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, 19971998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________________ TO __________________
COMMISSION FILE NUMBER 1-11334
REVLON CONSUMER PRODUCTS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3662953
(STATE OR OTHER JURISDICTION OF(State or other jurisdiction of (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.Employer
incorporation or organization) Identification No.)
625 MADISON AVENUE, NEW YORK, NEW YORKMadison Avenue, New York, New York 10022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 527-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B)12(b) OR 12(G)12(g) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTEREDName of each exchange
Title of each class on which registered
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10 1/2% SENIOR SUBORDINATED NOTES DUE 2003 N/A
9 3/8% SENIOR NOTES DUE 2001 N/A
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9 1/2% SENIOR NOTES DUESenior Notes due 1999 NEW YORK STOCK EXCHANGE, INC.New York Stock Exchange, Inc.
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
ItemINDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 of RegulationOF 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 PartIS 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 FormOF THIS FORM 10-K or any
amendment to this FormOR 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 ONE AFFILIATE. THE NUMBER OF OUTSTANDING
SHARES OF THE REGISTRANT'S COMMON STOCK, AS OF FEBRUARY 23, 1998,18, 1999, WAS 1,000.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
Revlon Consumer Products Corporation ("Products Corporation" and
together with its subsidiaries, the "Company") operates in a single business
segment with
many different products, which include an extensive array of glamorous, exciting
and innovative cosmetics and skin care, fragrance, personal care products
("consumer products"), and hair and nail care products principally for use in
and resale by professional products.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, ALMAY TIME-OFF, ULTIMA II,
JEANNE GATINEAU and NATURAL HONEY in skin care; CHARLIE and FIRE & ICE in
fragrances; FLEX, OUTRAGEOUS, AQUAMARINE, 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 the United States
self-select distribution channel in lip makeup and nail enamel
(which the Company has occupied for the past 2122 years) for 1997. The Company has, with the number one and
two position in faceselling brands of lip makeup in the United States self-select
distribution channel for 1997.1998. Propelled by the success of its new
product launches and market share gains in its existing product lines, the CompanyREVLON brand captured in
1996 and continued to hold in 19971998 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 21.6%21.2% for
1997.1998. 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 in which
consumers select their own purchases without the assistance of an in-store
demonstrator, includes
independent drug stores and chain drug stores (such as Walgreens, CVS, EckerdsEckerd
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.
The Company operates in a single business segment with many different
products, which include cosmetics and skin care, fragrance and personal care
products ("consumer products"), and hair and nail care products principally for
use in and resale by professional salons ("professional products"). The Company
presents its business geographically as its United States operation, which
comprises the Company's business in the United States, and its International
operation, which comprises its business outside of the United States.
On February 2,November 6, 1998, Revlon Escrow Corp. ("Revlon Escrow"), an
affiliate of Products Corporation issued and sold in a private
placement $650$250.0 million aggregate principal amount of 8 5/8% Senior Subordinated Notes due 2008
(the "8 5/8% Notes") and $250 million aggregate principal amount of 8 1/8%9% Senior Notes due 2006
(the "8 1/8%"9% Notes" and, together with the 8 5/8% Notes,
the "Notes"), with thereceiving net proceeds deposited into escrow. Theof $247.2 million. Products Corporation
intends to use $200.0 million of the net proceeds from the sale of the 9% Notes
to refinance Products Corporation's 9 1/2% Senior Notes due 1999 (the "1999
Notes"), including through open market purchases. Products Corporation intends
to use the balance of the net proceeds for general corporate purposes, including
to temporarily reduce indebtedness under the working capital lines under the
Credit Agreement (as hereinafter defined). Pending the refinancing of the 1999
Notes, such net proceeds will be retained by Products Corporation and a portion
of such proceeds will be used to financetemporarily reduce indebtedness under the
redemption of Products
Corporation's $555 million aggregate principal amount of 10 1/2% Senior
Subordinated Notes due 2003 (the "Senior Subordinated Notes")working capital lines under the Credit Agreement and $260 million
aggregate principal amount of 9 3/8% Senior Notes due 2001 (the "Senior
2
Notes" and, together with the Senior Subordinated Notes, the "Old Notes").
