Other Compensation for 1996 reflects matching contributions under the
401(k) Plan.
(d) Mr. Gehrmann became an executive officer of the Company in January 1998.
The amount shown for Mr. Gehrmann under Other Annual Compensation for 1998
reflects payments in respect of gross ups for taxes on imputed income
arising out of personal use of a Company-provided automobile. The amount
shown under All Other Compensation for 1998 reflects $4,800 in respect of
matching contributions under the 401(k) Plan and $12,497 in respect of
matching contributions under the Excess Plan.
(e) The amounts shown for Mr. Nichols under Bonus for 1997 and 1996 were
deferred pursuant to the Revlon Executive Deferred Compensation Plan (the
"Deferred Compensation Plan") pursuant to which eligible executive
employees who participate in the Executive Bonus Plan may elect to defer
all or a portion of the bonus otherwise payable in respect of a calendar
year. The amounts shown under Other Annual Compensation for 1998, 1997 and
1996 reflect payments in respect of gross ups for taxes on imputed income
arising out of personal use of a Company-provided automobile and payments
for taxes on imputed income arising out of premiums paid or reimbursed in
respect of life insurance. The amount shown under All Other Compensation
for 1998 reflects $9,990 in respect of life insurance premiums, $4,800 in
respect of matching contributions under the 401(k) Plan, $10,463 in
respect of matching contributions under the Excess Plan and $7,942 in
respect of above-market earnings on compensation deferred under the
Deferred Compensation Plan that were earned but not paid or payable during
1998. The amount shown under All Other Compensation for 1997 reflects
$4,252 in respect of life insurance premiums, $4,800 in respect of
matching contributions under the 401(k) Plan, $11,606 in respect of
matching contributions under the Excess Plan and $2,431 in respect of
above-market earnings on compensation deferred under the Deferred
Compensation Plan that were earned but not paid or payable during 1997.
The amount shown under All Other Compensation for 1996 reflects $4,500 in
respect of matching contributions under the 401(k) Plan and $1,453 in
respect of above-market earnings on compensation deferred under the
Deferred Compensation Plan that were earned but not paid or payable during
1996.
34
(f) Mr. Fox was an executive officer of the Company during 1996, 1997 and 1998
and resigned from the Company effective January 31, 1999. The amounts
shown for Mr. Fox under Other Annual Compensation for 1998, 1997 and 1996
reflect payments in respect of gross ups for taxes on imputed income
arising out of personal use of a Company-provided automobile and payments
for taxes on imputed income arising out of premiums paid or reimbursed in
respect of life insurance. The amount shown under All Other Compensation
for 1998 reflects $51,790 in respect of life insurance premiums, $4,800 in
respect of matching contributions under the 401(k) Plan and $15,000 in
respect of matching contributions under the Excess Plan. The amount shown
under Bonus for 1997 includes an additional payment of $125,000 based upon
Mr. Fox's performance. The amount shown under All Other Compensation for
1997 reflects $51,790 in respect of life insurance premiums, $4,800 in
respect of matching contributions under the 401(k) Plan and $15,000 in
respect of matching contributions under the Excess Plan. The amount shown
under All Other Compensation for 1996 reflects $51,790 in respect of life
insurance premiums and $4,500 in respect of matching contributions under
the 401(k) Plan.
OPTION GRANTS IN THE LAST FISCAL YEAR
During 1998, the following grants of stock options were made pursuant
to the Stock Plan to the executive officers named in the Summary Compensation
Table:
INDIVIDUAL GRANTS GRANT
DATE
____________________________________________________ VALUE (A)
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS EXERCISE GRANT
UNDERLYING GRANTED TO OR BASE DATE
OPTIONS EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE VALUE $
---- ----------- -------- ------ ---- -------
George Fellows 170,000 10% $34.00 1/07/08 $ 3,475,157
M. Katherine Dwyer 75,000 4% $34.00 1/07/08 1,533,158
Frank J. Gehrmann 30,000 2% $34.00 1/07/08 613,263
Wade H. Nichols III 40,000 2% $34.00 1/07/08 817,684
William J. Fox 75,000 $34.00 1/07/08 1,533,158
{6%
25,000 $48.50 6/16/08 725,658
The grants made during 1998 under the Stock Plan to Messrs. Fellows,
Gehrmann and Nichols and Ms. Dwyer were made on January 8, 1998 and consist of
non-qualified options having a term of 10 years. The grants made during 1998
under the Stock Plan to Mr. Fox were made on January 8, 1998 (with respect to
an option to purchase 75,000 shares of the Company's Class A Common Stock) and
June 17, 1998 (with respect to an option to purchase 25,000 shares of the
Company's Class A Common Stock) and consist of non-qualified options having a
term of 10 years. The options listed in the table vest 25% each year beginning
on the first anniversary of the grant date and will become 100% vested on the
fourth anniversary of the grant date and have an exercise price equal to the
NYSE closing price per share of the Class A Common Stock on the grant date, as
indicated in the table above. During 1998, the Company also granted an option
to purchase 300,000 shares of the Company's Class A Common Stock pursuant to
the Stock Plan to Mr. Perelman, the Chairman of the Board of Directors of the
Company. The option will vest in full on the fifth anniversary of the grant
date and has an exercise price of $50.00, the NYSE closing price per share of
the Class A Common Stock on April 27, 1998, the date of the grant.
(a) Grant Date Present Values were calculated using the Black-Scholes
option pricing model. The model as applied used the grant date
35
of January 8, 1998 with respect to the options granted on such date
and used the grant date of June 17, 1998 with respect to the option
granted to Mr. Fox on June 17, 1998. Stock option models require a
prediction about the future movement of stock price. The following
assumptions were made for purposes of calculating Grant Date Present
Values: (i) a risk-free rate of return of 5.46% with respect to the
options granted on January 8, 1998 and 5.26% with respect to the
option granted to Mr. Fox on June 17, 1998, which were the rates as
of the applicable grant dates for the U.S. Treasury Zero Coupon Bond
issues with a remaining term similar to the expected term of the
options; (ii) stock price volatility of 55.93% based upon the
volatility of the Company's stock price; (iii) a constant dividend
rate of zero percent and (iv) that the options normally would be
exercised on the final day of their seventh year after grant. No
adjustments to the theoretical value were made to reflect the waiting
period, if any, prior to vesting of the stock options or the
transferability (or restrictions related thereto) of the stock
options. The real value of the options in the table depends upon the
actual performance of the Company's stock during the applicable
period and upon when they are exercised.
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following chart shows the number of stock options exercised during
1998 and the 1998 year-end value of the stock options held by the executive
officers named in the Summary Compensation Table:
VALUE OF
NUMBER OF SECURITIES UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS
SHARES OPTIONS AT FISCAL AT FISCAL YEAR-END
ACQUIRED VALUE YEAR-END (#) EXERCISABLE/
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE UNEXERCISABLE (A)($)
- ---- --------------- ------------ ------------------------- --------------------
George Fellows 0 0 42,500/417,500 0/0
M. Katherine Dwyer 0 0 31,250/213,750 0/0
Frank J. Gehrmann 0 0 8,000/44,000 0/0
Wade H. Nichols III 0 0 7,500/92,500 0/0
William J. Fox 0 0 12,500/187,500 0/0
(a) The market value of the underlying shares of Class A Common Stock at
year end calculated using $16 3/8, the December 31, 1998 NYSE closing
price per share of Class A Common Stock, was less than the exercise
price of all stock options listed in the table. The actual value, if
any, an executive may realize upon exercise of a stock option depends
upon the amount by which the market price of shares of Class A Common
Stock exceeds the exercise price per share when the stock options are
exercised.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
Each of Messrs. Fellows, Nichols and Fox and Ms. Dwyer has entered
into an executive employment agreement with the Company's wholly owned
subsidiary, Products Corporation. Mr. Fellows' employment agreement, as
amended, provides that he will serve as the President and Chief Executive
Officer at a base salary of not less than $1,800,000 for 1998 and thereafter,
and that management recommend to the Compensation Committee that he be granted
options to purchase 170,000 shares of Class A Common Stock each year during the
term of the agreement. At any time after January 1, 2001, Products Corporation
may terminate the term of Mr. Fellows' agreement by 12 months' prior notice of
non-renewal. Ms. Dwyer's employment agreement provides that she will serve as
President of Products Corporation's United States Consumer Products business at
a base salary of not less than $875,000 per annum for 1998 to be increased as
of January 1 of each year by not less than $75,000, and that management
recommend to the Compensation Committee that she be granted options to purchase
75,000 shares of Class A Common Stock each year during the term of the
agreement. At any time on or after January 1, 2002, Products Corporation may
terminate Ms. Dwyer's agreement by 12 months' prior notice of non-renewal. Mr.
Nichols' employment agreement with Products Corporation provides that he will
serve as Executive Vice President and General Counsel through February 28, 2003
at a base salary of not less than $555,000 and that management will
36
recommend to the Compensation Committee that he be granted options to purchase
40,000 shares of Class A Common Stock each year during the term of the
agreement. Mr. Fox's agreement, which was amended effective as of June 1, 1998,
provides for an annual base salary of not less than $750,000 and a guaranteed
annual bonus of $805,625 through June 30, 2001. All of the agreements currently
in effect (other than in the case of Mr. Fox) provide for participation in the
Executive Bonus Plan, continuation of life insurance and executive medical
insurance coverage in the event of permanent disability and participation in
other executive benefit plans on a basis equivalent to senior executives of the
Company generally. The agreements with Messrs. Fellows and Nichols and Ms.
Dwyer provide for Company-paid supplemental term life insurance during
employment in the amount of three times base salary, and all of the agreements
currently in effect provide for Company-paid supplemental disability insurance.
Mr. Fox's agreement provides that, in lieu of any participation in Company-paid
pre-retirement life insurance coverage, through June 30, 2001 Products
Corporation will pay premiums and gross ups for taxes thereon in respect of 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 currently in effect, other than
Mr. Fox's, provide that in the event of termination of the term of the relevant
executive employment agreement by Products Corporation (otherwise than for
"cause" as defined in the employment agreements or disability) or by the
executive for 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 and subject to the terms
of the Executive Severance Policy (see "--Executive Severance Policy") (or, at
his or her election, to continued base salary payments throughout the term). In
addition, the employment agreement with Mr. Fellows provides that if he remains
continuously employed by Products Corporation or its affiliates until age 60,
then upon any subsequent retirement he will be entitled to a supplemental
pension benefit in a sufficient amount so that his annual pension benefit from
all qualified and non-qualified pension plans of Products Corporation and its
affiliates (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.
EXECUTIVE SEVERANCE POLICY
Products Corporation's Executive Severance Policy provides that upon
termination of employment of eligible executive employees, including the Chief
Executive Officer and the other Named Executive Officers (other than Mr. Fox)
other than voluntary resignation 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 non-competition
agreement, the eligible executive will be entitled to receive, in lieu of
severance under any employment agreement then in effect or under Products
Corporation's basic severance plan, a number of months of severance pay in
semi-monthly installments based upon such executive's grade level and years of
service reduced by the amount of any compensation from subsequent employment,
unemployment compensation or statutory termination payments received by such
executive during the severance period, and, in certain circumstances, by the
actuarial value of enhanced pension benefits received by the executive, as well
as continued participation in medical and certain other benefit plans for the
severance period (or in lieu thereof, upon commencement of subsequent
employment, a lump sum payment equal to the then present value of 50% of the
amount of base salary then remaining payable through the balance of the
severance period). Pursuant to the Executive Severance Policy, upon meeting the
conditions set forth therein, Messrs. Fellows, Gehrmann and Nichols 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.
37
DEFINED BENEFIT PLANS
The following table shows the estimated annual retirement benefits
payable (as of December 31, 1998) 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 ESTIMATED ANNUAL STRAIGHT LIFE ANNUITY BENEFITS AT RETIREMENT WITH
AVERAGE COMPENSATION DURING FINAL INDICATED YEARS OF CREDITED SERVICE (a)
TEN YEARS
- ----------------------------------- ---------------------------------------------------------------------------------
15 20 25 30 35
---------------- ------------------ ----------------- ------------------ --------------
$ 600,000 $151,881 $202,508 $253,135 $303,762 $303,762
700,000 177,881 237,175 296,468 355,762 355,762
800,000 203,881 271,841 339,802 407,762 407,762
900,000 229,881 306,508 383,135 459,762 459,762
1,000,000 255,881 341,175 426,468 500,000 500,000
1,100,000 281,881 375,841 469,802 500,000 500,000
1,200,000 307,881 410,508 500,000 500,000 500,000
1,300,000 333,881 445,175 500,000 500,000 500,000
1,400,000 359,881 479,841 500,000 500,000 500,000
1,500,000 385,881 500,000 500,000 500,000 500,000
2,000,000 500,000 500,000 500,000 500,000 500,000
2,500,000 500,000 500,000 500,000 500,000 500,000
(a) The normal form of benefit for the Retirement Plan and the Pension
Equalization Plan is a straight life annuity.
The Retirement Plan is intended to be a tax qualified defined benefit
plan. 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 includes all periods of employment with the Company
or a subsidiary prior to retirement. The base salaries and bonuses of each of
the Chief Executive Officer and the other 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 December 14, 1998, is a
non-qualified benefit arrangement designed to provide for the payment by the
Company of the difference, if any, between the amount of such maximum
limitations and the annual benefit that would be payable under the Retirement
Plan but for such limitations, up to a combined maximum annual straight life
annuity benefit at age 65 under the Retirement Plan and the Pension
Equalization Plan of $500,000. Benefits provided under the Pension Equalization
Plan are conditioned on the participant's compliance with his or her
non-competition agreement and on the participant not competing with Products
Corporation for one year after termination of employment.
The number of years of credited service under the Retirement Plan and
the Pension Equalization Plan as of January 1, 1999 (rounded to full years) for
Mr. Fellows is ten years (which includes credit for prior service with
Holdings), for Ms. Dwyer is five years, for Mr. Gehrmann is 5 five years, for
Mr. Nichols is 20 years (which
38
includes credit for prior service with Holdings) and for Mr. Fox is 15 years
(which includes credit for prior service with MacAndrews Holdings).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of January 31, 1999 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,
(iii) the Chief Executive Officer during 1998 and each of the other Named
Executive Officers during 1998 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 Commission, and such information is
not necessarily indicative of beneficial ownership for any other purpose. Under
such rules, beneficial ownership includes any shares of Common Stock as to
which a person has sole or shared voting power or investment power and any
shares of Common Stock which the person has the right to acquire within 60 days
through the exercise of any option, warrant or right, through conversion of any
security or pursuant to the automatic termination of a power of attorney or
revocation of a trust, discretionary account or similar arrangement.
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
------------------- -------------------- -----
Ronald O. Perelman 42,500,000 (Class A and Class B) (1) 83.0%
35 E. 62nd St.
New York, NY 10021
Donald Drapkin 12,000 (Class A)(2) *
M. Katherine Dwyer 130,173 (Class A)(3) *
Irwin Engelman 10,000 (Class A) (4) *
Meyer Feldberg 0
George Fellows 256,388 (Class A)(5) 1.3%
William J. Fox 104,702 (Class A)(6) *
Frank Gehrmann 24,798 (Class A)(7) *
Howard Gittis 15,000 (Class A) *
Morton L. Janklow 0
Vernon E. Jordan 0
Henry A. Kissinger 0
Edward J. Landau 100 *
Jerry W. Levin 323,989 (Class A)(8) 1.6%
Wade H. Nichols III 61,404 (Class A)(9) *
Linda Gosden Robinson 0
Terry Semel 5,000 (Class A)(10) *
Martha Stewart 1,000(11) *
FMR Corp. 1,561,500 (Class A)(12) 7.8%
82 Devonshire Street
Boston, MA 02109
All Directors and Executive Officers 12,196,250 (Class A)(13) 61.0%
as a Group 31,250,000 (Class B) 100.0%
(19 Persons)
*Less than one percent.
