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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 333-23451
REV HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3933701
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT IS NOT APPLICABLE, AS THERE IS NO PUBLIC MARKET THEREFOR. ALL
SHARES OF COMMON STOCK ARE HELD BY AN AFFILIATE OF MAFCO HOLDINGS INC. THE
NUMBER OF OUTSTANDING SHARES OF THE REGISTRANT'S COMMON STOCK, AS OF FEBRUARY
18, 1999, WAS 1,000.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
Effective August 5, 1997, Revlon Worldwide Corporation ("Revlon
Worldwide") was merged with and into Revlon Worldwide (Parent) Corporation
("Revlon Worldwide (Parent)") (the "Merger"), with Revlon Worldwide (Parent)
surviving the Merger and changing its name to REV Holdings Inc. (together with
its subsidiaries, "REV Holdings" or the "Company").
REV Holdings is a holding company formed in Delaware in February 1997
that conducts its business exclusively through its indirect subsidiary, Revlon
Consumer Products Corporation, and its subsidiaries (together with 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 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, Products Corporation 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
2
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").
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, Revlon, Inc., through Products Corporation, 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, all references to the Company or Revlon relating to dates or periods
prior to June 24, 1992 mean the cosmetics and skin care, fragrance and personal
care products business of Holdings to which Revlon, Inc. through Products
Corporation has succeeded. REV Holdings succeeded to the rights and obligations
of Revlon Worldwide under its various agreements, including those described in
Item 13, Certain Relationships and Related Transactions, by reason of the
Merger.
REV Holdings is an indirect wholly owned subsidiary of Holdings and an
indirect wholly owned subsidiary of MacAndrews & Forbes Holdings Inc.
("MacAndrews Holdings"), a corporation wholly owned through Mafco Holdings Inc.
("Mafco Holdings" and, together with MacAndrews Holdings, "MacAndrews & Forbes")
by Ronald O. Perelman. As a result of the initial public equity offering by
Revlon, Inc. (the "Revlon IPO"), a subsidiary of the Company, MacAndrews &
Forbes through REV Holdings beneficially owns 11,250,000 shares of Revlon, Inc.
Class A Common Stock and all 31,250,000 shares of Revlon, Inc. Class B Common
Stock (representing approximately 83.0% of the outstanding shares of Revlon,
Inc. common stock, which together have approximately 97.4% of the combined
voting power of the outstanding shares of Revlon, Inc. common stock).
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.
3
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.
4
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 PROFESSIONAL
CARE PRODUCTS
PRODUCTS
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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
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(a) Trademark owned in certain markets outside the United States.
5
Cosmetics and Skin Care. The Company sells a broad range of cosmetics
and skin care products designed to fulfill specifically identified consumer
needs, principally priced in the upper range of the self-select distribution
channel, including lip makeup, nail color and nail care products, eye and face
makeup and skin care products such as lotions, cleansers, creams, toners and
moisturizers. Many of the Company's products incorporate patented,
patent-pending or proprietary technology.
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
6
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.
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.
7
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.
8
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
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.
9
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. 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,
10
where the Company intends to expand the distribution of its products by
capitalizing on its market strengths in South Africa.
CUSTOMERS
The Company's principal customers include chain drug stores and large
mass volume retailers, including such well known retailers as Wal-Mart,
Walgreens, Kmart, Target, CVS, Drug 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.
11
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.
12
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.
13
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
All of the equity securities of REV Holdings are beneficially owned by
MacAndrews & Forbes, which is indirectly wholly owned by Ronald O. Perelman, and
there is no public market therefor. 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. The terms of
the Senior Secured Discount Notes (as hereinafter defined) currently restrict
the ability of REV Holdings to pay dividends or make distributions. See the
Consolidated Financial Statements of the Company and the Notes thereto.
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)
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 . ................ (93.5) (30.1) 101.2(c) (136.3) (161.9)
DECEMBER 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ----------------------- ------------- ----------------
(DOLLARS IN MILLIONS)
BALANCE SHEET DATA:
Total assets ............................. $ 1,838.1 $ 2,099.6 $ 1,622.3 $ 1,541.8 $ 1,427.7
Long-term debt, including current
portion . ............................... 2,271.2 2,305.0 2,330.6 2,339.6 2,098.4
Total stockholder's deficiency . ......... (1,253.0) (994.7) (1,461.7) (1,556.0) (1,410.8)
(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) Includes the gain on the sale of subsidiary stock of $187.8 million that
was recognized in connection with the Revlon IPO.
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.
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.
16
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.
Other expenses/income
Interest expense was $206.6 for 1998 compared to $232.9 for 1997. The
decrease in interest expense in 1998 is primarily due to the cancellation of the
Revlon Worldwide Notes (as hereinafter defined), and lower interest rates,
partially offset by higher average outstanding borrowings and higher interest
expense attributable to the Senior Secured Discount Notes.
Interest and net investment income was $9.0 for 1998 compared to $20.4
for 1997. For each year, interest and net investment income consists primarily
of interest income recognized on marketable securities that were purchased by
the Company in the first quarter of 1997 and deposited in an irrevocable trust
to effect the covenant defeasance of the remaining Revlon Worldwide Notes not
previously delivered to the Trustee for cancellation, which defeasance was
effected in the first quarter of 1998.
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.
17
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 Products Corporation's 9 3/8% Senior Notes due 2001 and
Products Corporation's 10 1/2% Senior Subordinated Notes due 2003. The
extraordinary item in 1997 resulted from the write-off of deferred financing
costs of approximately $8.6 associated with the extinguishment of borrowings
under the 1996 Credit Agreement (as hereinafter defined) prior to maturity with
proceeds from the Credit Agreement, 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") and $43.8 from the cancellation in the
first quarter of 1997 of a portion of the Revlon Worldwide Notes and the
write-off of the deferred financing costs associated with such cancellation.
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
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
18
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, for 1997 from $355.5, or 17.0% of net
sales, for 1996.
19
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 $232.9 for 1997 compared to $240.1 for 1996. The
decrease in interest expense in 1997 is primarily due to the cancellation in
March 1997 of a portion of the Revlon Worldwide Notes, lower interest rates
under the Credit Agreement and lower interest expense under the Senior Secured
Discount Notes partially offset by higher average outstanding borrowings under
the Credit Agreement.
Interest and net investment income was $20.4 for 1997 compared to $4.4
for 1996. The increase in interest and net investment income was primarily due
to the interest income recognized on marketable securities that were purchased
by the Company and deposited in an irrevocable trust to effect the covenant
defeasance of the remaining Revlon Worldwide Notes not previously delivered to
the Trustee for cancellation.
A gain on sale of subsidiary stock of $187.8 was recognized in the
first quarter of 1996 as a result of the Revlon IPO.