Products Corporation delivered a redemption notice to the holdersunder other short-term
facilities. On February 24, 1999, substantially all of the Senior
Subordinated9% 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 will assume 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"). On or before
March 19, 1998 either Revlon Escrow or Products Corporation is required to file
a registration statement with the Securities and Exchange Commission (the
"Commission") with respect to an offer to exchange the Noteswere
exchanged for registered notes with substantially identical terms (the "Exchange Offer"9% Notes
and the registered exchange notes shall each be referred to as the "9% Notes").
The Exchange
Offer is expected to occur on or before July 2
1998.
On April 25, 1997, Prestige Fragrance & Cosmetics, Inc. ("PFC"), a
wholly owned subsidiary of
During 1998, Products Corporation andcompleted the disposition of its
approximately 85% equity interest in The Cosmetic Center, Inc. ("CCI"Cosmetic
Center") completed the merger of PFC, along with and into CCI (the "Cosmetic Center
Merger") with CCI (subsequent to thecertain amounts due from Cosmetic Center Merger, "Cosmetic Center")
surviving the Cosmetic Center Merger. In the Cosmetic Center Merger,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 exchangethe limited partnership as
consideration for allthe 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 capital stockwigs
and hairpieces portion of PFC newly
issued Class C Common Stock of Cosmetic Center constituting approximately 85.0%
of Cosmetic Center's outstanding common stock. Accordingly, the Cosmetic Center
Merger was accounted for as a reverse acquisition using the purchase method of
accounting, so that PFC is considered the acquiring entity for accounting
purposes even though Cosmetic Center is the surviving legal entity. The results
of the Company for 1997 include the results of operations of Cosmetic Center
from and after the effective date of the Cosmetic Center Merger.
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 10 7/8% Sinking Fund Debentures due 2010 (the "Sinking
Fund Debentures") and were and will be used for general corporate purposes or,its business in the case of the Acquisition Facility (as defined herein), the financing of
acquisitions. The Credit Agreement provides up to $750.0 million and is
comprised of five senior secured facilities: $200.0 million in two term loan
facilities (the "Term Loan Facilities"), a $300.0 million multi-currency
facility (the "Multi-Currency Facility"), a $200.0 million revolving
acquisition facility, which may be increased to $400.0 million under certain
circumstances with the consent of a majority of the lenders (the "Acquisition
Facility"), and a $50.0 million special standby letter of credit facility (the
"Special LC Facility").
On March 5, 1996, Revlon, Inc., the direct parent of Products
Corporation, completed an initial public equity offering (the "Revlon IPO") in
which it issued and sold 8,625,000 shares of its Class A Common Stock for
$24.00 per share. The proceeds, net of underwriters' discount and related fees
and expenses, of $187.8 million were contributed to Products Corporation and
were used by Products Corporation to repay borrowings outstanding under
Products Corporation's credit agreement in effect at that time (the "1995
Credit Agreement") and to pay fees and expenses related to entering into the
1996 Credit Agreement.United States.
Products Corporation was incorporated in Delaware in April 1992. On June
24, 1992, 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 the formation of
Products Corporation mean the cosmetics and skin care, fragrance and personal
care products business of Holdings to which Products Corporation has succeeded.
Unless the context otherwise requires, all references in this Form 10-K to the
Company, Revlon or Products Corporation mean Revlon Consumer Products
Corporation and its subsidiaries.
All United States market share and market position data herein for the
Company's brands are based upon retail dollar sales, which are derived from A.C.
Nielsen data. A.C. Nielsen measures retail sales volume of products sold in the
United States self-select distribution channel. Such data represent A.C.
Nielsen's estimates based upon data gathered by A.C. Nielsen from market samples. Such datasamples
and are therefore subject to some degree of variance.
3
BUSINESS STRATEGY
The Company's business strategy, which implements its vision and is intended to continue to improve its
operating performance, is to:
o Strengthen and broaden its core brands through globalization of marketing and
advertising, product development and manufacturing and
through increasing its emphasis on advertising and promotion.manufacturing;
o Lead the industry in the development and introduction of technologically
advanced, innovative products that set new trends.trends;
o Expand the Company's presence in all markets in which the Companyit competes and enter
new and emerging markets.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.capital; and
o Continue to expand market share and product lines through possible strategic
acquisitions or joint ventures.