(1) Mr. Perelman through Mafco Holdings (which through REV Holdings)
beneficially owns 11,250,000 shares of Class A Common Stock
(representing approximately 56.3% 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 approximately 83.0% 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
39
Stock owned by REV Holdings are pledged by REV Holdings to secure
obligations, and shares of intermediate holding companies are or may
from time to time be pledged to secure obligations of Mafco Holdings
or its affiliates.
(2) All of such shares are held by trusts for Mr. Drapkin's children and
beneficial ownership is disclaimed.
(3) Includes 3,000 shares held directly; 306 shares acquired pursuant to
the Company matching under the 401(k) Plan; 617 shares that Ms. Dwyer
has the right to receive pursuant to the Company matching under the
Excess Plan; 31,250, 31,250 and 18,750 shares which may be acquired
under options which vested on January 9, 1998, January 9, 1999 and
January 8, 1999, respectively; and 45,000 shares which may be acquired
under options which vest on February 28, 1999.
(4) Includes 10,000 shares owned jointly by Mr. Engelman's wife.
(5) Includes 8,000 shares held directly; 226 shares acquired pursuant to
the Company matching under the 401(k) Plan; 662 shares that Mr.
Fellows has the right to receive pursuant to the Company matching
under the Excess Plan; 42,500, 42,500 and 42,500 shares which may be
acquired under options which vested on January 9, 1998, January 9,
1999 and January 8, 1999, respectively; and 120,000 shares which may
be acquired under options which vest on February 28, 1999.
(6) 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; 227
shares acquired pursuant to the Company matching under the 401(k)
Plan; 725 shares that Mr. Fox has the right to receive pursuant to the
Company matching under the Excess Plan; 12,500, 12,500 and 18,750
shares which may be acquired under options which vested on January 9,
1998, January 9, 1999 and January 8, 1999, respectively; and 50,000
shares which may be acquired under options which vest on February 28,
1999.
(7) Includes 3,000 shares owned jointly by Mr. Gehrmann's wife; 327 shares
acquired pursuant to the Company matching under the 401(k) Plan; 471
shares that Mr. Gehrmann has the right to receive pursuant to the
Company matching under the Excess Plan; 2,500, 2,500, 3,000, 3,000 and
7,500 shares which may be acquired under options which vested on
February 28, 1997, February 28, 1998, January 9, 1998, January 9, 1999
and January 8, 1999, respectively; and 2,500 shares which may be
acquired under options which vest on February 28, 1999.
(8) Includes 25,000 shares held directly by Mr. Levin, a director of the
Company at January 31, 1999; 1,000 shares owned by Mr. Levin's
daughter as to which beneficial ownership is disclaimed; 129 shares
acquired pursuant to the Company matching under the 401(k) Plan; 360
shares that Mr. Levin has the right to receive pursuant to the Company
matching under the Excess Plan; 42,500, 42,500 and 42,500 shares which
may be acquired under options which vested on January 9, 1998, January
9, 1999 and January 8, 1999, respectively; and 170,000 shares which
may be acquired under options which vest on February 28, 1999.
(9) Includes 5,400 shares held directly; 298 shares acquired pursuant to
the Company matching under the 401(k) Plan; 705 shares that Mr.
Nichols has the right to receive pursuant to the Company matching
under the Excess Plan; 7,500, 7,500 and 10,000 shares which may be
acquired under options which vested on January 9, 1998, January 9,
1999 and January 8, 1999, respectively; and 30,000 shares which may be
acquired under options which vest on February 28, 1999.
(10) Includes 2,000 shares owned by Mr. Semel's children as to which
beneficial ownership is disclaimed and 3,000 shares owned jointly by
Mr. Semel's wife.
(11) Includes 500 shares owned directly and 500 shares owned indirectly by
the Martha Stewart Inc. Defined Benefit Pension Plan.
(12) Based upon a Schedule 13G filed by FMR Corp. in February 1999, FMR
Corp. has sole voting power as to 550 shares and sole dispositive
power as to all 1,561,500 shares.
(13) Includes 1,697 shares owned by one executive officer not listed in the
table. Included in this share number for such executive officer are
750 shares which may be acquired under options which vested on July
16, 1998, 750 shares which may be acquired under options which vested
on January 8, 1999, and 197 shares acquired pursuant to the Company
matching under the 401(k) Plan.
40
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 Board of Directors of the Company.
TRANSFER AGREEMENTS
In June 1992, Revlon, Inc. and Products Corporation entered into an
asset transfer agreement with Holdings and certain of its wholly owned
subsidiaries (the "Asset Transfer Agreement"), and Revlon, Inc. and Products
Corporation entered into a real property asset transfer agreement with Holdings
(the "Real Property Transfer Agreement" and, together with the Asset Transfer
Agreement, the "Transfer Agreements"), and pursuant to such agreements, on June
24, 1992 Holdings transferred assets to Products Corporation and Products
Corporation assumed all the liabilities of Holdings, other than certain
specifically excluded assets and liabilities (the liabilities excluded are
referred to as the "Excluded Liabilities"). Holdings retained certain small
brands that historically had not been profitable. Holdings agreed to indemnify
Revlon, Inc. and Products Corporation against losses arising from the Excluded
Liabilities, and Revlon, Inc. and Products Corporation agreed to indemnify
Holdings against losses arising from the liabilities assumed by Products
Corporation. The amount reimbursed by Holdings to Products Corporation for the
Excluded Liabilities for 1998 was $0.6 million.
OPERATING SERVICES AGREEMENT
In June 1992, Revlon, Inc., 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 has manufactured, marketed, distributed, warehoused and
administered, including the collection of accounts receivable, the Retained
Brands for Holdings. Pursuant to the Operating Services Agreement, Products
Corporation was reimbursed an amount equal to all of its and Revlon, Inc.'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 due from Holdings to
Products Corporation for such direct and indirect costs for 1998 plus a fee
equal to 5% of the net sales of the Retained Brands was $0.9 million, which
amount was offset against certain notes payable to Holdings.
REIMBURSEMENT AGREEMENTS
Revlon, Inc., Products Corporation and MacAndrews Holdings have
entered into reimbursement agreements (the "Reimbursement Agreements") pursuant
to which (i) MacAndrews Holdings is obligated to provide (directly or through
affiliates) certain professional and administrative services, including
employees, to Revlon, Inc. and its subsidiaries, including Products
Corporation, and purchase services from third party providers, such as
insurance and legal and accounting services, on behalf of Revlon, Inc. and its
subsidiaries, including Products Corporation, to the extent requested by
Products Corporation, and (ii) Products Corporation is obligated to provide
certain professional and administrative services, including employees, to
MacAndrews Holdings (and its affiliates) and purchase services from third party
providers, such as insurance and legal and accounting services, on behalf of
MacAndrews Holdings (and its affiliates) to the extent requested by MacAndrews
Holdings, provided that in each case the performance of such services does not
cause an unreasonable burden to MacAndrews Holdings or Products Corporation, as
the case may be. The Company reimburses MacAndrews Holdings for the allocable
costs of the services purchased for or provided to the Company and its
subsidiaries and for reasonable out-of-pocket expenses incurred in connection
with the provision of such services. MacAndrews Holdings (or such affiliates)
reimburses the Company for the allocable costs of the services purchased for or
provided to MacAndrews Holdings (or such affiliates) and for the reasonable
out-of-pocket expenses incurred in connection with the purchase or provision of
such services. The net amount reimbursed by MacAndrews Holdings to the Company
for the services provided under the Reimbursement Agreements for 1998 was $3.1
million, $0.2 million of which was offset against certain notes payable to
Holdings. Each of Revlon, Inc. and Products Corporation, on the one hand, and
MacAndrews Holdings, on the other, has agreed to indemnify the other party for
losses arising out of the provision of services by
41
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
Revlon, Inc., for federal income tax purposes, is included in the
affiliated group of which Mafco Holdings is the common parent, and Revlon,
Inc.'s federal taxable income and loss is included in such group's consolidated
tax return filed by Mafco Holdings. Revlon, Inc. also may be included in
certain state and local tax returns of Mafco Holdings or its subsidiaries. In
June 1992, Holdings, Revlon, Inc. and certain of its subsidiaries, and Mafco
Holdings entered into a tax sharing agreement (as subsequently amended, the
"Tax Sharing Agreement"), pursuant to which Mafco Holdings has agreed to
indemnify Revlon, Inc. against federal, state or local income tax liabilities
of the consolidated or combined group of which Mafco Holdings (or a subsidiary
of Mafco Holdings other than Revlon, Inc. or its subsidiaries) is the common
parent for taxable periods beginning on or after January 1, 1992 during which
Revlon, Inc. or a subsidiary of Revlon, Inc. is a member of such group.
Pursuant to the Tax Sharing Agreement, for all taxable periods beginning on or
after January 1, 1992, Revlon, Inc. will pay to Holdings amounts equal to the
taxes that Revlon, Inc. would otherwise have to pay if it were to file separate
federal, state or local income tax returns (including any amounts determined to
be due as a result of a redetermination arising from an audit or otherwise of
the consolidated or combined tax liability relating to any such period which is
attributable to Revlon, Inc.), except that Revlon, Inc. will not be entitled to
carry back any losses to taxable periods ending prior to January 1, 1992. No
payments are required by Revlon, Inc. if and to the extent Products Corporation
is prohibited under the Credit Agreement from making tax sharing payments to
Revlon, Inc. The Credit Agreement prohibits Products Corporation from making
such tax sharing payments other than in respect of state and local income
taxes. Since the payments to be made under the Tax Sharing Agreement will be
determined by the amount of taxes that Revlon, Inc. would otherwise have to pay
if it were to file separate federal, state or local income tax returns, the Tax
Sharing Agreement will benefit Mafco Holdings to the extent Mafco Holdings can
offset the taxable income generated by Revlon, Inc. against losses and tax
credits generated by Mafco Holdings and its other subsidiaries. There were no
cash payments in respect of federal taxes made by Revlon, Inc. pursuant to the
Tax Sharing Agreement for 1998.
REGISTRATION RIGHTS AGREEMENT
Prior to the consummation of the Revlon IPO, Revlon, Inc. and Revlon
Worldwide Corporation (subsequently merged into REV Holdings), the then direct
parent of Revlon, Inc., entered into the Registration Rights Agreement pursuant
to which REV Holdings and certain transferees of Revlon, Inc.'s Common Stock
held by REV Holdings (the "Holders") have the right to require Revlon, Inc. to
register all or part of the Class A Common Stock owned by such Holders and the
Class A Common Stock issuable upon conversion of Revlon, Inc.'s Class B Common
Stock owned by such Holders under the Securities Act of 1933, as amended (the
"Securities Act") (a "Demand Registration"); provided that Revlon, Inc. may
postpone giving effect to a Demand Registration up to a period of 30 days if
Revlon, Inc. believes such registration might have a material adverse effect on
any plan or proposal by Revlon, Inc. with respect to any financing,
acquisition, recapitalization, reorganization or other material transaction, or
if Revlon, Inc. is in possession of material non-public information that, if
publicly disclosed, could result in a material disruption of a major corporate
development or transaction then pending or in progress or in other material
adverse consequences to Revlon, Inc. In addition, the Holders have the right to
participate in registrations by Revlon, Inc. of its Class A Common Stock (a
"Piggyback Registration"). The Holders will pay all out-of-pocket expenses
incurred in connection with any Demand Registration. Revlon, Inc. will pay any
expenses incurred in connection with a Piggyback Registration, except for
underwriting discounts, commissions and expenses attributable to the shares of
Class A Common Stock sold by such Holders.
42
OTHER
Pursuant to a lease dated April 2, 1993 (the "Edison Lease"), Holdings
leased to Products Corporation the Edison research and development facility for
a term of up to 10 years with an annual rent of $1.4 million and certain shared
operating expenses payable by Products Corporation which, together with the
annual rent, were not to exceed $2.0 million per year. 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 was 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 1998
Products Corporation rented from Holdings a portion of the administration
building located at the Edison facility and space for a retail store of
Products Corporation's now discontinued retail operation. During 1998, Products
Corporation provided certain administrative services, including accounting, for
Holdings with respect to the Edison facility pursuant to which Products
Corporation paid on behalf of Holdings costs associated with the Edison
facility and was reimbursed by Holdings for such costs, less the amount owed by
Products Corporation to Holdings pursuant to the Edison Lease and the occupancy
agreement. In August 1998, Holdings sold the Edison facility to an unrelated
third party, which assumed substantially all liability for environmental claims
and compliance costs relating to the Edison facility, and in connection with
the sale Products Corporation terminated the Edison Lease and entered into a
new lease with the new owner. Holdings agreed to indemnify Products Corporation
to the extent rent under the new lease exceeds rent that would have been
payable under the terminated Edison Lease had it not been terminated. The net
amount reimbursed by Holdings to Products Corporation with respect to the
Edison facility for 1998 was $0.5 million.
On February 2, 1998, Revlon Escrow issued and sold in a private
placement $650 million aggregate principal amount of 8 5/8% Notes and $250
million aggregate principal amount of 8 1/8% Notes, with the net proceeds
deposited into escrow. The proceeds from the sale of the Notes were used to
finance the redemption of Products Corporation's $555 million aggregate
principal amount of Senior Subordinated Notes and $260 million aggregate
principal amount of Senior Notes. Products Corporation delivered a redemption
notice to the holders of the Senior Subordinated Notes for the redemption of
the Senior Subordinated Notes on March 4, 1998, at which time Products
Corporation assumed the obligations under the 8 5/8% Notes and the related
indenture, and to the holders of the Senior Notes for the redemption of the
Senior Notes on April 1, 1998, at which time Products Corporation assumed the
obligations under the 8 1/8% Notes and the related indenture. A nationally
recognized investment banking firm rendered its written opinion that the
Assumption, upon consummation of the redemptions of the Old Notes, and the
subsequent release from escrow to Products Corporation of any remaining net
proceeds from the sale of the Notes are fair from a financial standpoint to
Products Corporation under the indenture governing Products Corporation's 1999
Notes.
During 1998, Products Corporation leased certain facilities to
MacAndrews & Forbes or its affiliates pursuant to occupancy agreements and
leases. These included space at Products Corporation's New York headquarters
and at Products Corporation's offices in London and, during the first half of
1998, Hong Kong. The rent paid to Products Corporation for 1998 was $2.9
million.
During 1998, approximately $5.7 million due to Products Corporation
from Holdings was offset against certain notes payable to Holdings.
Products Corporation's 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)
until the disposition of the Edison facility in August 1998, a mortgage on the
Edison facility.
43
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, 1998. 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 facilities in effect at the time of such borrowing. The
amount of interest paid by Products Corporation for such borrowings for 1998
was $0.8 million.
During 1998, the Company made advances of $0.25 million and $0.3
million to Mr. Fellows and Ms. Dwyer, respectively. During 1998, the Company
made an advance of $0.4 million to Mr. Levin, which advance was repaid in
January 1999.
During 1998, Products Corporation purchased products from a company
that was an affiliate of the Company during part of 1998, for which it paid
approximately $0.4 million.
Prior to 1998, Products Corporation provided licensing services to a
company that was an affiliate of the Company during part of 1998. In connection
with the termination of the licensing arrangement and its agreement to provide
consulting services during 1998, Products Corporation received payments of $2.0
million in 1998 and is entitled to receive an additional $1.0 million in 1999.
During 1998, a company that was an affiliate of the Company during
1998 assembled lipstick cases for Products Corporation. Products Corporation
paid approximately $1.1 million for such services in 1998.