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 of approximately $8.6
associated with the early extinguishment of borrowings under the 1996 Credit
Agreement prior to maturity with proceeds from the Credit Agreement, costs of
approximately $6.3 in connection with the redemption of Products Corporation's
Sinking Fund Debentures and $43.8 from the cancellation in the first quarter of
1997 of a portion of the Revlon Worldwide Notes and the write-off of the
deferred financing costs
20
associated with such cancellation. 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 Revlon IPO and proceeds from the 1996 Credit
Agreement.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash (used for) provided by operating activities was $(51.5), $10.2
and $(10.4) 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 provided by (used for) investing activities was $246.4,
$(403.9) and $(61.8) for 1998, 1997 and 1996, respectively. Net cash provided by
investing activities for 1998 includes proceeds from the sale of marketable
securities that were used to repay the remaining Revlon Worldwide Notes upon
their maturity, proceeds from the sale of the wigs and hairpieces portion of the
Company's business in the United States and proceeds from the sale of certain
assets, partially offset by cash paid in connection with acquisitions of
businesses and capital expenditures. Net cash used for investing activities in
1997 consisted of the purchase of marketable securities that were deposited in
an irrevocable trust to effect the covenant defeasance of the remaining Revlon
Worldwide Notes not previously delivered to the Trustee for cancellation and
cash paid in connection with acquisitions of businesses and capital
expenditures, partially offset by proceeds from the sale of certain assets. 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 (used for) provided by financing activities was $(178.3),
$403.0 and $78.0 for 1998, 1997 and 1996, respectively. Net cash used for
financing activities for 1998 included the repayment of the remaining portion of
the Revlon Worldwide Notes, payment of fees and expenses related to the issuance
of the 9% Notes, the 8 1/8% Notes (as hereinafter defined) and the 8 5/8% Notes
(as hereinafter defined), the redemption of the Senior Subordinated Notes
(as hereinafter defined) and the Senior Notes (as hereinafter defined), and the
repayment of borrowings under the Company's Japanese yen-denominated credit
agreement (the "Yen Credit Agreement"), partially offset by proceeds from the
issuance of the 9% Notes, the 8 1/8% Notes and the 8 5/8% Notes and cash drawn
under the 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 net proceeds from the
issuance of the Senior Secured Discount Notes and cash drawn under the 1996
Credit Agreement and the Credit Agreement, partially offset by cash used for the
purchase of the Revlon Worldwide Notes delivered to the Trustee for
cancellation, 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 and 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.
21
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 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").
On March 5, 1997, the Company issued and sold in a private placement
$770.0 aggregate principal amount at maturity (net proceeds of $505.0) of its
Senior Secured Discount Notes due 2001 (the "Senior Secured Discount Notes").
There are no periodic interest payments on the Senior Secured Discount Notes. In
August 1997, substantially all of the Senior Secured Discount Notes were
exchanged for registered notes with substantially identical terms.
During March 1997, $778.4 principal amount at maturity (accreted value
of $694.0) of Revlon Worldwide's Senior Secured Discount Notes due 1998 (the
"Revlon Worldwide Notes") was delivered to the Trustee under the indenture
governing the Revlon Worldwide Notes for cancellation. In connection with the
Revlon Worldwide Notes that were canceled, the Company recorded a capital
contribution from its indirect parent of $560.1 and recorded an extraordinary
loss of $43.8, which included the write-off of deferred financing costs, in the
first quarter of 1997. On March 16, 1998, $337.4 of funds held in an irrevocable
trust was used to repay the remaining Revlon Worldwide Notes upon their
maturity.
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.
22
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 repayments 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 Senior Secured Discount Notes contain
certain provisions that by their terms limit REV Holdings' 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).
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 tax sharing agreements (see "Certain Relationships
and Related Transactions - Tax Sharing Agreements"), REV Holdings and Revlon,
Inc. may be required to make tax sharing payments to Mafco Holdings Inc. as if
REV Holdings or Revlon, Inc., as the case may be, were filing separate income
tax returns, except that no payments are required by Revlon, Inc. if and to the
extent that Products Corporation is prohibited under the Credit Agreement from
making tax sharing payments to Revlon, Inc. The Credit Agreement prohibits
Products Corporation from making any tax sharing payments other than in respect
of state and local income taxes. REV Holdings currently anticipates that with
respect to Revlon, Inc. as a result of net operating tax losses and prohibitions
under the Credit Agreement, and with respect to REV Holdings as a result of the
absence of business operations or a source of income of its own, no cash federal
tax payments or cash payments in lieu of taxes pursuant to the tax sharing
agreements 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.
23
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 subsidiary credit facilities and refinancings of existing subsidiary
indebtedness will be sufficient to enable the Company to meet its anticipated
cash requirements for the foreseeable future, including debt service of its
subsidiaries (including refinancing the 1999 Notes). However, there can be no
assurance that cash flow will be sufficient to meet the Company's cash
requirements on a consolidated basis. If the Company is unable to satisfy such
cash requirements from these sources, the Company could be required to adopt one
or more alternatives, such as reducing or delaying capital expenditures,
restructuring subsidiary indebtedness, selling assets or operations, selling its
equity securities, seeking capital contributions or loans from affiliates of the
Company or selling additional shares of capital stock of Revlon, Inc. There can
be no assurance that any of such actions could be effected, that they would
enable the Company's subsidiaries to continue to satisfy their capital
requirements or that they would be permitted under the terms of the Company's
and its subsidiaries' various debt instruments then in effect. The Company, as a
holding company, will be dependent on distributions with respect to its
approximately 83.0% ownership interest in Revlon, Inc. from the net earnings
generated by Products Corporation to pay its expenses and to pay the principal
amount at maturity of the Senior Secured Discount Notes. 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 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.
The Company currently anticipates that cash flow generated from
operations will be insufficient to pay the principal amount at maturity of the
Senior Secured Discount Notes. Accordingly, the Company currently anticipates
that it will be required to adopt one or more alternatives to pay the principal
amount at maturity of the Senior Secured Discount Notes, such as refinancing its
indebtedness, selling its equity securities or the equity securities or assets
of Revlon, Inc. or seeking capital contributions or loans from its affiliates.
There can be no assurance that any of the foregoing actions could be effected on
satisfactory terms, that any of the foregoing actions would enable the Company
to pay the principal amount at maturity of the Senior Secured Discount Notes or
that any of such actions would be permitted by the terms of the indenture
relating to the Senior Secured Discount Notes or any other debt instruments of
the Company and the Company's subsidiaries then in effect.
24
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 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.
25
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 of the Company or additional shares of Revlon, Inc., or the
sale of equity securities of REV Holdings. 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 of the
Company or additional shares of Revlon, Inc. or equity securities of REV
Holdings; (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 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
26
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 fair value of foreign currency options and forward exchange contracts
is the estimated amount the Company would receive (pay) to terminate the
agreements.
27
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) ......... 200.0 611.2 $1,149.1 1,960.3 1,721.5
Average interest rate ............. 9.5% 27.5% 8.6%
Long-term variable rate ($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.
28
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, Chief Executive Officer and
Director
Howard Gittis Vice Chairman of the Board and Director
Todd J. Slotkin Executive Vice President and Chief Financial Officer
Barry F. Schwartz Executive Vice President and General Counsel
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 and a
Director of the Company since its formation in February 1997 and Chief Executive
Officer of the Company since March 1997. Mr. Perelman was Chairman of the Board
and a Director of Revlon Worldwide from its formation in 1993 and Chief
Executive Officer of Revlon Worldwide from March 1997 until August 1997 when
Revlon Worldwide was merged into the Company. Mr. Perelman has been Chairman of
the Board of Directors of Revlon, Inc. and of Products Corporation since June
1998, Chairman of the Executive Committees of the Boards of Revlon, Inc. and of
Products Corporation since November 1995, and a Director of Revlon, Inc. and of
Products Corporation since their respective formations in 1992. Mr. Perelman was
Chairman of the Board of Revlon, Inc. 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 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 and Panavision. (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. Gittis (65) has been a Director of the Company since its formation
in February 1997 and Vice Chairman of the Board of the Company since March 1997.
Mr. Gittis was a Director of Revlon Worldwide from its formation in 1993 and
Vice Chairman of the Board of Revlon Worldwide from March 1997 until August 1997
when Revlon Worldwide was merged into the Company. Mr. Gittis has been a
Director of Revlon, Inc. 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, Rutherford-Moran Oil Corporation
and Sunbeam Corporation.
Mr. Slotkin (45) has been Executive Vice President and Chief Financial
Officer of the Company since March 1999. He has been Executive Vice President of
MacAndrews & Forbes and various of its affiliates since 1998 and was Senior Vice
President from 1992 to 1998. Mr. Slotkin served as an officer of Citicorp for
approximately 17 years prior to joining MacAndrews & Forbes, most recently as a
Senior Managing Director. He is a Director of California Federal Bank, A Federal
Savings Bank, which files reports pursuant to the Exchange Act.