43
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 PROFESSIONAL PRODUCTS
PRODUCTS
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REVLON Revlon, Revlon, ColorStay, Moon Drops, Charlie, Charlie Red, Flex, Outrageous, Revlon
ColorStay, Drops, Charlie Aquamarine, Professional,
Revlon Revlon Red, Mitchum, Roux Fanci-full,
Age Defying, Revlon Results, Charlie White, Aquamarine, Professional, Roux
StreetWear, SuperLady Mitchum, Realistic, Creme
Defying, Eterna 27, Charlie Sunshine, Mitchum, Lady Fanci-full,
Lustrous, Moon Revlon Age Fire & Ice, Fire & Mitchum,White, Hi & Dri, of Nature, Sensor
Super 27, Fire ColorStay, Perm, Perfect
Lustrous, Revlon & Colorsilk, Perm, Fermodyl,
MoistureStay, Age Ice, African Pride, Perfect Touch,
Moon Defying Jontue, Frost & Glow, Salon Perfection,
Drops, Ciara Revlon Shadings, Revlonissimo,
Line Jean Nate, Voila, Young
& Roux Fanci-full, Color, Creative
Shine, Realistic, Nail, Contours,
New Creme of Drops, VelvetNature, American Crew,
Complexion, Herba Rich, R PRO,
Touch Defying Ice Cool, Jontue, ColorStay, Nature, Sensor
LineFabu-laxer True Cystem
&
Shine, New Ciara, Body Kisses Colorsilk, Frost & Perm, Perfect Perm,
Complexion, Overtime Glow, Revlon Fermodyl, Perfect
Eyes, Touch & Glow, Shadings, Jean Touch, Salon
Top
Speed,
Lashful,
Nate, Roux Perfection,
Lengthwise, Fanci-full, Revlonissimo,
Naturally
Glamorous,
Realistic, Creme Voila, Young Color,
Custom
Eyes,
of Nature, Herba Creative Nail,
Timeliner,
StreetWear,
Revlon
Rich, Fabu-laxer Contours, American
Implements
Crew, R PRO, True
Cystem
AlmayALMAY Almay, Time-Off, Sensitive Care, Almay
Almay ClearAmazing, One Coat, Oil Control,
Complexion Makeup,Stay Smooth, Time-Off,
Amazing, One CoatAlmay Stay Clean Moisture
Balance,
Moisture Renew,
Almay Clear
Complexion Skin
Care
UltimaULTIMA II Ultima II, Beautiful Ultima II,Glowtion, Vital
Nutrient, Wonderwear, Radiance,
Wonderwear, The Nakeds, Full Interactives, CHR
Nakeds
Significant Colorama(b)Moisture
SIGNIFICANT Colorama(a), Jeanne Floid(b)Floid(a), Versace(a)Plusbelle(a), Plusbelle(b)Colomer(a),
Colomer(b)REGIONAL Juvena(a), Regional Juvena(b), Gatineau(b)Gatineau(a), Charlie Gold Bozzano(b)Bozzano(a), Intercosmo(b)Intercosmo(a),
BrandsBRANDS Jeanne Gatineau(b)Gatineau(a), Natural Honey Juvena(b)Juvena(a), Personal Bio
Cutex(a) Geniol(a), Point, Geniol(b)Natural
Colorama(a), Natural Wonder,
Colorama(b)Llongueras(a), Llongueras(b)
Llongueras(b),Llongueras(a)
Bain de Soleil(b)Soleil(a),
ZP-11
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(a) License held for distribution in certain countries outside the
United States.
(b) Trademark owned in certain markets outside the United States.
4
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.
5
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 40approximately 50 shades. SUPER LUSTROUS lipstick is
produced in 60approximately 70 shades. MOON DROPS, a moisturizing lipstick, is
produced in 57approximately 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 8approximately 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 52approximately 80 shades and contains a patented speed drying polymer formula
which sets in 90 seconds. STRONG WEAR, a patented strengthening nail enamel formula produced
in 27 shades, contains ingredients that provide protection against splitting,
chipping and breaking. RevlonREVLON has the number one position in nail enamel in
the United States self-select distribution channel. The Company also sells NAIL
BUILDERS, which includesCUTEX
nail strengtheners, hardenerspolish remover and fortifiers.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, foundation, which uses
patent-pending transfer-resistant technology that provides long wear; and NEW
COMPLEXION, for consumers in the 2518 to 4934 age bracket.