The law firm of which Mr. Jordan is a senior partner provided legal
services to Revlon, Inc. and its subsidiaries during 1998, and it is
anticipated that it will provide legal services to Revlon, Inc. and its
subsidiaries during 1999.
Revlon, Inc. believes that the terms of the foregoing transactions are
at least as favorable to Revlon, Inc. or Products Corporation, as applicable,
as those that could be obtained from unaffiliated third parties.
44
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.).
3.2 Amended and Restated By-Laws of Revlon, Inc. dated January 30, 1997
(Incorporated by reference to Exhibit 3.2 to the Annual Report on Form
10-K for the year ended December 31, 1996 of Revlon, Inc. (the "Revlon
1996 10-K")).
4. INSTRUMENTS DEFINING THE RIGHT OF SECURITY HOLDERS, INCLUDING
INDENTURES.
4.1 Indenture, dated as of February 1, 1998, between Revlon Escrow and
U.S. Bank Trust National Association (formerly known as First Trust
National Association), as Trustee, relating to the 8 1/8% Senior Notes
due 2006 (the "8 1/8% Senior Notes Indenture"). (Incorporated by
reference to Exhibit 4.1 to the Registration Statement on Form S-1 of
Products Corporation filed with the Commission on March 12, 1998 (File
No. 333-47875) (the "Products Corporation 1998 Form S-1")).
4.2 Indenture, dated as of February 1, 1998, between Revlon Escrow and
U.S. Bank Trust National Association (formerly known as First Trust
National Association), as Trustee, relating to the 8 5/8% Senior Notes
Due 2006 (the "8 5/8% Senior Subordinated Notes Indenture").
(Incorporated by reference to Exhibit 4.3 to the Products Corporation
1998 Form S-1).
4.3 First Supplemental Indenture, dated April 1, 1998, among Revlon
Escrow, and the Trustee, amending the 8 1/8% Senior Notes Indenture.
(Incorporated by reference to Exhibit 4.2 to the Products Corporation
1998 Form S-1).
4.4 First Supplemental Indenture, dated March 4, 1998, among Revlon
Escrow, and the Trustee, amending the 8 5/8% Senior Subordinated Notes
Indenture. (Incorporated by reference to Exhibit 4.4 to the Products
Corporation 1998 Form S-1).
4.5 Indenture, dated as of November 6, 1998, between and U.S. Bank Trust
National Association, as Trustee, relating to Products Corporation's
9% Senior Notes due 2006. (Incorporated by reference to Exhibit 4.13
to the Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1998 of Revlon, Inc. (the "Revlon 1998 Second Quarter
Form 10-Q")).
4.6 Indenture dated as of June 1, 1993, between Products Corporation and
NationsBank of Georgia, National Association, as Trustee, relating to
Products Corporation's 9 1/2% 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).
4.7 Third Amended and Restated Credit Agreement dated as of June 30, 1997,
between Pacific Finance & Development Corp. and the Long-Term Credit
Bank of Japan, Ltd. (the "Yen Credit
45
Agreement") (Incorporated by reference to Exhibit 4.11 to the
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1997 of Revlon, Inc.).
4.8 First Amendment to the Yen Credit Agreement dated as of December 10,
1998 (Incorporated by reference to Exhibit 4.8 to the Registration
Statement on Form S-4 of Products Corporation filed with the
Commission on December 18, 1998, File No. 33-69213 (the "Products
Corporation 1998 S-4")).
4.9 Amended and Restated Credit Agreement, dated as of May 30, 1997, among
Products Corporation, The Chase Manhattan Bank, Citibank N.A., Lehman
Commercial Paper Inc., Chase Securities Inc. and the lenders party
thereto (the "Credit Agreement"). (Incorporated by reference to
Exhibit 4.23 to Amendment No. 2 to the Form S-1 of Revlon Worldwide
(Parent) Corporation, filed with the Securities and Exchange
Commission on June 26, 1997, File No. 33-23451).
4.10 First Amendment, dated as of January 29, 1998, to the Credit Agreement
(Incorporated by reference to Exhibit 4.8 to the Annual Report for the
year ended December 31, 1997 of Revlon, Inc. (the "Revlon 1997
10-K")).
4.11 Second Amendment, dated as of November 6, 1998, to the Credit
Agreement (Incorporated by reference to Exhibit 4.12 to the Revlon
1998 Second Quarter Form 10-Q).
4.12 Third Amendment, dated as of December 23, 1998, to the Credit
Agreement (Incorporated by reference to Exhibit 4.12 to Amendment No.
1 to the Products Corporation 1998 Form S-4 as filed with the
Securities and Exchange Commission on January 22, 1999, File No.
33-69213).
10. MATERIAL CONTRACTS.
10.1 Asset Transfer Agreement, dated as of June 24, 1992, among Holdings,
National Health Care Group, Inc., Charles of the Ritz Group Ltd.,
Products Corporation and Revlon, Inc. (Incorporated by reference to
Exhibit 10.1 to 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").
10.2 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).
10.3 First Amendment, dated as of February 28, 1995, to the Tax Sharing
Agreement. (Incorporated by reference to Exhibit 10.5 to the Annual
Report on Form 10-K for the year ended December 31, 1994 of Products
Corporation).
10.4 Second Amendment, dated as of January 1, 1997, to the Tax Sharing
Agreement. (Incorporated by reference to Exhibit 10.7 to the Revlon
1996 10-K).
10.5 Second Amended and Restated Operating Services Agreement by and among
Holdings, Revlon, Inc. and Products Corporation, as of January 1, 1996
(the "Operating Services Agreement"). (Incorporated by reference to
Exhibit 10.8 to the Revlon 1996 10-K).
10.6 Amendment to the Operating Services Agreement, dated as of July 1,
1997 (Incorporated by reference to Exhibit 10.10 to the Revlon 1997
10-K).
10.7 Employment Agreement dated as of January 1, 1997 between Products
Corporation and George Fellows (the "Fellows Employment Agreement")
(Incorporated by reference to Exhibit 10.10 to the Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1997 of Revlon,
Inc.).
*10.8 Amendment, effective January 1, 1997, to the Fellows Employment
Agreement.
10.9 Employment Agreement dated as of January 1, 1996 between Products
Corporation and William J. Fox (the "Fox Employment Agreement")
(Incorporated by reference to Exhibit 10.12 to the Annual Report on
Form 10-K for the year ended December 31, 1995 of Products
Corporation).
46
10.10 Amendment, effective January 1, 1997, to the Fox Employment Agreement
(Incorporated by reference to the Revlon 1998 Second Quarter Form
10-Q).
10.11 Employment Agreement dated as of January 1, 1998 between Products
Corporation and M. Katherine Dwyer (the "Dwyer Employment Agreement")
(Incorporated by reference to Exhibit 10.17 to the Revlon 1997 10-K).
*10.12 Amendment, effective January 1, 1998 to the Dwyer Employment
Agreement.
*10.13 Employment Agreement dated as of January 1, 1998 between Products
Corporation and Wade H. Nichols III (the "Nichols Employment
Agreement").
*10.14 Amendment, effective January 1, 1998 to the Nichols Employment
Agreement.
*10.15 Amended and Restated Revlon Pension Equalization Plan, amended and
restated as of December 14, 1998.
10.16 Executive Supplemental Medical Expense Plan Summary dated July 1991.
(Incorporated by reference to Exhibit 10.18 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")).
10.17 Description of Post Retirement Life Insurance Program for Key
Executives. (Incorporated by reference to Exhibit 10.19 to the Revlon
1992 Form S-1).
10.18 Benefit Plans Assumption Agreement dated as of July 1, 1992, by and
among Holdings, Revlon, Inc. and Products Corporation. (Incorporated
by reference to Exhibit 10.25 to the Annual Report on Form 10-K for
the year ended December 31, 1992 of Products Corporation).
10.19 Revlon Executive Bonus Plan effective January 1, 1997. (Incorporated
by reference to Exhibit 10.20 to the Revlon 1996 10-K).
10.20 Revlon Executive Deferred Compensation Plan, amended as of October 15,
1993. (Incorporated by reference to Exhibit 10.25 to the Annual Report
on Form 10-K for the year ended December 31, 1993 of Products
Corporation).
10.21 Revlon Executive Severance Policy effective January 1, 1996.
(Incorporated by reference to Exhibit 10.23 to the Amendment No. 3 to
the Revlon 1995 Form S-1 filed with the Securities and Exchange
Commission on February 5, 1996).
10.22 Revlon, Inc. 1996 Stock Plan, amended and restated as of December 17,
1996. (Incorporated by reference to Exhibit 10.23 to the Revlon 1996
10-K).
21. SUBSIDIARIES.
*21.1 Subsidiaries of the Registrant.
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 Irwin Engelman.
*24.4 Power of Attorney of Meyer Feldberg.
*24.5 Power of Attorney of William J. Fox.
*24.6 Power of Attorney of Howard Gittis.
47
*24.7 Power of Attorney of Morton L. Janklow.
*24.8 Power of Attorney of Vernon E. Jordan, Jr., Esq.
*24.9 Power of Attorney of Henry A. Kissinger.
*24.10 Power of Attorney of Edward J. Landau, Esq.
*24.11 Power of Attorney of Jerry W. Levin.
*24.12 Power of Attorney of Linda Gosden Robinson.
*24.13 Power of Attorney of Terry Semel.
*24.14 Power of Attorney of Martha Stewart.
27. Financial Data Schedule.
- --------------------
* Filed herewith.
(b) Reports on Form 8-K
On December 11, 1998, Revlon, Inc. filed a report on Form 8-K relating
to the announcement that its subsidiary, Products Corporation, disposed of its
entire equity interest in Cosmetic Center.
48
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, 1998 and 1997...........................................F-3
Consolidated Statements of Operations for each of the years in the three-year
period ended December 31, 1998......................................................................F-4
Consolidated Statements of Stockholders' Deficiency and Comprehensive Loss for each of the years in
the three-year period ended December 31, 1998......................................................F-5
Consolidated Statements of Cash Flows for each of the years in the three-year
period ended December 31, 1998.....................................................................F-6
Notes to Consolidated Financial Statements.............................................................F-7
FINANCIAL STATEMENT SCHEDULE:
Schedule II--Valuation and Qualifying Accounts.........................................................F-34
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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' deficiency and
comprehensive loss and cash flows for each of the years in the three-year
period ended December 31, 1998. 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, 1998 and 1997 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
KPMG LLP
New York, New York
January 25, 1999
F-2
REVLON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
DECEMBER 31, DECEMBER 31,
ASSETS 1998 1997
-------------- --------------
Current assets:
Cash and cash equivalents.............................................. $ 34.7 $ 37.4
Trade receivables, less allowances of $28.5 and $25.9, respectively. .. 536.0 492.5
Inventories............................................................ 264.1 260.7
Prepaid expenses and other............................................. 69.9 94.4
-------------- --------------
Total current assets.................................................. 904.7 885.0
Property, plant and equipment, net...................................... 378.9 364.0
Other assets............................................................ 173.5 142.7
Intangible assets, net.................................................. 372.9 319.2
Net assets of discontinued operations................................... -- 45.1
-------------- --------------
Total assets.......................................................... $1,830.0 $1,756.0
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Short-term borrowings-third parties.................................... $ 27.9 $ 42.7
Current portion of long-term debt-third parties........................ 6.0 5.5
Accounts payable....................................................... 134.8 178.8
Accrued expenses and other............................................. 389.7 356.0
-------------- --------------
Total current liabilities............................................. 558.4 583.0
Long-term debt-third parties ........................................... 1,629.9 1,388.8
Long-term debt-affiliates............................................... 24.1 30.9
Other long-term liabilities............................................. 265.6 211.8
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 B Common Stock, par value $.01 per share; 200,000,000 shares
authorized, 31,250,000 issued and outstanding......................... 0.3 0.3
Class A Common Stock, par value $.01 per share; 350,000,000 shares
authorized, 19,986,771 and 19,886,575 issued and outstanding,
respectively.......................................................... 0.2 0.2
Capital deficiency..................................................... (228.5) (231.1)
Accumulated deficit since June 24, 1992................................ (402.0) (258.8)
Accumulated other comprehensive loss................................... (72.6) (23.7)
-------------- --------------
Total stockholders' deficiency........................................ (648.0) (458.5)
-------------- --------------
Total liabilities and stockholders' deficiency........................ $1,830.0 $1,756.0
============== ==============
See Accompanying Notes to Consolidated Financial Statements.
F-3
REVLON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
------------ ------------ ------------
Net sales........................................... $ 2,252.2 $ 2,238.6 $ 2,092.1
Cost of sales....................................... 765.7 743.1 688.9
------------ ------------ ------------
Gross profit....................................... 1,486.5 1,495.5 1,403.2
Selling, general and administrative expenses ....... 1,328.8 1,277.0 1,204.0
Business consolidation costs and other, net ........ 33.1 3.6 --
------------ ------------ ------------
Operating income .................................. 124.6 214.9 199.2
------------ ------------ ------------
Other expenses (income):
Interest expense................................... 137.9 133.7 133.4
Interest income.................................... (5.2) (4.2) (4.4)
Amortization of debt issuance costs................ 5.1 6.6 8.3
Foreign currency losses, net....................... 4.6 6.4 5.7
Miscellaneous, net................................. 4.5 5.3 6.3
------------ ------------ ------------
Other expenses, net............................... 146.9 147.8 149.3
------------ ------------ ------------
(Loss) income from continuing operations before
income taxes....................................... (22.3) 67.1 49.9
Provision for income taxes.......................... 5.0 9.3 25.5
------------ ------------ ------------
(Loss) income from continuing operations............ (27.3) 57.8 24.4
(Loss) income from discontinued operations ......... (16.5) 0.7 0.4
Loss from disposal of discontinued operations ...... (47.7) -- --
Extraordinary items-early extinguishments of debt .. (51.7) (14.9) (6.6)
------------ ------------ ------------
Net (loss) income .................................. $ (143.2) $ 43.6 $ 18.2
============ ============ ============
Basic (loss) income per common share:
(Loss) income from continuing operations ......... $ (0.53) $ 1.13 $ 0.49
(Loss) income from discontinued operations ....... (1.26) 0.01 0.01
Extraordinary items ............................... (1.01) (0.29) (0.13)
------------ ------------ ------------
Net (loss) income per common share ................ $ (2.80) $ 0.85 $ 0.37
============ ============ ============
Diluted (loss) income per common share:
(Loss) income from continuing operations ......... $ (0.53) $ 1.13 $ 0.49
(Loss) income from discontinued operations ....... (1.26) 0.01 0.01
Extraordinary items ............................... (1.01) (0.29) (0.13)
------------ ------------ ------------
Net (loss) income per common share ................ $ (2.80) $ 0.85 $ 0.37
============ ============ ============
Weighted average number of common shares
outstanding:
Basic ............................................. 51,217,997 51,131,440 49,687,500
============ ============ ============
Dilutive .......................................... 51,217,997 51,544,318 49,818,792
============ ============ ============
See Accompanying Notes to Consolidated Financial Statements.