29
Mr. Schwartz (48) has been Executive Vice President and General Counsel
of the Company since March 1997. He was Executive Vice President and General
Counsel of Revlon Worldwide from March 1997 until August 1997 when Revlon
Worldwide was merged into the Company. He has been Executive Vice President and
General Counsel of MacAndrews & Forbes and various of its affiliates since 1993.
Mr. Schwartz was Senior Vice President of MacAndrews & Forbes and various of its
affiliates from 1989 to 1993. (On December 27, 1996. Marvel Holdings, Marvel
Parent and Marvel III, of which Mr. Schwartz was an executive officer on such
date, filed voluntary petitions for reorganization under Chapter 11 of the
United Bankruptcy Code.)
EXECUTIVE OFFICERS OF REVLON, INC. AND PRODUCTS CORPORATION
The Company engages in its business through Revlon, Inc., Products
Corporation and Products Corporation's subsidiaries. The following table sets
forth certain information (ages as of February 18, 1999) concerning the
executive officers of Revlon, Inc. and Products Corporation who do not also
serve as executive officers of the Company.
NAME POSITION
- ---- --------
George Fellows President and Chief Executive Officer
Irwin Engelman Vice Chairman and Chief Administrative Officer
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
Mr. Fellows (56) has been President and Chief Executive Officer of
Revlon, Inc. and of Products Corporation since January 1997. He was President
and Chief Operating Officer of Revlon, Inc. and Products Corporation from
November 1995 until January 1997, and has been a Director of Revlon, Inc. since
November 1995 and a Director of Products Corporation since September 1994. Mr.
Fellows was Senior Executive Vice President of Revlon, Inc. 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 Inc. Mr. Fellows is also a
Director of VF Corporation, which files reports pursuant to the Exchange Act.
Mr. Engelman (64) was Executive Vice President and Chief Financial
Officer of the Company from March 1997 until March 1999. He was Executive Vice
President and Chief Financial Officer of Revlon Worldwide from March 1997 until
August 1997 when Revlon Worldwide was merged into the Company. Mr. Engelman has
been Vice Chairman, Chief Administrative Officer and a Director of Revlon, Inc.
since November 1998, 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 Holdings 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. (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 Revlon, Inc. and of Products Corporation in December 1996.
Prior to December 1996, she served in various appointed senior executive
positions for Products Corporation and for Revlon, Inc., 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
30
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 Revlon, Inc. and of Products Corporation in January 1998.
From January 1997 until January 1998 he had been Vice President of Revlon, Inc.
and of Products Corporation. Prior to January 1997 he served in various
appointed senior executive positions for Revlon, Inc. 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 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) was Senior Vice President and General Counsel of the
Company from its formation in February 1997 until March 1997. He was Senior Vice
President and General Counsel of Revlon Worldwide from its formation in 1993
until March 1997. He has been Executive Vice President and General Counsel of
Revlon, Inc. and of Products Corporation since January 1998 and served as Senior
Vice President and General Counsel of Revlon, Inc. and of 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
Revlon, Inc. 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.
31
ITEM 11. EXECUTIVE COMPENSATION
The Company conducts its business through Revlon, Inc., Products
Corporation and Products Corporation's subsidiaries. For 1998, the Company's
executive officers did not receive compensation from the Company. The following
table sets forth information for the years indicated concerning the compensation
awarded to, earned by or paid to the persons who served as Chief Executive
Officer of Revlon, Inc. during 1998, and the four most highly paid executive
officers, other than the Chief Executive Officer, who served as executive
officers of Revlon, Inc. as of December 31, 1998 (collectively, the "Named
Executive Officers"), for services rendered in all capacities to Revlon, Inc.
and Products Corporation and its subsidiaries during such periods.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION (a) AWARDS
------------------------------------------------- ------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
POSITION YEAR ($) ($) ($) OPTIONS ($)
-------- ---- ---- ---- --- ------- ---
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 Revlon, Inc. and Products Corporation 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 Revlon, Inc.'s Compensation and Stock Plan
Committee (the "Compensation Committee"). Mr. Gehrmann's
32
compensation is reported for 1998 only because he did not serve as an
executive officer of Revlon, Inc. or Products Corporation prior to 1998.
(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 Revlon, Inc. and Products
Corporation 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
33
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.
(f) Mr. Fox was an executive officer of Revlon, Inc. and of Products
Corporation during 1996, 1997 and 1998 and resigned from Revlon, Inc. and
Products Corporation 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 $4,500 in respect of matching contributions under the 401(k)
Plan.
OPTION GRANTS IN THE LAST FISCAL YEAR
During 1998, the following grants of stock options were made pursuant
to the Revlon, Inc. Amended and Restated 1996 Stock Plan (the "Stock Plan") to
the executive officers named in the Summary Compensation Table:
GRANT
DATE
INDIVIDUAL GRANTS VALUE (a)
--------------------------------------------------------- ---------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS EXERCISE GRANT
UNDERLYING GRANTED TO OR BASE DATE
OPTIONS EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME GRANTED (#) FISCAL YEAR ($/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 Revlon, Inc. Class A Common Stock) and June
17, 1998 (with respect to an option to purchase 25,000 shares of Revlon, Inc.
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 Revlon, Inc. Class A Common Stock on the grant date,
as indicated in the table above. During 1998, Revlon, Inc. also granted an
option to purchase 300,000 shares of Revlon, Inc. Class A Common Stock pursuant
to the Stock Plan to Mr. Perelman, the Chairman of the Board of Directors, Chief
Executive Officer and a Director of the Company. The option will vest in full on
the fifth anniversary of the grant
34
date and has an exercise price of $50.00, the NYSE closing price per share of
Revlon, Inc. 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 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 stock price of
Revlon, Inc. Class A Common Stock; (iii) a constant dividend rate of
zero percent and (iv) that the options normally would be exercised on
the final day of their seventh year after grant. No adjustments to the
theoretical value were made to reflect the waiting period, if any,
prior to vesting of the stock options or the transferability (or
restrictions related thereto) of the stock options. The real value of
the options in the table depends upon the actual performance of Revlon,
Inc. Class A Common Stock during the applicable period and upon when
they are exercised.
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following chart shows the number of stock options exercised during
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 Revlon, Inc. Class A Common
Stock at year end calculated using $16 3/8, the December 31, 1998 NYSE
closing price per share of Revlon, Inc. 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 Revlon, Inc.
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 Products Corporation. Mr. Fellows'
employment agreement, as amended, provides that he will serve as the President
and Chief Executive Officer of Products Corporation 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
Revlon, Inc. 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
35
$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 Revlon, Inc. 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 of Products Corporation through February 28, 2003
at a base salary of not less than $555,000 and that management will recommend
to the Compensation Committee that he be granted options to purchase 40,000
shares of Revlon, Inc. 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 Products Corporation'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
36
terms as active employees.
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 ESTIMATED ANNUAL STRAIGHT LIFE ANNUITY BENEFITS AT RETIREMENT
FIVE-YEAR AVERAGE WITH INDICATED YEARS OF CREDITED SERVICE (a)
COMPENSATION DURING --------------------------------------------------------------------------
FINAL 10 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
Products Corporation of the difference, if any, between the amount of such
maximum limitations and the annual benefit that would be payable under the
Retirement Plan 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.
37
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 five years, for Mr.