F-4
REVLON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
AND COMPREHENSIVE LOSS
(DOLLARS IN MILLIONS)
ACCUMULATED
OTHER TOTAL
PREFERRED COMMON CAPITAL ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
STOCK STOCK DEFICIENCY DEFICIT (a) LOSS (b) DEFICIENCY
----------- -------- ------------ ------------- --------------- ---------------
Balance, January 1, 1996......... $54.6 $0.4 $(414.7) $(320.6) $ (22.0) $(702.3)
Net proceeds from initial
public offering................ 0.1 187.7 187.8
Net capital distribution........ (0.5)(c) (0.5)
Acquisition of business......... (4.1)(d) (4.1)
Comprehensive income:
Net income..................... 18.2 18.2
Adjustment for minimum pension
liability..................... 4.6 4.6
Currency translation
adjustment.................... (0.8)(e) (0.8)
---------------
Total comprehensive income ..... 22.0
----------- -------- ------------ ------------- --------------- ---------------
Balance, December 31, 1996 ...... 54.6 0.5 (231.6) (302.4) (18.2) (497.1)
Issuance of common stock........ 0.2 0.2
Net capital contribution........ 0.3 (c) 0.3
Comprehensive income:
Net income..................... 43.6 43.6
Adjustment for minimum pension
liability..................... 7.9 7.9
Currency translation
adjustment.................... (13.4) (13.4)
---------------
Total comprehensive income ..... 38.1
----------- -------- ------------ ------------- --------------- ---------------
Balance, December 31, 1997 ...... 54.6 0.5 (231.1) (258.8) (23.7) (458.5)
Issuance of common stock........ 2.6 2.6
Comprehensive loss:
Net loss....................... (143.2) (143.2)
Adjustment for minimum pension
liability..................... (28.0) (28.0)
Revaluation of marketable
securities.................... (3.0) (3.0)
Currency translation
adjustment.................... (17.9)(f) (17.9)
---------------
Total comprehensive loss........ (192.1)
----------- -------- ------------ ------------- --------------- ---------------
Balance, December 31, 1998 ...... $54.6 $0.5 $(228.5) $(402.0) $ (72.6) $(648.0)
=========== ======== ============ ============= =============== ===============
- ------------
(a) Represents net loss since June 24, 1992, the effective date of the
transfer agreements referred to in Note 16.
(b) Accumulated other comprehensive loss includes a revaluation of
marketable securities of $3.0 for 1998, currency translation
adjustments of $37.1, $19.2 and $5.8 for 1998, 1997 and 1996,
respectively, and adjustments for the minimum pension liability of
$32.5, $4.5 and $12.4 for 1998, 1997 and 1996, respectively.
(c) Represents changes in capital from the acquisition of the Bill Blass
business (See Note 16).
(d) Represents amounts paid to Revlon Holdings Inc. for the Tarlow
Advertising Division (Tarlow) (See Note 16).
(e) Includes $2.1 of gains related to the Company's simplification of its
corporate structure outside the United States.
(f) Accumulated other comprehensive loss and comprehensive loss each
include a reclassification adjustment of $2.2 for realized gains
associated with the sale of certain assets outside the United States.
See Accompanying Notes to Consolidated Financial Statements.
F-5
REVLON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31,
---------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997 1996
----------- --------- ---------
Net (loss) income........................................... $ (143.2) $ 43.6 $ 18.2
Adjustments to reconcile net (loss) income to net cash
(used for) provided by operating activities:
Depreciation and amortization.............................. 111.3 99.7 88.7
Loss (income) from discontinued operations................. 64.2 (0.7) (0.4)
Extraordinary items........................................ 51.7 14.9 6.6
Gain on sale of certain assets, net........................ (8.4) (4.4) --
Change in assets and liabilities:
Increase in trade receivables............................. (43.0) (70.0) (67.7)
Increase in inventories................................... (4.6) (16.9) (2.7)
(Increase) decrease in prepaid expenses and other current
assets................................................... (11.4) 0.4 (7.2)
(Decrease) increase in accounts payable................... (49.2) 17.9 9.4
Increase (decrease) in accrued expenses and other current
liabilities.............................................. 52.5 (2.8) (10.0)
Other, net................................................ (71.4) (73.0) (45.2)
----------- --------- ---------
Net cash (used for) provided by operating activities ....... (51.5) 8.7 (10.3)
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (60.8) (52.3) (54.7)
Acquisition of businesses, net of cash acquired............. (57.6) (40.5) (7.1)
Proceeds from the sale of certain assets.................... 27.4 8.5 --
----------- --------- ---------
Net cash used for investing activities...................... (91.0) (84.3) (61.8)
----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in short-term borrowings -third
parties.................................................... (16.3) 18.0 5.8
Proceeds from the issuance of long-term debt -third
parties.................................................... 1,469.1 760.2 266.4
Repayment of long-term debt -third parties.................. (1,270.9) (690.2) (366.6)
Net proceeds from issuance of common stock.................. 1.1 0.2 187.8
Net contribution from (distribution to) parent.............. -- 0.3 (0.5)
Proceeds from the issuance of debt-affiliates............... 105.9 120.7 115.0
Repayment of debt-affiliates................................ (105.9) (120.2) (115.0)
Acquisition of business from affiliate...................... -- -- (4.1)
Payment of debt issuance costs.............................. (23.9) (4.1) (10.9)
----------- --------- ---------
Net cash provided by financing activities................... 159.1 84.9 77.9
----------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents................................................ (2.0) (3.6) (0.9)
----------- --------- ---------
Net cash used by discontinued operations.................... (17.3) (3.4) (2.7)
----------- --------- ---------
Net (decrease) increase in cash and cash equivalents ...... (2.7) 2.3 2.2
Cash and cash equivalents at beginning of period .......... 37.4 35.1 32.9
----------- --------- ---------
Cash and cash equivalents at end of period................. $ 34.7 $ 37.4 $ 35.1
=========== ========= =========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest ................................................. $ 133.4 $ 139.6 $ 139.0
Income taxes, net of refunds.............................. 10.9 10.5 15.4
Supplemental schedule of noncash investing activities:
In connection with business acquisitions, liabilities were
assumed (including minority interest and discontinued
operations) as follows:
Fair value of assets acquired............................. $ 74.5 $ 132.7 $ 9.7
Cash paid................................................. (57.6) (64.5) (7.2)
----------- --------- ---------
Liabilities assumed....................................... $ 16.9 $ 68.2 $ 2.5
=========== ========= =========
See Accompanying Notes to Consolidated Financial Statements.
F-6
REVLON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION:
Revlon, Inc. (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 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 and has a licensing group. Outside the United
States, the Company also sells such 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 were retained by Holdings. Unless the context otherwise requires,
all references to the Company mean Revlon, Inc. and its subsidiaries. Through
December 31, 1998, 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 (loss) income has historically
consisted predominantly of its equity in the net (loss) income of Products
Corporation and in 1998, 1997 and 1996 included approximately $1.5, $1.2 and
$0.8, respectively, in expenses incidental to being a public holding company.
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, 1998 and 1997, the amounts reflected in the Company's
Consolidated Balance Sheets aggregated a net liability of $25.9, of which $7.5
is included in accrued expenses and other and $18.4 is included in other
long-term liabilities as of both dates.
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
F-7
estimates and assumptions relating to the reporting of assets and liabilities,
the disclosure of liabilities and the reporting of revenues and expenses to
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
The Company is an indirect majority owned subsidiary of MacAndrews &
Forbes Holdings Inc. ("MacAndrews Holdings"), a corporation wholly owned
indirectly through Mafco Holdings Inc. ("Mafco Holdings" and, together with
MacAndrews Holdings, "MacAndrews & Forbes") by Ronald O. Perelman.
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 AND OTHER ASSETS:
Property, plant and equipment is recorded at cost and is depreciated
on a straight-line basis over the estimated useful lives of such assets as
follows: land improvements, 20 to 40 years; buildings and improvements, 5 to 50
years; machinery and equipment, 3 to 17 years; and office furniture and
fixtures and capitalized software, 2 to 12 years. Leasehold improvements are
amortized over their estimated useful lives or the terms of the leases,
whichever is shorter. Repairs and maintenance are charged to operations as
incurred, and expenditures for additions and improvements are capitalized.
During 1998, the Company adopted Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which requires capitalization of certain development costs of
software to be used internally. The adoption of this statement did not have a
material effect on the Company's financial condition or results of operations.
Included in other assets are permanent displays amounting to
approximately $129.0 and $107.7 (net of amortization) as of December 31, 1998
and 1997, respectively, which are amortized over 3 to 5 years. In addition, the
Company has included in other assets charges related to the issuance of its
debt instruments amounting to approximately $23.6 and $20.5 (net of
amortization) as of December 31, 1998 and 1997, respectively, which are
amortized over the term of the debt instruments.
INTANGIBLE ASSETS RELATED TO BUSINESSES ACQUIRED:
Intangible assets related to businesses acquired principally represent
goodwill, the majority of 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 $115.6 and $104.2 at December 31, 1998 and
1997, 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.
F-8
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 Notes 13 and 16.
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.
The Company accounts for benefits such as severance, disability and
health insurance provided to former employees prior to their retirement, if
estimable, on a terminal basis in accordance with the provisions of SFAS No.5,
"Accounting for Contingencies," as amended by SFAS No. 112, "Employers'
Accounting for Postemployment Benefits," 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.
RESEARCH AND DEVELOPMENT:
Research and development expenditures are expensed as incurred. The
amounts charged against earnings in 1998, 1997 and 1996 were $31.9, $29.7 and
$26.3, 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-hyperinflationary economies are recorded as a component of stockholders'
deficiency. Foreign subsidiaries and branches operating in hyperinflationary
economies translate nonmonetary assets and liabilities at historical rates and
include translation adjustments in the results of operations.
Effective January 1997, the Company's operations in Mexico have been
accounted for as operating in a hyperinflationary economy. Effective January 1,
1999, Mexico will no longer be considered a hyperinflationary economy.
Effective July 1997, the Company's operations in Brazil have been accounted for
as is required for a non-hyperinflationary economy. The impact of the changes
in accounting for Brazil and Mexico were not material to the Company's
operating results in 1997.
F-9
SALE OF SUBSIDIARY STOCK:
The Company recognizes gains and losses on sales of subsidiary stock
in its Consolidated Statements of Operations.
BASIC AND DILUTED (LOSS) INCOME PER COMMON SHARE AND CLASSES OF STOCK:
The basic (loss) income per common share has been computed based upon
the weighted average number of shares of common stock outstanding. Diluted
(loss) income per common share has been computed based upon the weighted
average number of shares of common stock outstanding and shares that would have
been outstanding assuming the issuance of common stock for all dilutive
potential common stock outstanding. The Company's outstanding stock options
represent the only potential dilutive common stock outstanding. The amounts of
(loss) income used in the calculations of diluted and basic (loss) income per
common share were the same for all years presented. The number of shares used
in the calculation of diluted (loss) income per common share for 1998 does not
include any incremental shares that would have been outstanding assuming the
exercise of stock options because the effect of those incremental shares would
have been antidilutive. The number of shares used in the calculation of diluted
(loss) income per common share for 1997 and 1996 increased by 412,878 and
131,292 shares, respectively, to give effect to outstanding stock options.
Basic and diluted (loss) income per common share calculations assume
that 42,500,000 shares of Common Stock (as defined below) had been outstanding
for all periods presented prior to the consummation of the Company's initial
public equity offering on March 5, 1996 (the "Revlon IPO"), in which each of
the outstanding shares of the Company's common stock in existence at that time
was converted 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 Revlon IPO. In
connection with the Revlon IPO, the Company issued and sold 8,625,000 shares of
its Class A Common Stock. Such shares were included in the Company's basic
weighted average number of shares outstanding from March 5, 1996.
The Class A Common Stock and Class B Common Stock vote as a single
class on all matters, except as otherwise required by law, with each share of
Class A Common Stock entitling its holder to one vote and each share of the
Class B Common Stock entitling its holder to ten votes. All of the shares of
the Class B Common Stock are owned by REV Holdings Inc. ("REV Holdings"), an
indirect wholly owned subsidiary of Mafco Holdings. Mafco Holdings beneficially
owns shares of Common Stock having approximately 97.4% of the combined voting
power of the outstanding shares of Common Stock. The holders of the Company's
two classes of common stock are entitled to share equally in the earnings of
the Company from dividends, when and if declared by the Board.
The Company designated 1,000 shares of Preferred Stock as the Series A
Preferred Stock, of which 546 shares are outstanding and held by REV Holdings.
The holder of Series A Preferred Stock is not entitled to receive any
dividends. The Series A Preferred Stock is entitled to a liquidation preference
of $100,000 per share before any distribution is made to the holders of Common
Stock. The holder of the Series A Preferred Stock does not have any voting
rights, except as required by law. The Series A Preferred Stock may be redeemed
at any time by the Company, at its option, for $100,000 per share. However, the
terms of Products Corporation's various debt agreements currently restrict
Revlon, Inc.'s ability to effect such redemption by generally restricting the
amount of dividends or distributions Products Corporation can pay to Revlon,
Inc.
F-10
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 interpretation. 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 15).
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 or until repayment of
the hedged indebtedness. Unrealized gains and losses on outstanding contracts
designated as hedges are not recognized.
Gains and losses on contracts designated 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 foreign currency
contracts are included in income currently. Transaction gains and losses have
not been material.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The effect of adopting the statement and the date of such
adoption by the Company have not yet been determined.
2. DISCONTINUED OPERATIONS
During 1998, the Company completed the disposition of its
approximately 85% equity interest in The Cosmetic Center, Inc. (the "Cosmetic
Center"), along with certain amounts due from Cosmetic Center to the Company
for working capital and inventory, to a newly formed limited partnership
controlled by an unrelated third party. The Company received a minority limited
partnership interest in the limited partnership as consideration for the
disposition. Based upon the Company's expectation that it will receive no
future cash flows from the limited partnership, as well as other factors, the
Company has assigned no value to such interest. As a result, the Company
recorded a loss on disposal of $47.7 during 1998. All prior periods have been
restated to reflect the results of operations of Cosmetic Center as
discontinued operations. As of December 31, 1997, the net assets of the
discontinued operations consisted primarily of inventory and intangible assets,
offset by liabilities, including third party debt and minority interest.
3. EXTRAORDINARY ITEMS
The extraordinary item of $51.7 in 1998 resulted primarily from the
write-off of deferred financing costs and payment of call premiums associated
with the redemption of the Senior Notes (as hereinafter defined) and the Senior
Subordinated Notes (as hereinafter defined). The extraordinary item in 1997
resulted from the write-off in the second quarter of 1997 of deferred financing
costs associated with the early extinguishment of borrowings under a prior
credit agreement and costs of approximately $6.3 in connection with the
redemption of Products Corporation's 10 7/8% Sinking Fund Debentures due 2010
(the "Sinking Fund Debentures"). The early extinguishment of borrowings under a
prior credit agreement and the redemption of the Sinking Fund Debentures were
financed by the proceeds from a new credit agreement which became effective in
May 1997 (the "Credit Agreement"). The extraordinary item in 1996 resulted from
the write-off of deferred financing costs associated with the early
extinguishment of borrowings with the net proceeds from the Revlon IPO and
proceeds from a prior credit agreement.
F-11
4. BUSINESS CONSOLIDATION COSTS AND OTHER, NET
In the fourth quarter of 1998 the Company committed to a restructuring
plan to realign and reduce personnel, exit excess leased real estate, realign
and consolidate regional activities, reconfigure certain manufacturing
operations and exit certain product lines. The restructuring also included the
sale of a factory outside the United States. As a result, the Company
recognized a net charge of $42.9, which includes $2.7 charged to cost of sales.
The restructuring included the termination of 720 sales, marketing,
administrative, factory and distribution employees worldwide. By December 31,
1998 the Company had terminated 215 employees.
In the third quarter of 1998 the Company recognized a gain of
approximately $7.1 for the sale of the wigs and hairpieces portion of its
business in the United States.
The cash and noncash elements of the restructuring charge and gains
recorded in 1998 approximate $30.1 and $5.7, respectively.
In 1997 the Company incurred business consolidation costs of $20.6 in
connection with the implementation of its business strategy to rationalize
factory operations. These costs primarily included severance for 415 factory
and administrative employees and other costs related to the rationalization of
certain factory and warehouse operations worldwide. Such costs were partially
offset by an approximately $12.7 settlement of a claim and related gains of
approximately $4.3 on the sales of certain factory operations outside the
United States. As of December 31, 1998 and 1997 the Company had terminated 415
and 200 employees, respectively, relating to the 1997 charge.