Nichols is 20 years (which 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
Ronald O. Perelman, 35 East 62nd Street, New York, New York 10021,
through MacAndrews & Forbes, beneficially owns all of the outstanding shares of
common stock of REV Holdings. No other director, executive officer or other
person beneficially owns any shares of common stock of REV Holdings. MacAndrews
& Forbes, through Mafco Holdings (which through REV Holdings), beneficially owns
11,250,000 shares of Class A Common Stock of Revlon, Inc. (representing 56.3% of
the outstanding shares of Class A Common Stock of Revlon, Inc.) and all of the
outstanding 31,250,000 shares of Class B Common Stock of Revlon, Inc., which
together represent 83.0% of the outstanding shares of Revlon, Inc. common stock
and have approximately 97.4% of the combined voting power of the outstanding
shares of Revlon, Inc. common stock. All of the shares of Revlon, Inc. common
stock owned by REV Holdings are pledged by REV Holdings to secure obligations
under certain indebtedness. Shares of REV Holdings and shares of intermediate
holding companies are or may from time to time be pledged to secure obligations
of Mafco Holdings or its affiliates.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MacAndrews & Forbes beneficially owns all of the outstanding shares of
REV Holdings' common stock. As a result, MacAndrews & Forbes is able to elect
the entire Board of Directors of REV Holdings and control the vote on all
matters submitted to a vote of REV Holdings' stockholder, including
extraordinary transactions such as mergers or sales of all or substantially all
of REV Holdings' assets. MacAndrews & Forbes is wholly owned by Ronald O.
Perelman, who is Chairman of the Board, Chief Executive Officer and a Director
of REV Holdings.
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.
38
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. Products Corporation
reimburses MacAndrews Holdings for the allocable costs of the services purchased
for or provided to Revlon, Inc. and its subsidiaries and for reasonable
out-of-pocket expenses incurred in connection with the provision of such
services. MacAndrews Holdings (or such affiliates) reimburses Products
Corporation for the allocable costs of the services purchased for or provided to
MacAndrews Holdings (or such affiliates) and for the reasonable out-of-pocket
expenses incurred in connection with the purchase or provision of such services.
The net amount reimbursed by MacAndrews Holdings to Products Corporation for the
services provided under the Reimbursement Agreements for 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 it under the Reimbursement
Agreements other than losses resulting from its willful misconduct or gross
negligence. The Reimbursement Agreements may be terminated by either party on 90
days' notice. REV Holdings does not expect Revlon, Inc. or Products Corporation
to request services under the Reimbursement Agreements unless their costs would
be at least as favorable to Revlon, Inc. or Products Corporation, as the case
may be, as could be obtained from unaffiliated third parties.
In March 1993, Revlon Worldwide (now REV Holdings) and MacAndrews
Holdings entered into a reimbursement agreement pursuant to which MacAndrews
Holdings agreed to provide third party services to REV Holdings on the same
basis as it provides services to Revlon, Inc., and REV Holdings agreed to
indemnify MacAndrews Holdings on the same basis as Revlon, Inc. is obligated to
indemnify MacAndrews Holdings under the Reimbursement Agreements. There were no
services provided and no payments made pursuant to this agreement during 1998.
TAX SHARING AGREEMENTS
REV Holdings, Holdings, Revlon, Inc. and Products Corporation, for
federal income tax purposes, are included in the affiliated group of which Mafco
Holdings is the common parent, and REV Holdings', Revlon, Inc.'s and Products
Corporation's federal taxable income and loss are included in such group's
consolidated tax return filed by Mafco Holdings. REV Holdings, Revlon, Inc. and
Products Corporation also may be included in certain state and local tax returns
of Mafco Holdings or its subsidiaries. In June 1992, Holdings, Revlon, Inc.,
Products Corporation and certain of its subsidiaries, and Mafco Holdings entered
into a tax sharing agreement (as subsequently amended, the "1992 Tax Sharing
Agreement"), pursuant to which Mafco Holdings has agreed to indemnify Revlon,
Inc. and Products Corporation against federal, state or local income tax
liabilities of the consolidated or combined group of which Mafco Holdings (or a
subsidiary of Mafco Holdings other than Revlon, Inc. and Products Corporation or
its subsidiaries) is the common parent for taxable periods beginning on or after
January 1, 1992 during which Revlon, Inc. and Products Corporation or a
subsidiary of Products Corporation is a member of such group. Pursuant to the
1992 Tax Sharing Agreement, for all taxable periods beginning on or after
January 1, 1992, Revlon, Inc. will pay to Holdings amounts equal to the taxes
that Revlon, Inc. would otherwise have to pay if it were to file separate
federal, state or local income tax returns (including any amounts determined to
be due as a result of a redetermination arising from an audit or otherwise of
the consolidated or combined tax liability relating to any such period which is
attributable to Revlon, Inc.), except that Revlon, Inc. will not be entitled to
carry back any losses to taxable periods ending prior to January 1, 1992. No
payments are required by Revlon, Inc. if and to the extent Products Corporation
is prohibited under the Credit Agreement from making tax
39
sharing payments to Revlon, Inc. The Credit Agreement prohibits Products
Corporation from making such tax sharing payments other than in respect of state
and local income taxes.
In March 1993, Revlon Worldwide (now REV Holdings) and Mafco Holdings
entered into a tax sharing agreement (the "1993 Tax Sharing Agreement" and,
together with the 1992 Tax Sharing Agreement, the "Tax Sharing Agreements")
pursuant to which, for all taxable periods beginning on or after January 1,
1993, REV Holdings will pay to Mafco Holdings amounts equal to the taxes that
REV Holdings would otherwise have to pay if it were to file separate federal,
state and local income tax returns for itself, excluding Revlon, Inc. and its
subsidiaries (including any amounts determined to be due as a result of a
redetermination arising from an audit or otherwise of the tax liability relating
to any such period which is attributable to REV Holdings).
Since the payments to be made by Revlon, Inc. under the 1992 Tax
Sharing Agreement and by REV Holdings under the 1993 Tax Sharing Agreement will
be determined by the amount of taxes that Revlon, Inc. or REV Holdings, as the
case may be, would otherwise have to pay if it were to file separate federal,
state or local income tax returns, the Tax Sharing Agreements will benefit Mafco
Holdings to the extent Mafco Holdings can offset the taxable income generated by
Revlon, Inc. or REV Holdings against losses and tax credits generated by Mafco
Holdings and its other subsidiaries. With respect to REV Holdings, as a result
of the absence of business operations or a source of income on its own, there
were no cash payments in respect of federal taxes pursuant to the 1993 Tax
Sharing Agreement for 1998. With respect to Revlon, Inc., as a result of net
operating tax losses and prohibitions under the Credit Agreement, there were no
cash payments in respect of federal taxes pursuant to the 1992 Tax Sharing
Agreement for 1998.
REGISTRATION RIGHTS AGREEMENT
Prior to the consummation of the Revlon IPO, Revlon, Inc. and Revlon
Worldwide (now 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. 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. 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.
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,
40
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.
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, Products Corporation made advances of $0.25 million and
$0.3 million to Mr. Fellows and Ms. Dwyer, respectively. During 1998, Products
Corporation made an advance of $0.4 million to Mr. Levin, a director of Products
Corporation during part of 1998, which advance was repaid in January 1999.
During 1998, Products Corporation purchased products from a company
that was its affiliate during part of 1998, for which it paid approximately $0.4
million.
41
Prior to 1998, Products Corporation provided licensing services to a
company that was its affiliate 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 Products Corporation
during 1998 assembled lipstick cases for Products Corporation. Products
Corporation paid approximately $1.1 million for such services in 1998.
In connection with the cancellation of the Revlon Worldwide Notes, at
December 31, 1998 REV Holdings had an outstanding payable to an affiliate of
approximately $1.9 million.
REV Holdings has guaranteed, on a non-recourse basis, certain
obligations of an affiliate and has pledged certain shares of the Revlon, Inc.
common stock owned by REV Holdings to secure such guarantee.
The Company believes that the terms of the foregoing transactions are
at least as favorable to the Company as those that could be obtained from
unaffiliated third parties.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this Report:
(1) Consolidated Financial Statements and Independent Auditors' Report
included herein: See Index on page F-1
(2) Financial Statement Schedule:
See Index on page F-1
All other schedules are omitted as they are inapplicable or the
required information is furnished in the Consolidated Financial
Statements of the Company or the Notes thereto.
(3) List of Exhibits:
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3. CERTIFICATE OF INCORPORATION AND BY-LAWS.
3.1 Certificate of Incorporation and Certificate of Ownership and Merger
dated as of August 5, 1997 merging Revlon Worldwide into Revlon
Worldwide (Parent) and changing the name of Revlon Worldwide (Parent)
to REV Holdings Inc. (Incorporated by reference to Exhibit 3.1 to the
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1997 of REV Holdings (the "REV Holdings 1997 Second Quarter 10-Q")).
3.2 By-Laws of REV Holdings (formerly Revlon Worldwide (Parent)).
(Incorporated by reference to Exhibit 3.2 to the Registration Statement
on Form S-1 of Revlon Worldwide (Parent) Corporation filed with the
Commission on March 17, 1997. (File No. 333-23451) (the "Worldwide 1997
Form S-1).
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
42
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 Products
Corporation, Revlon Escrow and the Trustee, amending the 8 1/8% Senior
Notes Indenture. (Incorporated by reference to Exhibit 4.2 to the
Products Corporation 1998 Form S-1).
4.4 First Supplemental Indenture, dated March 4, 1998, among Products
Corporation, Revlon Escrow and the Trustee, amending the 8 5/8% Senior
Subordinated Notes Indenture. (Incorporated by reference to Exhibit 4.4
to the Products Corporation 1998 Form S-1).
4.5 Indenture, dated as of November 6, 1998, between Products Corporation
and U.S. Bank Trust National Association, as Trustee, relating to
Products Corporation's 9% Senior Notes due 2006. (Incorporated by
reference to Exhibit 4.13 to the Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1998 of Revlon, Inc. (the "Revlon
1998 Third 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 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
Form 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 Registration Statement on Form S-1 of
Revlon Worldwide (Parent) Corporation, filed with the 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 on Form
10-K 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 Third 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
Commission on January 22, 1999).
4.13 Indenture, dated as of March 1, 1997, between REV Holdings (formerly
Revlon Worldwide (Parent)) and The Bank of New York, as Trustee,
relating to the Senior Secured Discount Notes due 2001 and the Series B
Senior Secured Discount Notes due 2001. (Incorporated by reference to
Exhibit 4.1 to the Worldwide 1997 Form S-1).
10. MATERIAL CONTRACTS.
10.1 Asset Transfer Agreement, dated as of June 24, 1992, among Holdings,
National Health Care Group, Inc., Charles of the Ritz Group Ltd.,
Products Corporation and Revlon, Inc. (Incorporated by reference to
Exhibit 10.1 to Amendment No. 1 to the Revlon, Inc. Registration
Statement on Form S-1 filed with the Commission on June 29, 1992,
File No. 33-47100 (the "Revlon 1992 Amendment No. 1")).
10.2 Tax Sharing Agreement, dated as of June 24, 1992, among Mafco Holdings,
Revlon, Inc.,
43
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 Annual
Report on Form 10-K for the year ended December 31, 1996 of Revlon,
Inc. (the "Revlon 1996 10-K)).
10.5 Second Amended and Restated Operating Services Agreement by and among
Holdings, Revlon, Inc. and Products Corporation, dated 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. (Incorporated by reference to Exhibit 10.8 to the Annual
Report on Form 10-K for the year ended December 31, 1998 of Revlon,
Inc. (the "Revlon 1998 10-K")).
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).
10.10 Amendment, effective June 1, 1998, to the Fox Employment Agreement.
(Incorporated by reference to Exhibit 10.28 to the Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1998 of Revlon,
Inc.).
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. (Incorporated by reference to Exhibit 10.12 to the Revlon
1998 10-K).
10.13 Employment Agreement dated as of January 1, 1998, between Products
Corporation and Wade H. Nichols III (the "Nichols Employment
Agreement"). (Incorporated by reference to Exhibit 10.13 to the Revlon
1998 10-K).
10.14 Amendment, effective January 1, 1998, to the Nichols Employment
Agreement. (Incorporated by reference to Exhibit 10.14 to the Revlon
1998 10-K).
10.15 Amended and Restated Revlon Pension Equalization Plan, amended and
restated as of December 14, 1998. (Incorporated by reference to Exhibit
10.15 to the Revlon 1998 10-K).
10.16 Executive Supplemental Medical Expense Plan Summary dated July 1991.
(Incorporated by reference to Exhibit 10.18 to the Registration
Statement on Form S-1 of Revlon, Inc. filed with the 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).
44
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 Amendment No. 3 to the
Registration Statement on Form S-1 of Revlon, Inc. filed with the
Commission on February 5, 1996 (File No. 33-99558)).
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).
10.23 Tax Sharing Agreement, dated as of March 17, 1993, between Revlon
Worldwide and Mafco Holdings. (Incorporated by reference to Exhibit
10.30 the Registration Statement on Form S-1 of Revlon Worldwide
Corporation filed with the Commission on April 2, 1993 (File No.
33-60488) (the "Worldwide 1993 Form S-1")).
10.24 Indemnity Agreement, dated March 25, 1993, between Revlon Worldwide and
Holdings. (Incorporated by reference to Exhibit 10.32 to the Worldwide
1993 Form S-1).
10.25 Form of Registration Rights Agreement. (Incorporated by reference to
Exhibit 10.1 to the Annual Report on Form 10-K for the year ended
December 31, 1995 of Revlon Worldwide).
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 Howard Gittis.
*27. Financial Data Schedule.
- --------------------
* Filed herewith.
(b) Reports on Form 8-K
On December 11, 1998, REV Holdings filed a report on Form 8-K relating
to the announcement that its indirect subsidiary, Products Corporation, disposed
of its entire equity interest in Cosmetic Center.
45
REV HOLDINGS 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 Stockholder's 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 Stockholder
REV Holdings Inc.:
We have audited the accompanying consolidated balance sheets of REV Holdings
Inc. and its subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholder's 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 REV Holdings 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
REV HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
DECEMBER 31, DECEMBER 31,
1998 1997
ASSETS -------------- -------------
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 92.0
Restricted marketable securities ........................................ -- 334.0
---------- ---------
Total current assets ................................................... 904.7 1,216.6
Property, plant and equipment, net ....................................... 378.9 364.0
Other assets ............................................................. 181.6 154.7
Intangible assets, net ................................................... 372.9 319.2
Net assets of discontinued operations .................................... -- 45.1
---------- ---------
Total assets ........................................................... $ 1,838.1 $ 2,099.6
========== =========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current liabilities:
Short-term borrowings - third parties ................................... $ 27.9 $ 42.7
Current portion of long-term debt - third parties ....................... 6.0 334.8
Accounts payable ........................................................ 134.8 178.8
Accrued expenses and other .............................................. 389.7 356.0
---------- ---------
Total current liabilities .............................................. 558.4 912.3
Long-term debt - third parties ........................................... 2,241.1 1,939.3
Long-term debt - affiliates .............................................. 24.1 30.9
Other long-term liabilities .............................................. 267.5 211.8
Stockholder's deficiency:
Common stock, par value $1.00 per share, 1,000 shares authorized,
issued and outstanding ................................................ -- --
Capital deficiency ...................................................... (408.8) (408.8)
Accumulated deficit since June 24, 1992 ................................. (771.6) (562.2)
Accumulated other comprehensive loss .................................... ( 72.6) (23.7)
---------- ---------
Total stockholder's deficiency ......................................... (1,253.0) (994.7)
---------- ---------
Total liabilities and stockholder's deficiency ......................... $ 1,838.1 $ 2,099.6
========== =========
See Accompanying Notes to Consolidated Financial Statements.