Details of the charges are as follows:
BALANCE (UTILIZED) RECEIVED
BEGINNING EXPENSE ------------------- BALANCE
OF YEAR (INCOME) CASH NONCASH END OF YEAR
--------- -------- -------- ------- -----------
1998
- ------------------------------------
Employee severance and termination
benefits ........................... $ 7.8 $ 26.6 $(9.5) $ -- $24.9
Factory, warehouse and
office costs ....................... 3.2 14.9 (2.4) (3.6) 12.1
Sale of assets ...................... -- (8.4) 8.4 -- --
Other (expense included in cost of
sales) ............................. -- 2.7 -- (2.7) --
--------- -------- -------- ------- -----------
$11.0 $ 35.8 $(3.5) $(6.3) $37.0
========= ======== ======== ======= ===========
1997
- ------------------------------------
Employee severance and termination
benefits ........................... $ -- $ 14.2 $(6.4) $ -- $ 7.8
Factory, warehouse and office costs -- 6.4 (1.2) (2.0) 3.2
Sale of assets ...................... -- (4.3) 4.3 -- --
Settlement of claim ................. -- (12.7) 12.7 -- --
--------- -------- -------- ------- -----------
$ -- $ 3.6 $ 9.4 $(2.0) $11.0
========= ======== ======== ======= ===========
F-12
5. ACQUISITIONS
In 1998 and 1997 the Company consummated acquisitions for a combined
purchase price of $62.6 and $51.6 (excluding the acquisition of Cosmetic
Center), respectively, with resulting goodwill of $63.7 and $35.8,
respectively. These acquisitions were not significant to the Company's results
of operations. Acquisitions consummated in 1996 were also not significant to
the Company's results of operations.
6. INVENTORIES
DECEMBER 31,
--------------------
1998 1997
--------- ---------
Raw materials and supplies ............................ $ 78.2 $ 82.6
Work-in-process........................................ 14.4 14.9
Finished goods......................................... 171.5 163.2
--------- ---------
$ 264.1 $ 260.7
========= =========
7. PREPAID EXPENSES AND OTHER
DECEMBER 31,
--------------------
1998 1997
--------- ---------
Prepaid expenses....................................... $ 42.4 $ 40.7
Other.................................................. 27.5 53.7
--------- ---------
$ 69.9 $ 94.4
========= =========
8. PROPERTY, PLANT AND EQUIPMENT, NET
DECEMBER 31,
--------------------
1998 1997
--------- ---------
Land and improvements.................................. $ 33.8 $ 32.5
Buildings and improvements............................. 197.3 193.2
Machinery and equipment................................ 216.8 203.5
Office furniture and fixtures and capitalized
software.............................................. 88.5 73.9
Leasehold improvements................................. 37.2 37.5
Construction-in-progress............................... 36.9 30.6
--------- ---------
610.5 571.2
Accumulated depreciation............................... (231.6) (207.2)
--------- ---------
$ 378.9 $ 364.0
========= =========
Depreciation expense for the years ended December 31, 1998, 1997 and
1996 was $40.5, $38.4 and $37.0, respectively.
F-13
9. ACCRUED EXPENSES AND OTHER
DECEMBER 31,
------------------
1998 1997
-------- --------
Advertising and promotional costs and accrual for sales
returns........................................................ $158.3 $147.1
Compensation and related benefits............................... 68.6 73.5
Interest........................................................ 39.4 32.1
Taxes, other than federal income taxes.......................... 27.5 30.2
Restructuring and business consolidation costs.................. 27.1 18.2
Other........................................................... 68.8 54.9
-------- --------
$389.7 $356.0
======== ========
10. SHORT-TERM BORROWINGS
Products Corporation maintained short-term bank lines of credit at
December 31, 1998 and 1997 aggregating approximately $88.3 and $82.3,
respectively, of which approximately $27.9 and $42.7 were outstanding at
December 31, 1998 and 1997, respectively. Interest rates on amounts borrowed
under such short-term lines at December 31, 1998 and 1997 varied from 2.9% to
8.6% and from 2.5% to 12.0%, respectively, excluding Latin American countries
in which the Company had outstanding borrowings of approximately $3.5 and $7.5
at December 31, 1998 and 1997, respectively. Compensating balances at December
31, 1998 and 1997 were approximately $5.1 and $6.2, respectively. Interest
rates on compensating balances at December 31, 1998 and 1997 varied from 3.3%
to 5.0% and 0.4% to 8.1%, respectively.
11. LONG-TERM DEBT
DECEMBER 31,
---------------------
1998 1997
---------- ---------
Working capital lines (a)...................... $ 272.2 $ 344.6
Bank mortgage loan agreement due 2000 (b) ..... 13.6 33.3
9 1/2% Senior Notes due 1999 (c)............... 200.0 200.0
9 3/8 % Senior Notes due 2001 (d).............. -- 260.0
8 1/8 % Senior Notes due 2006 (e).............. 249.3 --
9 % Senior Notes due 2006 (f).................. 250.0 --
10 1/2% Senior Subordinated Notes due 2003 (g). -- 555.0
8 5/8% Senior Subordinated Notes due 2008 (h) . 649.8 --
Advances from Holdings (i)..................... 24.1 30.9
Notes payable due through 2004 (7.2%) ......... 1.0 1.4
---------- ---------
1,660.0 1,425.2
Less current portion........................... (6.0) (5.5)
---------- ---------
$1,654.0 $1,419.7
========== =========
(a) In May 1997, Products Corporation entered into the Credit
Agreement with a syndicate of lenders, whose individual members change from
time to time. The proceeds of loans made under the Credit Agreement were used
to repay the loans outstanding under the credit agreement in effect at that
time and to redeem the Sinking Fund Debentures.
The Credit Agreement provides up to $749.0 and is comprised of five
senior secured facilities: $199.0 in two term loan facilities (the "Term Loan
Facilities"), a $300.0 multi-currency facility (the "Multi-Currency Facility"),
a $200.0 revolving acquisition facility, which may be increased to $400.0 under
certain circumstances with the consent of a majority of the lenders (the
"Acquisition Facility"), and a $50.0 special standby letter of credit facility
(the "Special LC Facility" and together with the Term Loan Facilities, 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
F-14
loans and bankers' acceptances denominated in U.S. dollars and other currencies
(the "Local Loans"). At December 31, 1998, Products Corporation had
approximately $199.0 outstanding under the Term Loan Facilities, $9.7
outstanding under the Multi-Currency Facility, $63.5 outstanding under the
Acquisition Facility and $29.0 of issued but undrawn letters of credit under
the Special LC Facility.
The Credit Facilities (other than loans in foreign currencies) bear
interest as of December 31, 1998 at a rate equal to, at Products Corporation's
option, either (A) the Alternate Base Rate plus 1.75% (or 2.75% for Local
Loans); or (B) the Eurodollar Rate plus 2.75%. Loans in foreign currencies bear
interest as of December 31, 1998 at a rate equal to the Eurocurrency Rate or,
in the case of Local Loans, the local lender rate, in each case plus 2.75%. The
applicable margin is reduced in the event Products Corporation attains certain
leverage ratios. Products Corporation pays the lender a commitment fee as of
December 31, 1998 of 1/2 of 1% of the unused portion of the Credit Facilities.
Under the Multi-Currency Facility, the Company pays the lenders an
administrative fee of 1/4% per annum on the aggregate principal amount of
specified Local Loans. 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 in
the aggregate during the term with respect to certain specified dispositions),
subject to certain limited exceptions, (ii) certain proceeds from the sales of
collateral security granted to the lenders, (iii) the net proceeds from the
issuance by Products Corporation or any of its subsidiaries of certain
additional debt, (iv) 50% of the excess cash flow of Products Corporation and
its subsidiaries (unless certain leverage ratios are attained) and (v) certain
scheduled reductions in the case of the Term Loan Facilities, which commenced
on May 31, 1998 in the aggregate amount of $1.0 annually over the remaining
life of the Credit Agreement, and in the case of the Acquisition Facility,
which will commence on December 31, 1999 in the amount of $25.0 and in the
amounts of $60.0 during 2000, $90.0 during 2001 and $25.0 during 2002 (which
reductions will be proportionately increased if the Acquisition Facility is
increased). The Credit Agreement will terminate on May 30, 2002. The weighted
average interest rates on the Term Loan Facilities, the Multi-Currency Facility
and the Acquisition Facility were 8.1%, 9.2% and 8.7% per annum for 1998,
respectively, and 7.1%, 5.4% and 5.7% for 1997, respectively.
The Credit Facilities, subject to certain exceptions and limitations,
are supported by guarantees from Holdings and certain of its subsidiaries,
Revlon, Inc., Products Corporation 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 (until its disposition in August 1998) and Products Corporation's
Phoenix, Arizona facility; (ii) the capital stock of Products Corporation and
its domestic subsidiaries, 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, such as interest
rate hedging obligations, working capital lines and a subsidiary of Products
Corporation's yen-denominated credit agreement.
The Credit Agreement contains various material restrictive covenants
prohibiting Products Corporation from (i) incurring additional indebtedness or
guarantees, with certain exceptions, (ii) making dividend, tax sharing and
other payments or loans to Revlon, Inc. or other affiliates, with certain
exceptions, including among others, permitting Products Corporation to pay
dividends and make distributions to Revlon, Inc., among other things, to enable
Revlon, Inc. to pay expenses incidental to being a public holding company,
including, among other things, professional fees such as legal and accounting,
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 in certain circumstances to
finance the purchase by Revlon, Inc. of its common stock in connection with the
delivery of such common stock to grantees under any stock option plan, provided
that the aggregate amount of such dividends and distributions taken together
with any purchases of Revlon, Inc. common stock on the market to satisfy
matching obligations under an excess savings plan may not exceed $6.0 per
annum, (iii) creating liens or other encumbrances on their assets or revenues,
granting negative pledges or selling or
F-15
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 financial covenants
requiring Products Corporation to maintain minimum interest coverage and
covenants which limit the leverage ratio of Products Corporation and the amount
of capital expenditures.
The events of default under the Credit Agreement include a Change of
Control (as defined in the Credit Agreement) of Products Corporation, the
acceleration of, or certain payment defaults under, indebtedness of REV
Holdings in excess of $0.5, and other customary events of default for such
types of agreements.
In December 1998, Products Corporation amended the Credit Agreement to
modify the terms of certain of the financial ratios and tests to account for,
among other things, the expected charges in connection with the Company's
restructuring effort. In addition, the amendment increased the applicable
margin to the levels set forth in the description above and provides that
Products Corporation may use the proceeds of the Acquisition Facility for
general corporate purposes as well as for acquisitions.
(b) The Pacific Finance & Development Corp., a subsidiary of Products
Corporation, is the borrower under a yen-denominated credit agreement (the "Yen
Credit Agreement"), which had a principal balance of approximately (Yen)1.5
billion as of December 31, 1998 (approximately $13.6 U.S. dollar equivalent as
of December 31, 1998) (after giving effect to the repayment described below).
Approximately (Yen)539 million (approximately $4.2 U.S. dollar equivalent) was
paid in March 1998, approximately (Yen)539 million (approximately $4.7 U.S.
dollar equivalent as of December 31, 1998) is due in each of March 1999 and
2000 and approximately (Yen)474 million (approximately $4.2 U.S. dollar
equivalent as of December 31, 1998) is due on December 31, 2000. On December
10, 1998, in connection with the disposition of the stock of Cosmetic Center,
which had served as collateral under the Yen Credit Agreement, Products
Corporation repaid (Yen)2.22 billion (approximately $19.0 U.S. dollar
equivalent as of December 10, 1998) principal amount. The applicable interest
rate at December 31, 1998 under the Yen Credit Agreement was the Euro-Yen rate
plus 2.75%, which approximated 3.5%. The interest rate at December 31, 1997 was
the Euro-Yen rate plus 1.25%, which approximated 1.9%.
(c) The 9 1/2% Senior Notes due 1999 (the "1999 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 Notes (the "1999 Notes Indenture")). The 1999 Notes bear
interest at 9 1/2% per annum. Interest is payable on June 1 and December 1.
The 1999 Notes may not be redeemed prior to maturity. Upon a Change of
Control (as defined in the 1999 Notes Indenture) and subject to certain
conditions, each holder of 1999 Notes will have the right to require Products
Corporation to repurchase all or a portion of such holder's 1999 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 Notes Indenture), Products
Corporation will be obligated to make offers to purchase the 1999 Notes.
The 1999 Notes 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 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 Notes Indenture permits Products Corporation to pay dividends and
make distributions to Revlon, Inc., among other things, to enable Revlon, Inc.
to pay expenses incidental to being a public holding company, including, among
other things, professional fees such as legal and accounting, 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 (subject to allowable increases) in certain circumstances to
finance the purchase by Revlon, Inc. of its Class A Common Stock in connection
with the delivery of such Class A Common Stock to grantees under any stock
option plan, (v) the sale of assets and subsidiary stock, (vi) transactions
F-16
with affiliates and (vii) consolidations, mergers and transfers of all or
substantially all of Products Corporation's assets. The 1999 Notes Indenture
also prohibits certain restrictions on distributions from subsidiaries. All of
these limitations and prohibitions, however, are subject to a number of
important qualifications.
On November 6, 1998, Products Corporation issued and sold in a private
placement $250.0 aggregate principal amount of 9% Senior Notes due 2006 (the "9%
Notes"), receiving net proceeds of $247.2. Products Corporation intends to use
$200.0 of the net proceeds from the sale of the 9% Notes to refinance the 1999
Notes, including through open market purchases. Such proceeds have temporarily
been used to reduce borrowings under the Credit Agreement. As a result of the
refinancing, the Company has classified the 1999 Notes as "Long-term debt-third
parties" in its consolidated balance sheet as of December 31, 1998. On
January 22, 1999, Products Corporation filed a registration statement with the
Commission with respect to an offer to exchange the 9% Notes for registered
notes with substantially identical terms (the "Exchange Offer"). The Exchange
Offer will expire on February 24, 1999, unless extended.
(d) During 1998 Products Corporation redeemed the 9 3/8% Senior Notes
due 2001 with proceeds from the sale of the 8 1/8 % Notes due 2006 (the "8 1/8%
Notes") and 8 5/8% Notes due 2008 (the "8 5/8% Notes").
(e) The 8 1/8% Notes are senior unsecured obligations of Products
Corporation and rank pari passu in right of payment with all existing and
future Senior Debt (as defined in the indenture relating to the 8 1/8% Notes
(the "8 1/8% Notes Indenture")) of Products Corporation, including the 1999
Notes until the maturity or earlier retirement thereof, the 9% Notes and the
indebtedness under the Credit Agreement, and are senior to the 8 5/8% Notes and
to all future subordinated indebtedness of Products Corporation. The 8 1/8%
Notes are effectively subordinated to the outstanding indebtedness and other
liabilities of Products Corporation's subsidiaries. Interest is payable on
February 1 and August 1.
The 8 1/8% Notes may be redeemed at the option of Products Corporation
in whole or from time to time in part at any time on or after February 1, 2002
at the redemption prices set forth in the 8 1/8% Notes Indenture plus accrued
and unpaid interest, if any, to the date of redemption. In addition, at any
time prior to February 1, 2001, Products Corporation may redeem up to 35% of
the aggregate principal amount of the 8 1/8% Notes originally issued at a
redemption price of 108 1/8% of the principal amount thereof, plus accrued and
unpaid interest, if any, thereon to the date fixed for redemption, with, and to
the extent Products Corporation receives, the net cash proceeds of one or more
Public Equity Offerings (as defined in the 8 1/8% Notes Indenture), provided
that at least $162.5 aggregate principal amount of the 8 1/8% Notes remains
outstanding immediately after the occurrence of each such redemption.
Upon a Change of Control (as defined in the 8 1/8% Notes Indenture),
Products Corporation will have the option to redeem the 8 1/8% Notes in whole
at a redemption price equal to the principal amount thereof, plus accrued and
unpaid interest, if any, thereon to the date of redemption plus the Applicable
Premium (as defined in the 8 1/8% Notes Indenture) and, subject to certain
conditions, each holder of the 8 1/8% Notes will have the right to require
Products Corporation to repurchase all or a portion of such holder's 8 1/8%
Notes at a price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest, if any, thereon to the date of repurchase.
The 8 1/8% Notes Indenture contains covenants that, among other
things, limit (i) the issuance of additional debt and redeemable stock by
Products Corporation, (ii) the incurrence of liens, (iii) the issuance of debt
and preferred stock by Products Corporation's subsidiaries, (iv) the payment of
dividends on capital stock of Products Corporation and its subsidiaries and the
redemption of capital stock of Products Corporation and certain subordinated
obligations, (v) the sale of assets and subsidiary stock, (vi) transactions
with affiliates and (vii) consolidations, mergers and transfers of all or
substantially all Products Corporation's assets. The 8 1/8% Notes Indenture
also prohibits certain restrictions on distributions from subsidiaries. All of
these limitations and prohibitions, however, are subject to a number of
important qualifications.
(f) The 9% Notes are senior unsecured obligations of Products
Corporation and rank pari passu in right of payment with all existing and
future Senior Debt (as defined in the indenture relating to the 9% Notes (the
"9% Notes Indenture")) of Products Corporation, including the 1999 Notes until
the maturity or earlier retirement thereof, the 8 1/8% Notes and the
indebtedness under the Credit Agreement, and are senior to the 8 5/8% Notes and
to all future subordinated indebtedness of Products Corporation. The 9% Notes
are effectively subordinated to
F-17
outstanding indebtedness and other liabilities of Products Corporation's
subsidiaries. Interest is payable on May 1 and November 1.
The 9% Notes may be redeemed at the option of Products Corporation in
whole or from time to time in part at any time on or after November 1, 2002 at
the redemption prices set forth in the 9% Notes Indenture plus accrued and
unpaid interest, if any, to the date of redemption. In addition, at any time
prior to November 1, 2001, Products Corporation may redeem up to 35% of the
aggregate principal amount of the 9% Notes originally issued at a redemption
price of 109% of the principal amount thereof, plus accrued and unpaid
interest, if any, thereon to the date fixed for redemption, with, and to the
extent Products Corporation receives, the net cash proceeds of one or more
Public Equity Offerings (as defined in the 9% Notes Indenture), provided that
at least $162.5 aggregate principal amount of the 9% Notes remains outstanding
immediately after the occurrence of each such redemption.
Upon a Change in Control (as defined in the 9% Notes Indenture),
Products Corporation will have the option to redeem the 9% Notes in whole at a
redemption price equal to the principal amount thereof, plus accrued and unpaid
interest, if any, thereon to the date of redemption plus the Applicable Premium
(as defined in the 9% Notes Indenture) and, subject to certain conditions, each
holder of the 9% Notes will have the right to require Products Corporation to
repurchase all or a portion of such holder's 9% Notes at a price equal to 101%
of the principal amount thereof, plus accrued and unpaid interest, if any,
thereon to the date of repurchase.
The 9% Notes Indenture contains covenants that, among other things,
limit (i) the issuance of additional debt and redeemable stock by Products
Corporation, (ii) the incurrence of liens, (iii) the issuance of debt and
preferred stock by Products Corporation's subsidiaries, (iv) the payment of
dividends on capital stock of Products Corporation and its subsidiaries and the
redemption of capital stock of Products Corporation and certain subordinated
obligations, (v) the sale of assets and subsidiary stock, (vi) transactions
with affiliates and (vii) consolidations, mergers and transfers of all or
substantially all Products Corporation's assets. The 9% Notes Indenture also
prohibits certain restrictions on distributions from subsidiaries. All of these
limitations and prohibitions, however, are subject to a number of important
qualifications.
(g) During 1998 Products Corporation redeemed the 10 1/2% Senior
Subordinated Notes due 2003 with proceeds from the sale of the 8 1/8% Notes and
8 5/8% Notes.
(h) The 8 5/8% Notes are general unsecured obligations of Products
Corporation and are (i) subordinate in right of payment to all existing and
future Senior Debt (as defined in the indenture relating to the 8 5/8% Notes
(the "8 5/8% Notes Indenture")) of Products Corporation, including the 1999
Notes until the maturity or earlier retirement thereof, the 9% Notes, the 8
1/8% Notes and the indebtedness under the Credit Agreement, (ii) pari passu in
right of payment with all future senior subordinated debt, if any, of Products
Corporation and (iii) senior in right of payment to all future subordinated
debt, if any, of Products Corporation. The 8 5/8% Notes are effectively
subordinated to the outstanding indebtedness and other liabilities of Products
Corporation's subsidiaries. Interest is payable on February 1 and August 1.
The 8 5/8% Notes may be redeemed at the option of Products Corporation
in whole or from time to time in part at any time on or after February 1, 2003
at the redemption prices set forth in the 8 5/8% Notes Indenture plus accrued
and unpaid interest, if any, to the date of redemption. In addition, at any
time prior to February 1, 2001, Products Corporation may redeem up to 35% of
the aggregate principal amount of the 8 5/8% Notes originally issued at a
redemption price of 108 5/8% of the principal amount thereof, plus accrued and
unpaid interest, if any, thereon to the date fixed for redemption, with, and to
the extent Products Corporation receives, the net cash proceeds of one or more
Public Equity Offerings (as defined in the 8 5/8% Notes Indenture), provided
that at least $422.5 aggregate principal amount of the 8 5/8% Notes remains
outstanding immediately after the occurrence of each such redemption.
Upon a Change of Control (as defined in the 8 5/8% Notes Indenture),
Products Corporation will have the option to redeem the 8 5/8% Notes in whole
at a redemption price equal to the principal amount thereof, plus accrued and
unpaid interest, if any, thereon to the date of redemption plus the Applicable
Premium (as defined in the 8 5/8% Notes Indenture) and, subject to certain
conditions, each holder of the 8 5/8% Notes will have the right
F-18
to require Products Corporation to repurchase all or a portion of such holder's
8 5/8% Notes at a price equal to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, thereon to the date of repurchase.
The 8 5/8% Notes Indenture contains covenants that, among other
things, limit (i) the issuance of additional debt and redeemable stock by
Products Corporation, (ii) the incurrence of liens, (iii) the issuance of debt
and preferred stock by Products Corporation's subsidiaries, (iv) the payment of
dividends on capital stock of Products Corporation and its subsidiaries and the
redemption of capital stock of Products Corporation, (v) the sale of assets and
subsidiary stock, (vi) transactions with affiliates, (vii) consolidations,
mergers and transfers of all or substantially all Products Corporation's assets
and (viii) the issuance of additional subordinated debt that is senior in right
of payment to the 8 5/8% Notes. The 8 5/8% Notes Indenture also prohibits
certain restrictions on distributions from subsidiaries. All of these
limitations and prohibitions, however, are subject to a number of important
qualifications.
The 1999 Notes Indenture, the 8 1/8% Notes Indenture, the 8 5/8% Notes
Indenture and the 9% Notes Indenture contain customary events of default for
debt instruments of such type.
(i) During 1992, Holdings made an advance of $25.0 to Products
Corporation, evidenced by subordinated noninterest-bearing demand notes. The
notes were subsequently adjusted by offsets of amounts due from Holdings to
Products Corporation, and additional amounts loaned by Holdings to Products
Corporation, such that the amount outstanding under the notes was $41.3 as of
December 31, 1995. In June 1996, $10.9 in notes due to Products Corporation from
Holdings under the Financing Reimbursement Agreement was offset against the
notes. In June 1997, Products Corporation borrowed from Holdings approximately
$0.5, representing certain amounts received by Holdings from the sale of a brand
and the inventory relating thereto. In 1998, approximately $6.8 due to Products
Corporation from Holdings was offset against the notes payable to Holdings. At
December 31, 1998 the balance of $24.1 is evidenced by noninterest-bearing
promissory notes payable to Holdings that are subordinated to Products
Corporation's obligations under the Credit Agreement.
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, 1998 or 1997.
The aggregate amounts of long-term debt maturities (at December 31,
1998), in the years 1999 through 2003 are $206.0, $10.2, $39.8, $254.8 and $0,
respectively, and $1,149.2 thereafter.
12. FINANCIAL INSTRUMENTS
As of December 31, 1997, Products Corporation was party to a series of
interest rate swap agreements 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 LIBOR 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.
Products Corporation terminated these agreements in January 1998 and realized a
gain of approximately $1.6, which was recognized upon repayment of the hedged
indebtedness and is included in the extraordinary item for the early
extinguishment of debt. Certain other swap agreements were terminated in 1993
for a gain of $14.0 that was amortized over the original lives of the
agreements through 1997. The amortization of the 1993 realized gain in 1997 and
1996 was approximately $3.1 and $3.2, respectively.
Products Corporation enters into forward foreign exchange contracts
and option contracts from time to time to hedge certain cash flows denominated
in foreign currencies. At December 31, 1998 and 1997, Products Corporation had
outstanding forward foreign exchange contracts denominated in various
currencies of approximately $197.5 and $90.1, respectively, and outstanding
option contracts of approximately $51.0 and $94.9, respectively. Such contracts
are entered into to hedge transactions predominantly occurring within twelve
months. If Products Corporation had terminated these contracts on December 31,
1998 and 1997 or the contracts then outstanding on December 31, 1996, no
material gain or loss would have been realized.
F-19
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, 1998 and 1997 was approximately $(63.1) and
$39.0 (less) more than the carrying value of $1,660.0 and $1,425.2,
respectively. 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 $30.7 and $40.6 (including
amounts available under credit agreements in effect at that time) were
maintained at December 31, 1998 and 1997, respectively. Included in these
amounts are $26.9 and $27.7, respectively, in standby letters of credit, which
support Products Corporation's self-insurance programs. The estimated liability
under such programs is accrued by Products Corporation.
The carrying amounts of cash and cash equivalents, marketable
securities, trade receivables, accounts payable and short-term borrowings
approximate their fair values.
13. INCOME TAXES
In June 1992, Holdings, Revlon, Inc. and certain of its subsidiaries,
and Mafco Holdings entered into a tax sharing agreement (as subsequently
amended, the "Tax Sharing Agreement"), pursuant to which Mafco Holdings has
agreed to indemnify Revlon, Inc. against federal, state or local income tax
liabilities of the consolidated or combined group of which Mafco Holdings (or a
subsidiary of Mafco Holdings other than Revlon, Inc. or its subsidiaries) is
the common parent for taxable periods beginning on or after January 1, 1992
during which Revlon, Inc. or a subsidiary of Revlon, Inc. is a member of such
group. Pursuant to the Tax Sharing Agreement, for all taxable periods beginning
on or after January 1, 1992, Revlon, Inc. will pay to Holdings amounts equal to
the taxes that Revlon, Inc. would otherwise have to pay if it were to file
separate federal, state or local income tax returns (including any amounts
determined to be due as a result of a redetermination arising from an audit or
otherwise of the consolidated or combined tax liability relating to any such
period which is attributable to Revlon, Inc.), except that Revlon, Inc. will
not be entitled to carry back any losses to taxable periods ending prior to
January 1, 1992. No payments are required by Revlon, Inc. if and to the extent
that Products Corporation is prohibited under the Credit Agreement from making
tax sharing payments to Revlon, Inc. The Credit Agreement prohibits Products
Corporation from making any tax sharing payments other than in respect of state
and local income taxes. Since the payments to be made by Revlon, Inc. under the
Tax Sharing Agreement will be determined by the amount of taxes that Revlon,
Inc. would otherwise have to pay if it were to file separate federal, state or
local income tax returns, the Tax Sharing Agreement will benefit Mafco Holdings
to the extent Mafco Holdings can offset the taxable income generated by Revlon,
Inc. against losses and tax credits generated by Mafco Holdings and its other
subsidiaries. As a result of net operating tax losses and prohibitions under
the Credit Agreement there were no federal tax payments or payments in lieu of
taxes pursuant to the Tax Sharing Agreement for 1998, 1997 or 1996. The Company
has a liability of $0.9 to Holdings in respect of federal taxes for 1997 under
the Tax Sharing Agreement.
Pursuant to the asset transfer agreement referred to in Note 16,
Products Corporation assumed all tax liabilities of Holdings other than (i)
certain income tax liabilities arising prior to January 1, 1992 to the extent
such liabilities exceeded reserves on Holdings' books as of January 1, 1992 or
were not of the nature reserved for and (ii) other tax liabilities to the
extent such liabilities are related to the business and assets retained by
Holdings.
F-20
The Company's (loss) income from continuing operations before income
taxes and the applicable provision (benefit) for income taxes are as follows:
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996
--------- -------- -------
(Loss) income from continuing operations before income
taxes:
Domestic.................................................... $ 15.3 $ 82.6 $ 9.4
Foreign..................................................... (37.6) (15.5) 40.5
--------- -------- -------
$(22.3) $ 67.1 $49.9
========= ======== =======
Provision (benefit) for income taxes:
Federal..................................................... $ -- $ 0.9 $ --
State and local............................................. 0.6 1.1 1.2
Foreign..................................................... 4.4 7.3 24.3
--------- -------- -------
$ 5.0 $ 9.3 $25.5
========= ======== =======
Current..................................................... $ 12.1 $ 31.9 $22.7
Deferred.................................................... (0.3) 10.4 6.6
Benefits of operating loss carryforwards.................... (7.7) (34.1) (4.7)
Carryforward utilization applied to goodwill................ 0.5 1.1 1.0
Effect of enacted change of tax rates....................... 0.4 -- (0.1)
--------- -------- -------
$ 5.0 $ 9.3 $25.5
========= ======== =======
The effective tax rate on (loss) income from continuing operations
before income taxes is reconciled to the applicable statutory federal income
tax rate as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
--------- -------- --------
Statutory federal income tax rate.............................. (35.0)% 35.0 % 35.0 %
State and local taxes, net of federal income tax benefit....... 1.7 1.1 1.6
Foreign and U.S. tax effects attributable to operations
outside the U.S............................................... 75.1 13.4 36.2
Tax write-off of U.S. investment in foreign subsidiary......... (232.9) -- --
Nondeductible amortization expense............................. 13.5 4.5 5.9
Change in domestic valuation allowance......................... 200.3 (43.5) (29.7)
Other.......................................................... (0.3) 3.4 2.1
--------- -------- --------
Effective rate................................................. 22.4 % 13.9 % 51.1 %
========= ======== ========
F-21
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1998 and 1997 are presented below:
DECEMBER 31,
--------------------
1998 1997
--------- ---------
Deferred tax assets:
Accounts receivable, principally due to doubtful accounts ..... $ 4.2 $ 3.3
Inventories.................................................... 12.1 10.5
Net operating loss carryforwards-domestic...................... 190.3 107.6
Net operating loss carryforwards-foreign....................... 111.0 100.1
Accruals and related reserves.................................. 22.6 9.4
Employee benefits.............................................. 32.5 28.7
State and local taxes.......................................... 13.1 13.1
Self-insurance................................................. 2.2 3.8
Advertising, sales discounts and returns and coupon
redemptions................................................... 30.5 26.0
Other.......................................................... 27.5 25.3
--------- ---------
Total gross deferred tax assets............................... 446.0 327.8
Less valuation allowance...................................... (383.0) (280.1)
--------- ---------
Net deferred tax assets....................................... 63.0 47.7
Deferred tax liabilities:
Plant, equipment and other assets.............................. (58.4) (50.8)
Other.......................................................... (8.2) (5.5)
--------- ---------
Total gross deferred tax liabilities.......................... (66.6) (56.3)
--------- ---------
Net deferred tax liability.................................... $ (3.6) $ (8.6)
========= =========
The valuation allowance for deferred tax assets at January 1, 1998 was
$280.1. The valuation allowance increased by $102.9 during 1998 and decreased
by $54.0 and $9.9 during 1997 and 1996, respectively.