F-3
REV HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS)
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 ........................................... 206.6 232.9 240.1
Interest and net investment income ......................... (9.0) (20.4) (4.4)
Gain on sale of subsidiary stock ........................... (2.6) (0.3) (187.8)
Amortization of debt issuance costs ........................ 9.0 11.6 12.5
Foreign currency losses, net ............................... 4.6 6.4 5.7
Miscellaneous, net ......................................... 4.5 5.5 6.4
--------- --------- ----------
Other expenses, net ...................................... 213.1 235.7 72.5
--------- --------- ----------
(Loss) income from continuing operations before
income taxes ............................................... (88.5) (20.8) 126.7
Provision for income taxes .................................. 5.0 9.3 25.5
--------- --------- ----------
(Loss) income from continuing operations .................... (93.5) (30.1) 101.2
(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) (58.7) (6.6)
--------- --------- ----------
Net (loss) income ........................................... $ (209.4) $ (88.1) $ 95.0
========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements.
F-4
REV HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIENCY AND COMPREHENSIVE LOSS
(DOLLARS IN MILLIONS)
ACCUMULATED
OTHER TOTAL
CAPITAL ACCUMULATED COMPREHENSIVE STOCKHOLDER'S
DEFICIENCY DEFICIT(a) LOSS(b) DEFICIENCY
----------------- --------------- --------------- --------------
Balance, January 1, 1996 .................... $ (964.9) $ (569.1) $ (22.0) $ (1,556.0)
Net capital distribution ................... (0.4)(c) (0.4)
Acquisition of business .................... (4.1)(d) (4.1)
Comprehensive income:
Net income ............................... 95.0(e) 95.0
Adjustment for minimum pension
liability ............................... 4.6 4.6
Currency translation adjustment .......... (0.8)(f) (0.8)
----------
Total comprehensive income ................. 98.8
--------- ------------ -------- ----------
Balance, December 31, 1996 .................. (969.4) (474.1) (18.2) (1,461.7)
Capital contribution from indirect parent 560.1(g) 560.1
Net capital contribution ................... 0.5(c) 0.5
Comprehensive loss:
Net loss ................................. (88.1) (88.1)
Adjustment for minimum pension
liability ............................... 7.9 7.9
Currency translation adjustment .......... (13.4) (13.4)
----------
Total comprehensive loss ................... (93.6)
--------- ------------ -------- ----------
Balance, December 31, 1997 .................. (408.8) (562.2) (23.7) (994.7)
Comprehensive loss:
Net loss ................................. (209.4) (209.4)
Adjustment for minimum pension
liability ............................... (28.0) (28.0)
Revaluation of marketable securities ..... (3.0) (3.0)
Currency translation adjustment .......... (17.9)(h) (17.9)
----------
Total comprehensive loss ................... (258.3)
--------- ------------ -------- ----------
Balance, December 31, 1998 .................. $ (408.8) $ (771.6) $ (72.6) $ (1,253.0)
========= ============ ======== ==========
- ----------
(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 the gain on the sale of subsidiary stock of $187.8 in
connection with Revlon, Inc.'s public equity offering (the "Revlon
IPO").
(f) Includes $2.1 of gains related to the Company's simplification of
its corporate structure outside the United States.
(g) Represents a noncash capital contribution from the Company's
indirect parent to cancel Revlon Worldwide Corporation's Senior
Secured Discount Notes due 1998 (the "Revlon Worldwide Notes").
(h) 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
REV HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES: ------------- ------------ -----------
Net (loss) income ........................................................ $ (209.4) $ (88.1) $ 95.0
Adjustments to reconcile net (loss) income to net cash (used for)
provided by operating activities:
Depreciation and amortization ........................................... 115.2 104.7 92.9
Amortization of debt discount ........................................... 68.7 99.2 106.7
Loss (income) from discontinued operations .............................. 64.2 (0.7) (0.4)
Extraordinary items ..................................................... 51.7 58.7 6.6
Gain on sale of subsidiary stock ........................................ (2.6) (0.3) (187.8)
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 ............................................................ (75.2) (87.5) (45.2)
---------- --------- --------
Net cash (used for) provided by operating activities ..................... (51.5) 10.2 (10.4)
---------- --------- --------
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)
Sale (purchase) of marketable securities, net ............................ 337.4 (319.6) --
Proceeds from the sale of certain assets ................................. 27.4 8.5 --
---------- --------- --------
Net cash provided by (used for) investing activities ..................... 246.4 (403.9) (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 1,265.2 266.4
Repayment of long-term debt - third parties .............................. (1,608.3) (865.2) (366.6)
Net proceeds from the sale of subsidiary common stock .................... 1.1 0.3 187.8
Proceeds from the issuance of debt - affiliates .......................... 105.9 123.1 115.0
Repayment of debt - affiliates ........................................... (105.9) (120.2) (115.0)
Acquisition of business from affiliate ................................... -- -- (4.1)
Net contribution from (distribution to) parent ........................... -- 0.5 (0.4)
Payment of debt issuance costs ........................................... (23.9) (18.7) (10.9)
---------- --------- --------
Net cash (used for) provided by financing activities ..................... (178.3) 403.0 78.0
---------- --------- --------
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 and financing
activities:
Noncash contribution from indirect parent to cancel Revlon ..............
Worldwide Notes ....................................................... $ -- $ 560.1 $ --
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
REV HOLDINGS 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:
Effective August 5, 1997, Revlon Worldwide Corporation ("Revlon Worldwide")
was merged with and into Revlon Worldwide (Parent) Corporation ("Revlon
Worldwide (Parent)") (the "Merger"), with Revlon Worldwide (Parent) surviving
the Merger and changing its name to REV Holdings Inc. (together with its
subsidiaries, "REV Holdings" or the "Company"). All references to the Company
for periods prior to the Merger are to Revlon Worldwide and for periods
subsequent to the Merger are to REV Holdings. REV Holdings succeeded to the
rights and obligations of Revlon Worldwide under its various agreements,
including those described in Note 16, Related Party Transactions, by reason of
the Merger.
REV Holdings is a holding company, formed in 1997, that conducts its
business exclusively through its indirect 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. Through December 31, 1998, REV Holdings has had no
business operations of its own and its only material asset is its ownership of
approximately 83.0% of the outstanding shares of capital stock of Revlon, Inc
(which represents approximately 97.4% of the voting power of those outstanding
shares), which, in turn, owns all of the capital stock of Products Corporation.
As such, its net (loss) income has historically consisted predominantly of its
equity in the net (loss) income of Revlon, Inc. and accretion of interest
expense and amortization of debt issuance costs related to the Revlon Worldwide
Notes and REV Holdings Senior Secured Discount Notes due 2001 (the "Senior
Secured Discount Notes"). For such years, REV Holdings has had no cash flows of
its own other than capital contributions from its indirect parent in 1997 and
1996 and proceeds from the issuance of the Senior Secured Discount Notes and the
repayment of a portion of the Revlon Worldwide Notes in 1998 and 1997.
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.
F-7
Although the Retained Brands were not transferred to Products Corporation
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 REV Holdings
and its subsidiaries after elimination of all material intercompany balances and
transactions. Further, the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities, the disclosure
of liabilities and the reporting of revenues and expenses to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
The Company is an indirect wholly owned subsidiary of Holdings and an
indirect wholly owned subsidiary of MacAndrews & Forbes Holdings Inc.
("MacAndrews Holdings"), a corporation wholly owned indirectly through Mafco
Holdings Inc. ("Mafco Holdings" and, together with MacAndrews Holdings,
"MacAndrews & Forbes") by Ronald O. Perelman. All of the equity securities of
REV Holdings are beneficially owned by MacAndrews & Forbes.
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.
F-8
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 $31.7 and $32.5 (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.