During 1998, 1997 and 1996, certain of the Company's foreign
subsidiaries used operating loss carryforwards to credit the current provision
for income taxes by $2.4, $4.0, and $4.7, respectively. Certain other foreign
operations generated losses during 1998, 1997 and 1996 for which the potential
tax benefit was reduced by a valuation allowance. During 1998 and 1997, the
Company used domestic operating loss carryforwards to credit the deferred
provision for income taxes by $5.3 and $12.0, respectively. During 1997, the
Company applied domestic operating loss carryforwards to credit the current
provision for income taxes by $18.1. At December 31, 1998, the Company had tax
loss carryforwards of approximately $830.4 as compared with $581.3 at December
31, 1997. The increase in 1998 is primarily related to a substantial increase
in the domestic net operating loss carryforwards as a result of the write-off
of the U.S. tax basis of the investment in certain foreign operations. The net
operating losses at December 31, 1998 expire in future years as follows:
1999-$29.9; 2000-$14.2; 2001-$17.1; 2002-$32.5; 2003 and beyond-$593.8;
unlimited-$142.9. The Company could receive the benefit of such tax loss
carryforwards only to the extent it has taxable income during the carryforward
periods in the applicable jurisdictions. In addition, based upon certain
factors, including the amount and nature of gains or losses recognized by Mafco
Holdings and its other subsidiaries included in the consolidated federal income
tax return, the amount of net operating loss carryforwards attributable to
Mafco Holdings and such other subsidiaries and the amounts of alternative
minimum tax liability of Mafco Holdings and such other subsidiaries, pursuant
to the terms of the Tax Sharing Agreement, all or a portion of the domestic
operating loss carryforwards may not be available to the Company should the
Company cease being a member of the Mafco Holdings consolidated federal income
tax return.
F-22
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 $14.3 at December 31, 1998, excluding those
amounts which, if remitted in the near future, would not result in significant
additional taxes under tax statutes currently in effect.
14. POSTRETIREMENT BENEFITS
Pension:
A substantial portion of the Company's employees in the United States
are covered by defined benefit pension plans. The Company uses September 30 as
its measurement date for plan obligations and assets.
Other Postretirement Benefits:
The Company also has sponsored an unfunded retiree benefit plan, which
provides death benefits payable to beneficiaries of certain key employees and
former employees. Participation in this plan is limited to participants
enrolled as of December 31, 1993. The Company also administers a medical
insurance plan on behalf of Holdings, the cost of which has been apportioned to
Holdings. The Company uses September 30 as its measurement date for plan
obligations.
F-23
Information regarding the Company's significant pension and other
postretirement plans at the dates indicated is as follows:
OTHER POSTRETIREMENT
PENSION PLANS BENEFITS
----------------------------- -------------------------
DECEMBER 31,
---------------------------------------------------------
1998 1997 1998 1997
------------- ------------- ----------- -----------
Change in Benefit Obligation:
Benefit obligation - September 30 of prior year ........ $ (364.8) $ (339.5) $ (8.7) $ (8.2)
Service cost ........................................... (12.8) (11.7) (0.1) (0.1)
Interest cost .......................................... (27.0) (26.0) (0.7) (0.7)
Plan amendments ........................................ 0.2 (2.5) -- 0.3
Actuarial loss ......................................... (51.6) (5.9) (0.3) (0.3)
Curtailments ........................................... 0.6 (0.1) -- --
Benefits paid .......................................... 17.6 20.5 0.5 0.3
Foreign exchange ....................................... (0.1) 1.1 -- --
Plan participant contributions ......................... (0.7) (0.7) -- --
---------- ---------- --------- ---------
Benefit obligation - September 30 of current year ...... (438.6) (364.8) (9.3) (8.7)
---------- ---------- --------- ---------
Change in Plan Assets:
Fair value of plan assets - September 30 of prior
year ................................................. 306.9 254.9 -- --
Actual (loss) return on plan assets. ................... (6.5) 58.0 -- --
Employer contributions ................................. 3.5 14.4 0.5 0.3
Plan participant contributions ......................... 0.7 0.7 -- --
Benefits paid .......................................... (17.6) (20.5) (0.5) (0.3)
Foreign exchange ....................................... (1.0) (0.6) -- --
---------- ---------- --------- ---------
Fair value of plan assets - September 30 of current
year ................................................. 286.0 306.9 -- --
---------- ---------- --------- ---------
Funded status of plans .................................. (152.6) (57.9) (9.3) (8.7)
Amounts contributed to plans during fourth quarter. ..... 1.0 0.9 0.1 0.1
Unrecognized net loss (gain) ............................ 96.6 12.9 (1.4) (2.0)
Unrecognized prior service cost ......................... 7.3 9.7 -- --
Unrecognized net (asset) obligation ..................... (0.9) (1.1) -- --
---------- ---------- --------- ---------
Accrued benefit cost ................................... $ (48.6) $ (35.5) $ (10.6) $ (10.6)
========== ========== ========= =========
Amounts recognized in the Consolidated Balance
Sheets consist of:
Prepaid expenses ....................................... $ 8.7 $ 9.6 $ -- $ --
Other long-term liabilities ............................ (98.6) (51.6) (10.6) (10.6)
Intangible asset ....................................... 7.8 1.0 -- --
Accumulated other comprehensive loss ................... 32.5 4.5 -- --
Due from affiliate ..................................... 1.0 1.0 1.7 1.9
---------- ---------- --------- ---------
$ (48.6) $ (35.5) $ (8.9) $ (8.7)
========== ========== ========= =========
F-24
The following weighted-average assumptions were used in accounting for
the plans:
U.S. PLANS INTERNATIONAL PLANS
------------------------------------ ---------------------------------
1998 1997 1996 1998 1997 1996
---------- ---------- ---------- --------- --------- ---------
Discount rate ................................. 6.75% 7.75% 7.75% 6.2% 7.1% 7.9%
Expected return on plan assets ................ 9.0 9.0 9.0 9.6 10.1 10.4
Rate of future compensation increases ......... 5.3 5.3 5.3 4.9 5.3 5.1
The components of net periodic benefit cost for the plans are as
follows:
PENSION PLANS OTHER POSTRETIREMENT BENEFITS
--------------------------------------- ------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ---------- ---------- ----------
Service cost .............................. $ 12.8 $ 11.7 $ 10.6 $ 0.1 $ 0.1 $ 0.1
Interest cost ............................. 27.0 26.0 24.3 0.7 0.7 0.7
Expected return on plan assets ............ (27.4) (23.0) (19.3) -- -- --
Amortization of prior service cost ........ 1.8 1.8 1.7 -- -- --
Amortization of net transition asset ...... (0.2) (0.2) 0.3 -- -- --
Amortization of actuarial loss (gain) ..... 1.0 1.2 2.0 (0.3) (0.2) (0.2)
Settlement loss ........................... -- 0.2 0.3 -- -- --
Curtailment loss .......................... 0.3 0.1 1.0 -- -- --
-------- -------- -------- ------- ------- -------
15.3 17.8 20.9 0.5 0.6 0.6
Portion allocated to Holdings ............. (0.3) (0.3) (0.3) 0.1 0.1 0.1
-------- -------- -------- ------- ------- -------
$ 15.0 $ 17.5 $ 20.6 $ 0.6 $ 0.7 $ 0.7
======== ======== ======== ======= ======= =======
Where the accumulated benefit obligation exceeded the related fair
value of plan assets, the projected benefit obligation, accumulated benefit
obligation, and fair value of plan assets for the Company's pension plans are
as follows:
DECEMBER 31,
-----------------------------------------
1998 1997 1996
------------ ----------- ------------
Projected benefit obligation ........... $ 428.2 $ 55.5 $ 141.4
Accumulated benefit obligation ......... 370.5 45.2 131.4
Fair value of plan assets .............. 276.3 1.9 81.6
15. STOCK COMPENSATION PLAN
Since March 5, 1996, Revlon, Inc. has had a stock-based compensation
plan (the "Plan"), which is described below. Revlon, Inc. applies APB Opinion
No. 25 and its related interpretation in accounting for the Plan. Under APB
Opinion No. 25, because the exercise price of Revlon, Inc.'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 Plan
been determined consistent with SFAS No. 123, Revlon, Inc.'s net (loss) income
and net (loss) income per diluted share of $(143.2) and $(2.80), respectively,
for 1998, $43.6 and $0.85, respectively, for 1997 and $18.2 and $0.37,
respectively, for 1996 would have been changed to the pro forma amounts of
$(166.8) and $(3.25) for 1998, respectively, $31.3 and $0.61, respectively, for
1997 and $15.0 and $0.30, respectively, for 1996. The fair value of each option
grant is estimated on the date of the grant using the Black-Scholes
option-pricing model assuming no dividend yield, expected volatility of
approximately 56% in 1998, 39% in 1997 and 31% in 1996; weighted average
risk-free interest rate of 5.37% in 1998, 6.54% in 1997 and 5.99% in 1996; and
a seven year expected average life for the Plan's options issued in 1998, 1997
and 1996. The effects of applying SFAS No. 123 in this pro forma disclosure are
not necessarily indicative of future amounts.
F-25
Under the Plan, Revlon, Inc. 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 Revlon, Inc. between the second
and third anniversary of the grant 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. Primarily all other option
grants, including options granted to certain executive officers in 1998 and
1997, 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. During each of 1997 and 1998, the Company granted to Mr. Perelman,
Chairman of the Board, options to purchase 300,000 shares of Class A Common
Stock, which grants will vest in full on the fifth anniversary of the grant
dates. At December 31, 1998 and 1997 there were 403,950 and 98,450 options
exercisable under the Plan, respectively. At December 31, 1996 there were no
options exercisable under the Plan.
A summary of the status of the Plan as of December 31, 1998, 1997 and
1996 and changes during the years then ended is presented below:
SHARES WEIGHTED AVERAGE
(000) EXERCISE PRICE
------------ ------------------
Outstanding at February 28, 1996 ......... -- --
Granted .................................. 1,010.2 $ 24.37
Exercised ................................ -- --
Forfeited ................................ (119.1) 24.00
--------
Outstanding at December 31, 1996 ......... 891.1 24.37
Granted .................................. 1,485.5 32.64
Exercised ................................ (12.1) 24.00
Forfeited ................................ (85.1) 29.33
--------
Outstanding at December 31, 1997 ......... 2,279.4 29.57
Granted .................................. 1,707.8 36.65
Exercised ................................ (55.9) 26.83
Forfeited ................................ (166.8) 32.14
--------
Outstanding at December 31, 1998 ......... 3,764.5 32.71
========
The weighted average fair value of each option granted during 1998,
1997 and 1996 approximated $22.26, $16.42 and $11.00, respectively.
The following table summarizes information about the Plan's options
outstanding at December 31, 1998:
DECEMBER 31, 1998
- ---------------------------------------------------------------------
WEIGHTED
RANGE NUMBER AVERAGE WEIGHTED
OF OUTSTANDING YEARS AVERAGE
EXERCISE PRICES (000) REMAINING EXERCISE PRICE
- --------------------------- ------------- ----------- ---------------
$17.13 to $29.88......... 833.2 7.43 $ 23.41
31.38 to 33.88 ......... 1,012.7 8.05 31.41
34.00 to 53.56 ......... 1,918.6 8.95 37.44
-------
17.13 to 53.56 ......... 3,764.5 8.37 32.71
=======
F-26
16. RELATED PARTY TRANSACTIONS
TRANSFER AGREEMENTS
In June 1992, Revlon, Inc. and Products Corporation entered into an
asset transfer agreement with Holdings and certain of its wholly owned
subsidiaries (the "Asset Transfer Agreement"), and Revlon, Inc. and Products
Corporation entered into a real property asset transfer agreement with Holdings
(the "Real Property Transfer Agreement" and, together with the Asset Transfer
Agreement, the "Transfer Agreements"), and pursuant to such agreements, on June
24, 1992 Holdings transferred assets to Products Corporation and Products
Corporation assumed all the liabilities of Holdings, other than certain
specifically excluded assets and liabilities (the liabilities excluded are
referred to as the "Excluded Liabilities"). Holdings retained the Retained
Brands. Holdings agreed to indemnify Revlon, Inc. and Products Corporation
against losses arising from the Excluded Liabilities, and Revlon, Inc. and
Products Corporation agreed to indemnify Holdings against losses arising from
the liabilities assumed by Products Corporation. The amounts reimbursed by
Holdings to Products Corporation for the Excluded Liabilities for 1998, 1997
and 1996 were $0.6, $0.4 and $1.4, respectively.
OPERATING SERVICES AGREEMENT
In June 1992, Revlon, Inc., 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 has manufactured, marketed, distributed, warehoused and
administered, including the collection of accounts receivable, the Retained
Brands for Holdings. Pursuant to the Operating Services Agreement, Products
Corporation was reimbursed an amount equal to all of its and Revlon, Inc.'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 due from Holdings to
Products Corporation for such direct and indirect costs plus a fee equal to 5%
of the net sales of the Retained Brands for 1998, 1997 and 1996 were $0.9
(which amount was offset against certain notes payable to Holdings), $1.7 and
$5.7, respectively.
REIMBURSEMENT AGREEMENTS
Revlon, Inc., Products Corporation and MacAndrews Holdings have
entered into reimbursement agreements (the "Reimbursement Agreements") pursuant
to which (i) MacAndrews Holdings is obligated to provide (directly or through
affiliates) certain professional and administrative services, including
employees, to Revlon, Inc. and its subsidiaries, including Products
Corporation, and purchase services from third party providers, such as
insurance and legal and accounting services, on behalf of Revlon, Inc. and its
subsidiaries, including Products Corporation, to the extent requested by
Products Corporation, and (ii) Products Corporation is obligated to provide
certain professional and administrative services, including employees, to
MacAndrews Holdings (and its affiliates) and purchase services from third party
providers, such as insurance and legal and accounting services, on behalf of
MacAndrews Holdings (and its affiliates) to the extent requested by MacAndrews
Holdings, provided that in each case the performance of such services does not
cause an unreasonable burden to MacAndrews Holdings or Products Corporation, as
the case may be. The Company reimburses MacAndrews Holdings for the allocable
costs of the services purchased for or provided to the Company and its
subsidiaries and for reasonable out-of-pocket expenses incurred in connection
with the provision of such services. MacAndrews Holdings (or such affiliates)
reimburses the Company for the allocable costs of the services purchased for or
provided to MacAndrews Holdings (or such affiliates) and for the reasonable
out-of-pocket expenses incurred in connection with the purchase or provision of
such services. The net amounts reimbursed by MacAndrews Holdings to the Company
for the services provided under the Reimbursement Agreements for 1998, 1997 and
1996 were $3.1 ($0.2 of which was offset against certain notes payable to
Holdings), $4.0 and $2.2, respectively. Each of Revlon, Inc. and Products
Corporation, on the one hand, and MacAndrews Holdings, on the other, has agreed
to indemnify the other party for losses arising out of the provision of
services by it under the Reimbursement Agreements other than losses resulting
from its willful misconduct or gross negligence. The Reimbursement Agreements
may be terminated by either party on 90 days' notice. 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.