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 REV Holdings filed its own income tax
returns (excluding Revlon, Inc. and its subsidiaries) and as if Revlon, Inc. and
its subsidiaries filed its own tax returns. On June 24, 1992, Holdings, Products
Corporation and certain of its subsidiaries, Revlon, Inc. and Mafco Holdings
entered into a tax sharing agreement and on March 17, 1993 Revlon Worldwide (now
REV Holdings) and Mafco Holdings entered into a tax sharing agreement, each of
which is described in Notes 13 and 16.
F-9
PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS:
Products Corporation 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.
Products Corporation 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 stockholder's 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.
SALE OF SUBSIDIARY STOCK:
The Company recognizes gains and losses on sales of subsidiary stock in its
Consolidated Statements of Operations.
STOCK-BASED COMPENSATION:
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to account for
stock-based compensation plans using the intrinsic value method prescribed in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretation. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
Revlon, Inc.'s stock at the date of the grant over the amount an employee must
pay to acquire the stock (See Note 15).
F-10
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 Products Corporation 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 of approximately $8.6 associated with the early extinguishment of
borrowings under a prior credit agreement, 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") and $43.8 from the
cancellation in the first quarter of 1997 of a portion of the Revlon Worldwide
Notes and the write-off of the deferred financing costs associated with such
cancellation. 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 BALANCE
BEGINNING EXPENSE ----------------------- END
OF YEAR (INCOME) CASH NONCASH 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 51.3
------- --------
$ 69.9 $ 92.0
======= ========
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.
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
======== ========
F-13
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
Revlon Worldwide Notes, net of unamortized discount of $8.1
in 1997 (j) ............................................. -- 329.3
Senior Secured Discount Notes due 2001, net of unamortized
discount of $158.8 and $219.5 (k) ....................... 611.2 550.5
Notes payable due through 2004 (7.2%) ..................... 1.0 1.4
--------- ---------
2,271.2 2,305.0
Less current portion ...................................... (6.0) (334.8)
--------- ---------
$ 2,265.2 $ 1,970.2
========= =========
(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 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.
F-14
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 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
F-15
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 repayments 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 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.
F-16
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 outstanding indebtedness and other liabilities of Products
Corporation's subsidiaries. Interest is payable on May 1 and November 1.
F-17
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 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.
F-18
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.
(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.
(j) During March 1997, $778.4 principal amount at maturity (accreted value
of $694.0) of the Revlon Worldwide Notes was delivered to the Trustee under the
indenture governing the Revlon Worldwide Notes for cancellation. In connection
with the Revlon Worldwide Notes that were canceled, the Company recorded a
capital contribution from its indirect parent of $560.1 and recorded an
extraordinary loss of $43.8, which included the write-off of deferred financing
costs, in the first quarter of 1997. On March 16, 1998, $337.4 of funds held in
an irrevocable trust was used to repay the remaining Revlon Worldwide Notes upon
their maturity.
As a result of the Merger, REV Holdings directly owns all of the shares of
common stock of Revlon, Inc. that were owned by Revlon Worldwide. Following the
Merger, REV Holdings pledged 20 million shares of Revlon, Inc. common stock to
secure the indebtedness of the Company and the balance to secure the obligations
of an affiliate.
(k) On March 5, 1997, the Company issued and sold $770.0 aggregate
principal amount at maturity (net proceeds of $505.0) of its Senior Secured
Discount Notes. The Senior Secured Discount Notes were issued at a discount from
their principal amount at maturity representing a yield to maturity of 10 3/4%
per annum calculated from March 5, 1997. There are no periodic interest payments
on the Senior Secured Discount Notes. In August 1997, substantially all of the
Senior Secured Discount Notes were exchanged for registered notes with
substantially identical terms. The Senior Secured Discount Notes are senior debt
of REV Holdings and rank pari passu in right of payment with any future debt of
REV Holdings. REV Holdings is a holding company and substantially all of its
liabilities (other than the Senior Secured Discount Notes) are liabilities of
subsidiaries. The Senior Secured Discount Notes are effectively subordinated to
all liabilities of REV Holdings subsidiaries, including trade payables.
The Senior Secured Discount Notes may be redeemed at the option of REV
Holdings in whole or from time to time in part at any time on and after March
15, 2000 at 102.6875% of their accreted value on the date of redemption. Upon a
Change of Control (as defined in the Indenture for the Senior Secured Discount
Notes (the "Senior Secured Discount Notes Indenture")) REV Holdings may redeem
the Senior Secured Discount Notes, in whole, at a redemption price equal to the
Accreted Value plus the Applicable Premium (each as defined in the Senior
Secured Discount Notes Indenture).
The Senior Secured Discount Notes Indenture requires the Company to hold at
all times a minimum percentage of common stock of Revlon, Inc. pledged to secure
the Senior Secured Discount Notes. In addition, the Senior Secured Discount
Notes Indenture contains covenants that, among other things, limit (i) the
issuance of additional debt and redeemable stock by the Company or Revlon, Inc.
and the issuance of preferred stock by Revlon, Inc., (ii) the issuance of debt
and preferred stock by Products Corporation and its subsidiaries, (iii) the
payments of
F-19
dividends on capital stock of the Company and its subsidiaries and the
redemption of capital stock of the Company, (iv) the sale of assets and
subsidiary stock, (v) transactions with affiliates and (vi) consolidations,
mergers and transfers of all or substantially all of the Company's assets. The
Senior Secured Discount Notes Indenture also prohibits certain restrictions on
distributions from subsidiaries. All of these limitations and prohibitions,
however, are subject to a number of qualifications which are set forth in the
Senior Secured Discount Notes Indenture.
The 1999 Notes Indenture, the 8 1/8% Notes Indenture, the 8 5/8% Notes
Indenture, the 9% Notes Indenture and the Senior Secured Discount Notes
Indenture contain customary events of default for debt instruments of such type.
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, $651.0, $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.
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 $(238.8) and
$22.7 (less) more than the carrying value of $2,271.2 and $2,305.0,
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.
F-20
The carrying amounts of cash and cash equivalents, marketable securities,
trade receivables, accounts payable and short-term borrowings approximate their
fair values.
The Company accounts for investments in marketable securities, which
consisted of U.S. Treasury Bills, in accordance with SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." As of December 31, 1997,
the fair market value of the Company's investments in restricted marketable
securities approximated its carrying value. The restricted marketable securities
were deposited in an irrevocable trust in connection with the covenant
defeasance of a portion of the Revlon Worldwide Notes. On March 16, 1998, $337.4
of funds held in the irrevocable trust was used to repay the remaining Revlon
Worldwide Notes upon their maturity.
13. INCOME TAXES
In June 1992, Holdings, Revlon, Inc., Products Corporation and certain of
its subsidiaries, and Mafco Holdings entered into a tax sharing agreement (as
subsequently amended, the "1992 Tax Sharing Agreement"), pursuant to which Mafco
Holdings has agreed to indemnify Revlon, Inc. and Products Corporation against
federal, state or local income tax liabilities of the consolidated or combined
group of which Mafco Holdings (or a subsidiary of Mafco Holdings other than
Revlon, Inc. 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 1992 Tax Sharing
Agreement, for all taxable periods beginning on or after January 1, 1992,
Revlon, Inc. will pay to Holdings amounts equal to the taxes that Revlon, Inc.
would otherwise have to pay if it were to file separate federal, state or local
income tax returns (including any amounts determined to be due as a result of a
redetermination arising from an audit or otherwise of the consolidated or
combined tax liability relating to any such period which is attributable to
Revlon, Inc.), except that Revlon, Inc. will not be entitled to carry back any
losses to taxable periods ending prior to January 1, 1992. No payments are
required by Revlon, Inc. if and to the extent 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.
In March 1993, Revlon Worldwide (now REV Holdings) and Mafco Holdings
entered into a tax sharing agreement (the "1993 Tax Sharing Agreement" and,
together with the 1992 Tax Sharing Agreement, the "Tax Sharing Agreements")
pursuant to which, for all taxable periods beginning on or after January 1,
1993, REV Holdings will pay to Mafco Holdings amounts equal to the taxes that
REV Holdings would otherwise have to pay if it were to file separate federal,
state and local income tax returns for itself, excluding Revlon, Inc. and its
subsidiaries (including any amounts determined to be due as a result of a
redetermination arising from an audit or otherwise of the tax liability relating
to any such period which is attributable to REV Holdings).
Since the payments to be made by Revlon, Inc. under the 1992 Tax Sharing
Agreement and by REV Holdings under the 1993 Tax Sharing Agreement will be
determined by the amount of taxes that Revlon, Inc. or REV Holdings, as the case
may be, would otherwise have to pay if they were to file separate federal, state
or local 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. or REV Holdings against losses and tax credits generated by Mafco
Holdings and its other subsidiaries. With respect to REV Holdings, as a result
of the absence of business operations or a source of income of its own, no
federal tax payments or payments in lieu of taxes pursuant to the 1993 Tax
Sharing Agreement were required for 1998, 1997 or 1996. With respect to Revlon,
Inc., as a result of net operating tax losses and prohibitions under the Credit
Agreement, no federal tax payments or payments in lieu of taxes pursuant to the
1992 Tax Sharing Agreement were required for 1998, 1997 or 1996. Revlon, Inc.
has a liability of $0.9 to Holdings in respect of federal taxes for 1997 under
the 1992 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-21
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 ..................................................... $ (50.9) $ (5.3) $ 86.2
Foreign ...................................................... (37.6) (15.5) 40.5
------- ------- -------
$ (88.5) $ (20.8) $ 126.7
======= ======= =======
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 ...... 0.4 3.4 0.6
Foreign and U.S. tax effects attributable to operations
outside the U.S .............................................. 18.9 43.1 14.3
Tax write-off of U.S. investment in foreign subsidiary ........ (58.7) -- --
Nondeductible amortization expense ............................ 3.4 14.6 2.3
U.S. loss without benefit ..................................... 76.7 25.5 19.8
Nontaxable gain on sale of subsidiary stock ................... -- -- (51.9)
Other ......................................................... (0.1) (6.9) --
----- ----- ----
Effective rate ................................................ 5.6% 44.7% 20.1%
===== ===== ====
F-22
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 ............................. 386.5 279.7
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 ....................................... 642.2 499.9
Less valuation allowance .............................................. (579.2) (452.2)
-------- --------
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
$452.2. The valuation allowance increased by $127.0 during 1998 and decreased by
$7.8 during 1997 and increased by $29.0 during 1996.
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 $1,390.9 as compared with $1,073.0 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-$1,154.3; 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.
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.
F-23
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.
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 employee stock options under the Plan 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, the Company's net (loss) income for 1998 of
$(209.4), 1997 of $(88.1) and $95.0 for 1996 would have been changed to the pro
forma amounts of $(233.0) for 1998, $(100.4) for 1997 and $91.8 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.
Under the Plan, options may be granted to employees for up to an aggregate
of 5.0 million shares of Revlon, Inc. 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 Revlon, Inc. Class A Common Stock at an exercise price
which must be not
F-25
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 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, Revlon,
Inc. granted to Mr. Perelman, Chairman of the Board, options to purchase 300,000
shares of Revlon, Inc. 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. Products Corporation
reimburses MacAndrews Holdings for the allocable costs of the services purchased
for or provided to Revlon, Inc. and its subsidiaries and for reasonable
out-of-pocket expenses incurred in connection with the provision of such
services. MacAndrews Holdings (or such affiliates) reimburses Products
Corporation for the allocable costs of the services purchased for or provided to
MacAndrews Holdings (or such affiliates) and for the reasonable out-of-pocket
expenses incurred in connection with the purchase or provision of such services.
The net amounts reimbursed by MacAndrews Holdings to Products Corporation 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. REV Holdings does not expect Revlon, Inc. or Products
Corporation to request services under the Reimbursement Agreements unless their
costs would be at least as favorable to Revlon, Inc. or Products Corporation, as
the case may be, as could be obtained from unaffiliated third parties.
F-27
In March 1993, Revlon Worldwide (now REV Holdings) and MacAndrews Holdings
entered into a reimbursement agreement pursuant to which MacAndrews Holdings
agreed to provide third party services to REV Holdings on the same basis as it
provides services to Revlon, Inc., and REV Holdings agreed to indemnify
MacAndrews Holdings on the same basis as Revlon, Inc. is obligated to indemnify
MacAndrews Holdings under the Reimbursement Agreements. There were no services
provided and no payments made pursuant to this agreement during 1998, 1997 or
1996.
TAX SHARING AGREEMENTS
Holdings, Revlon, Inc., Products Corporation and certain of its
subsidiaries and Mafco Holdings are parties to the 1992 Tax Sharing Agreement
and Revlon Worldwide (now REV Holdings) and Mafco Holdings are parties to the
1993 Tax Sharing Agreement, each of which is described in Note 13. Since
payments to be made by Revlon, Inc. under the 1992 Tax Sharing Agreement and by
REV Holdings under the 1993 Tax Sharing Agreement will be determined by the
amount of taxes that Revlon, Inc. or REV Holdings, as the case may be, would
otherwise have to pay if they were to file separate federal, state or local
income tax returns, the Tax Sharing Agreements will benefit Mafco Holdings to
the extent Mafco Holdings can offset the taxable income generated by Revlon,
Inc. or REV Holdings against losses and tax credits generated by Mafco Holdings
and its other subsidiaries.
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 (now 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 its affiliate 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 Products Corporation
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.
F-29
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 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, a director of Products Corporation during part of 1998, which advance was
repaid in January 1999.
F-30
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 Products Corporation 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 its affiliate 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 its affiliate 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 Products Corporation 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.
In connection with the cancellation of the Revlon Worldwide Notes, at
December 31, 1998 REV Holdings had an outstanding payable to an affiliate of
approximately $1.9.
REV Holdings has guaranteed, on a non-recourse basis, certain obligations
of an affiliate and has pledged certain shares of the Revlon, Inc. common stock
owned by REV Holdings to secure such guarantee.
F-31
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.
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 from continuing operations ........................... (33.6) (3.2) (3.5)(a) (53.2)(a)
Loss from discontinued operations ......................... (4.6) (26.9) -- (32.7)
Extraordinary items-early extinguishments of debt ......... (38.2) (13.5) -- --
Net loss .................................................. (76.4) (43.6) (3.5) (85.9)
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 .................. (52.0) (10.5) 15.3 17.1
(Loss) income from discontinued operations ................ (2.8) 1.0 (1.5) 4.0
Extraordinary items-early extinguishments of debt ......... (43.8) (14.9) -- --
Net (loss) income ......................................... (98.6) (24.4) 13.8 21.1
(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.
GEOGRAPHIC AREAS: YEAR ENDED DECEMBER 31,
----------------------------------
Net sales: 1998 1997 1996
---------- ---------- ----------
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 ..................... $646.0 $557.4
International ..................... 287.4 280.5
--------------- -----------------
$933.4 $837.9
=============== =================
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
REV HOLDINGS 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.
REV Holdings Inc.
(Registrant)
By: /s/ Todd J. Slotkin By: /s/ Lawrence E. Kreider
---------------------------- ------------------------------
Todd J. Slotkin Lawrence E. Kreider
Executive Vice Senior Vice President
President and Controller and
Chief Financial Officer Chief Accounting Officer
Dated: March 17, 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
17, 1999 and in the capacities indicated.
Signature Title
*
__________________________________ Chairman of the Board, Chief Executive
(Ronald O. Perelman) Officer and Director
*
__________________________________ Vice Chairman of the Board and Director
(Howard Gittis)
*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