F-27
TAX SHARING AGREEMENT
Holdings, Revlon, Inc., Products Corporation and certain of its
subsidiaries and Mafco Holdings are parties to the Tax Sharing Agreement, which
is described in Note 13. Since payments to be made under the Tax Sharing
Agreement will be determined by the amount of taxes that Revlon, Inc. would
otherwise have to pay if it were to file separate federal, state or local
income tax returns, the Tax Sharing Agreement will benefit Mafco Holdings to
the extent Mafco Holdings can offset the taxable income generated by Revlon,
Inc. against losses and tax credits generated by Mafco Holdings and its other
subsidiaries.
FINANCING REIMBURSEMENT AGREEMENT
Holdings and Products Corporation entered into a financing
reimbursement agreement (the "Financing Reimbursement Agreement") in 1992,
which expired on June 30, 1996, 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 certain 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 credit
agreement then in effect (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 credit
agreement then in effect 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. 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 from
Holdings in 1996, under the Financing Reimbursement Agreement was offset
against an $11.7 demand note payable by Products Corporation to Holdings.
REGISTRATION RIGHTS AGREEMENT
Prior to the consummation of the Revlon IPO, Revlon, Inc. and Revlon
Worldwide Corporation (subsequently merged into REV Holdings), the then direct
parent of Revlon, Inc., entered into the Registration Rights Agreement pursuant
to which REV Holdings and certain transferees of Revlon, Inc.'s Common Stock
held by REV Holdings (the "Holders") have the right to require Revlon, Inc. to
register all or part of the Class A Common Stock owned by such Holders and the
Class A Common Stock issuable upon conversion of Revlon, Inc.'s Class B Common
Stock owned by such Holders under the Securities Act of 1933, as amended (a
"Demand Registration"); provided that Revlon, Inc. may postpone giving effect
to a Demand Registration up to a period of 30 days if Revlon, Inc. believes
such registration might have a material adverse effect on any plan or proposal
by Revlon, Inc. with respect to any financing, acquisition, recapitalization,
reorganization or other material transaction, or if Revlon, Inc. is in
possession of material non-public information that, if publicly disclosed,
could result in a material disruption of a major corporate development or
transaction then pending or in progress or in other material adverse
consequences to Revlon, Inc. In addition, the Holders have the right to
participate in registrations by Revlon, Inc. of its Class A Common Stock (a
"Piggyback Registration"). The Holders will pay all out-of-pocket expenses
incurred in connection with any Demand Registration. Revlon, Inc. will pay any
expenses incurred in connection with a Piggyback Registration, except for
underwriting discounts, commissions and expenses attributable to the shares of
Class A Common Stock sold by such Holders.
F-28
OTHER
Pursuant to a lease dated April 2, 1993 (the "Edison Lease"), Holdings
leased to Products Corporation the Edison research and development facility for
a term of up to 10 years with an annual rent of $1.4 and certain shared
operating expenses payable by Products Corporation which, together with the
annual rent, were not to exceed $2.0 per year. 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 was
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 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 1998, 1997 and 1996 Products
Corporation rented from Holdings a portion of the administration building
located at the Edison facility and space for a retail store of Products
Corporation's now discontinued retail operation. Products Corporation provided
certain administrative services, including accounting, for Holdings with
respect to the Edison facility pursuant to which Products Corporation paid on
behalf of Holdings costs associated with the Edison facility and was reimbursed
by Holdings for such costs, less the amount owed by Products Corporation to
Holdings pursuant to the Edison Lease and the occupancy agreement. In August
1998, Holdings sold the Edison facility to an unrelated third party, which
assumed substantially all liability for environmental claims and compliance
costs relating to the Edison facility, and in connection with the sale, Products
Corporation terminated the Edison Lease and entered into a new lease with the
new owner. Holdings agreed to indemnify Products Corporation to the extent rent
under the new lease exceeds rent that would have been payable under the
terminated Edison Lease had it not been terminated. The net amount reimbursed
by Holdings to Products Corporation with respect to the Edison facility for
1998, 1997 and 1996 was $0.5, $0.7 and $1.1, respectively.
During 1997, a subsidiary of Products Corporation sold an inactive
subsidiary to a company that was an affiliate of the Company during 1997 and
part of 1998 for approximately $1.0.
Effective July 1, 1997, Holdings contributed to Products Corporation
substantially all of the assets and liabilities of the Bill Blass business not
already owned by Products Corporation. The contributed assets approximated the
contributed liabilities and were accounted for at historical cost in a manner
similar to that of a pooling of interests and, accordingly, prior period
financial statements were restated as if the contribution took place prior to
the beginning of the earliest period presented.
In the fourth quarter of 1996, a subsidiary of Products Corporation
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.
On February 2, 1998, Revlon Escrow Corp., an affiliate of Products
Corporation, issued and sold in a private placement $650.0 aggregate principal
amount of 8 5/8% Notes and $250.0 aggregate principal amount of 8 1/8% Notes,
with the net proceeds deposited into escrow. The proceeds from the sale of the
8 5/8% and 8 1/8% Notes were used to finance the redemption of Products
Corporation's $555.0 aggregate principal amount of 10 1/2% Senior Subordinated
Notes due 2003 (the "Senior Subordinated Notes") and $260.0 aggregate principal
amount of 9 3/8% Senior Notes due 2001 (the "Senior Notes" and, together with
the Senior Subordinated Notes, the "Old
F-29
Notes"). Products Corporation delivered a redemption notice to the holders of
the Senior Subordinated Notes for the redemption of the Senior Subordinated
Notes on March 4, 1998, at which time Products Corporation assumed the
obligations under the 8 5/8% Notes and the related indenture (the "8 5/8% Notes
Assumption"), and to the holders of the Senior Notes for the redemption of the
Senior Notes on April 1, 1998, at which time Products Corporation assumed the
obligations under the 8 1/8% Notes and the related indenture (the "8 1/8% Notes
Assumption" and, together with the 8 5/8% Notes Assumption, the "Assumption").
A nationally recognized investment banking firm rendered its written opinion
that the Assumption, upon consummation of the redemptions of the Old Notes, and
the subsequent release from escrow to Products Corporation of any remaining net
proceeds from the sale of the 8 5/8% and 8 1/8% Notes are fair from a financial
standpoint to Products Corporation under the 1999 Notes Indenture.
Products Corporation leases certain facilities to MacAndrews & Forbes
or its affiliates pursuant to occupancy agreements and leases. These included
space at Products Corporation's New York headquarters and at Products
Corporation's offices in London during 1998, 1997 and 1996; in Tokyo during
1996 and in Hong Kong during 1997 and the first half of 1998. The rent paid to
Products Corporation for 1998, 1997 and 1996 was $2.9, $3.8 and $4.6,
respectively.
In June 1997, Products Corporation borrowed from Holdings
approximately $0.5, representing certain amounts received by Holdings from the
sale of a brand and inventory relating thereto. 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.
During 1998, approximately $5.7 due to Products Corporation from
Holdings was offset against certain notes payable to Holdings.
Products Corporation's 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)
until the disposition of the Edison facility in August 1998, a mortgage on the
Edison 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, 1998, 1997 or 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 facilities in effect at the time of such
borrowing. The amount of interest paid by Products Corporation for such
borrowings for 1998, 1997 and 1996 was $0.8, $0.6 and $0.5, respectively.
During 1998, the Company made advances of $0.25 and $0.3 to Mr.
Fellows and Ms. Dwyer, respectively. During 1998, the Company made an advance
of $0.4 to Mr. Levin, which advance was repaid in January 1999.
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 Board. 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 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 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 for 1996.
During 1997 and 1996, Products Corporation used an airplane owned by a
corporation of which Messrs. Gittis, Drapkin and, during 1996, Levin, were the
sole stockholders, for which Products Corporation paid approximately $0.2 and
$0.2 for 1997 and 1996, respectively.
During 1998 and 1997, Products Corporation purchased products from a
company that was an affiliate of the
F-30
Company during part of 1998, for which it paid approximately $0.4 and $0.9,
respectively.
During 1997, Products Corporation provided licensing services to a
company that was an affiliate of the Company during 1997 and part of 1998, for
which Products Corporation was paid approximately $0.7 in 1997. In connection
with the termination of the licensing arrangement and its agreement to provide
consulting services during 1998, Products Corporation received payments of $2.0
in 1998 and is entitled to receive an additional $1.0 in 1999.
A company that was an affiliate of the Company during 1996, 1997 and
1998 assembled lipstick cases for Products Corporation. Products Corporation
paid approximately $1.1, $0.9 and $1.0 for such services for 1998, 1997 and
1996, respectively.
17. 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 $43.7, $46.1 and $46.7 for
the years ended December 31, 1998, 1997 and 1996, respectively. Minimum rental
commitments under all noncancelable leases, including those pertaining to idled
facilities, with remaining lease terms in excess of one year from December 31,
1998 aggregated $164.0; such commitments for each of the five years subsequent
to December 31, 1998 are $37.4, $33.4, $27.4, $24.6 and $12.8, respectively.
Such amounts exclude the minimum rentals to be received by the Company in the
future under noncancelable subleases of $5.1.
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-31
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations:
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
Net sales ................................................. $ 497.8 $ 575.3 $ 548.6 $ 630.5
Gross profit .............................................. 334.5 381.3 362.5 408.2
(Loss) income from continuing operations .................. (15.3) 11.7 12.7(a) (36.4)(a)
Loss from discontinued operations ......................... (4.6) (26.9) -- (32.7)
Extraordinary items-early extinguishments of debt ......... (38.2) (13.5) -- --
Net (loss) income ......................................... (58.1) (28.7) 12.7 (69.1)
Basic (loss) income per common share:
(Loss) income from continuing operations ................. $ (0.30) $ 0.23 $ 0.25 $ (0.71)
Loss from discontinued operations ........................ (0.09) (0.53) -- (0.64)
Extraordinary items ...................................... (0.75) (0.26) -- --
--------- --------- --------- ---------
Net (loss) income per common share ....................... $ (1.14) $ (0.56) $ 0.25 $ (1.35)
========= ========= ========= =========
Diluted (loss) income per common share:
(Loss) income from continuing operations ................. $ (0.30) $ 0.22 $ 0.24 $ (0.71)
Loss from discontinued operations ........................ (0.09) (0.51) -- (0.64)
Extraordinary items. ..................................... (0.75) (0.26) -- --
--------- --------- --------- ---------
Net (loss) income per common share ....................... $ (1.14) $ (0.55) $ 0.24 $ (1.35)
========= ========= ========= =========
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
Net sales ................................................. $ 480.0 $ 537.7 $ 581.0 $ 639.9
Gross profit. ............................................. 319.6 356.5 389.3 430.1
(Loss) income from continuing operations .................. (22.6) 8.4 34.6 37.4
(Loss) income from discontinued operations ................ (2.8) 1.0 (1.5) 4.0
Extraordinary items-early extinguishments of debt ......... -- (14.9) -- --
Net (loss) income ......................................... (25.4) (5.5) 33.1 41.4
Basic (loss) income per common share:
(Loss) income from continuing operations ................. $ (0.44) $ 0.16 $ 0.68 $ 0.73
(Loss) income from discontinued operations ............... (0.06) 0.02 (0.03) 0.08
Extraordinary items ...................................... -- (0.29) -- --
--------- --------- --------- ---------
Net (loss) income per common share ....................... $ (0.50) $ (0.11) $ 0.65 $ 0.81
========= ========= ========= =========
Diluted (loss) income per common share:
(Loss) income from continuing operations ................. $ (0.44) $ 0.16 $ 0.67 $ 0.72
(Loss) income from discontinued operations ............... (0.06) 0.02 (0.03) 0.08
Extraordinary items ...................................... -- (0.29) -- --
--------- --------- --------- ---------
Net (loss) income per common share ....................... $ (0.50) $ (0.11) $ 0.64 $ 0.80
========= ========= ========= =========
(a) Includes a non-recurring gain of $7.1 in the third quarter and
non-recurring charges, net, of $42.9 in the fourth quarter (See Note 4).
F-32
19. GEOGRAPHIC INFORMATION
The Company manages its business on the basis of one reportable
operating segment. See Note 1 for a brief description of the Company's
business. As of December 31, 1998, the Company had operations established in 26
countries outside of the United States 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's operations in Brazil have
accounted for approximately 5.4%, 5.8% and 6.3% of the Company's net sales for
1998, 1997 and 1996, respectively. Net sales by geographic area are presented
by attributing revenues from external customers on the basis of where the
products are sold. During 1998, 1997 and 1996, one customer and its affiliates
accounted for approximately 10.1%, 10.3% and 10.5% of the Company's
consolidated net sales, respectively.
YEAR ENDED DECEMBER 31,
GEOGRAPHIC AREAS: ------------------------------------------
1998 1997 1996
Net sales: ---------- ---------- ----------
United States ............................... $ 1,338.5 $ 1,300.2 $ 1,182.3
International ............................... 913.7 938.4 909.8
---------- ---------- ----------
$ 2,252.2 $ 2,238.6 $ 2,092.1
========== ========== ==========
DECEMBER 31,
--------------------------
Long-lived assets: 1998 1997
---------- ----------
United States ............................... $ 637.9 $ 545.4
International ............................... 287.4 280.5
---------- ----------
$ 925.3 $ 825.9
========== ==========
CLASSES OF SIMILAR PRODUCTS: YEAR ENDED DECEMBER 31,
------------------------------------------
Net sales: 1998 1997 1996
---------- ---------- ----------
Cosmetics, skin care and fragrances ......... $ 1,309.7 $ 1,319.6 $ 1,216.3
Personal care and professional .............. 942.5 919.0 875.8
---------- ---------- ----------
$ 2,252.2 $ 2,238.6 $ 2,092.1
========== ========== ==========
F-33
SCHEDULE II
REVLON, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN MILLIONS)
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND OTHER AT END
OF YEAR EXPENSES DEDUCTIONS OF YEAR
------------ ------------ ----------------- ---------
YEAR ENDED DECEMBER 31, 1998:
Applied against asset accounts:
Allowance for doubtful accounts ......... $ 12.0 $ 4.5 $ (2.5)(1) $ 14.0
Allowance for volume and early payment
discounts ............................. $ 13.9 $ 44.8 $ (44.2)(2) $ 14.5
YEAR ENDED DECEMBER 31, 1997:
Applied against asset accounts:
Allowance for doubtful accounts ......... $ 12.9 $ 3.6 $ (4.5)(1) $ 12.0
Allowance for volume and early payment
discounts ............................. $ 12.0 $ 46.8 $ (44.9)(2) $ 13.9
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
- ----------
Notes:
(1) Doubtful accounts written off, less recoveries, reclassifications and
foreign currency translation adjustments.
(2) Discounts taken, reclassifications and foreign currency translation
adjustments.
F-34
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/ Frank J. Gehrmann By: /s/ Lawrence E. Kreider
------------------------------------- ---------------------------------------- ----------------------------------------
George Fellows Frank J. Gehrmann Lawrence E. Kreider
President, Executive Vice Senior Vice
Chief Executive Officer President and President,
and Director Chief Financial Officer Controller and
Chief Accounting Officer
Dated: March 3, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant on
March 3, 1999 and in the capacities indicated.
Signature Title
* Chairman of the Board and Director
- ----------------------------------
(Ronald O. Perelman)
/s/ George Fellows President, Chief Executive Officer and Director
- -----------------------------------
(George Fellows)
* Vice Chairman, Chief Administrative Officer and
- ----------------------------------- Director
(Irwin Engelman)
* Director
- -----------------------------------
(Jerry W. Levin)
* 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 Gosden Robinson)
* Director
- -----------------------------------
(Terry Semel)
* Director
- -----------------------------------
(Martha Stewart)
* Director
- -----------------------------------
(Morton L. Janklow)
* 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