The Company's eye makeup products include mascaras, eyeliners, eye
shadows and brow color and liners.color. COLORSTAY eyecolor, mascara and brow color, LASHFUL
and
LENGTHWISE mascaras,mascara, SOFTSTROKE eyeliners and REVLON CUSTOM EYES and OVERTIME
SHADOW eye shadows are targeted
for women in the 18 to 49 age bracket, and
REVLON AGE DEFYING eye color is targeted for women over 35.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.skin" with "no fuss." The Company
positions the ALMAY brand as the clean, natural-looking and healthy choice.
ALMAY products include lip makeup, nail color and nail care products, eye and
face makeup, skin care products, and sunscreen lotions and creams, including
TIME-OFF makeup and skin care and the ALMAY AMAZING collection, which includes
ALMAY AMAZING LASTING lip makeup, which includes the Company's proprietary
transfer-resistant technology developed for COLORSTAY, ALMAY AMAZING LASH mascara, ALMAY AMAZING eye makeup, ALMAY AMAZING LASTING
makeup, and ALMAY CLEAR COMPLEXION SKIN CARE and MAKEUP, and ALMAY EASY-TO-WEAR
eyecolor, TIME-OFF makeup and skin care, ALMAY ONE COAT mascara.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 consciousvalue-conscious consumers by offering benefits
comparable to higher priced products, such as Clinique, at affordable prices.
ALMAY iswas the leadingfastest-growing major brand in the hypo-allergenic market in
the United States self-select distribution channel.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 trend
consciousyoung,
value-conscious consumer.
STREETWEAR was developed in response toThe Company's premium priced cosmetics and skin care products are sold
under the recent trend in
colorULTIMA 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 fashion coming fromface 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 street.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
5
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.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.
6
TheHONEY and the Company's premium priced cosmetics and skin care products are sold
under the ULTIMA II brand name, which is the Company's flagship premium priced
brand sold throughout the world, and the JEANNE
GATINEAU brand name, which is
sold outside the United States. The ULTIMA II line includes the WONDERWEAR
collection, which includes a long-wearing foundation that uses patent-pending
technology, cheek and eyecolor products that use proprietary technology that
provides long wear, and WONDERWEAR LIPSEXXXY lipstick, which uses patented
transfer-resistant technology that provides long wear, the BEAUTIFUL NUTRIENT
collection, a complete line of nourishing makeup that provides advanced
nutrient protection against dryness and THE NAKEDS makeup, a trend-setting line
of makeup emphasizing neutral colors.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, CHARLIE SUNSHINE and FIRE &
ICE COOL.WHITE. The Company's CHARLIE
fragrance has been a market leader since the mid-1970's and, the Company believes, one of the top selling fragrances
worldwide.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
recent acquisitions, Creative Nail Design, Inc. ("Creative Nail"),CREATIVE NAIL, acquired in November 1995, and American Crew, Inc.,AMERICAN CREW,
acquired in April 1996, increase the Company's strength in the exclusive
distribution channel. Through Creative Nail,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, Inc.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.
The Company
markets in salons, beauty supply stores and the self-select distribution
channel several lines of hair relaxers, styling products, hair conditioners and
other hair care products under such names as FABU-LAXER and CREME OF NATURE
designed for the particular needs of ethnic consumers. The Company also
developed a new exclusive line of ethnic products, AROSCI, which was launched
in 1996. The Company also sells wigs and hair pieces to retail outlets and
certain professional salons under the REVLON brand and, pursuant to a license,
under the ADOLFO brand.
76
MARKETING
The Company's vision is to provide glamour, excitement and innovation
through quality products at affordable prices. The Company's marketing efforts
are designed to implement this vision. The Company has formed Global Marketing
Committees, consisting of managers from the Company's marketing, research and
development, operations, advertising and finance departments from the United
States and abroad, which develop strategies for the Company's current and new
brands and products. The Global Marketing Committees coordinate the Company's
globalization efforts while allowing sufficient flexibility to tailor products
to local and regional preferences.
Consumer Products. The Company markets extensive consumer product lines
at a range of retail prices primarily through the self-select distribution
channel and markets select premium lines through demonstrator-assisted channels.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.
Advertising and consumer-directed promotion expenditures increased by 11.8% in
1997 over 1996 levels and by 17.4% in 1996 over 1995 levels. 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 34approximately 78 countries and 18approximately
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. The Company has created on-the-road beauty sampling and information
vehicles that travel to major retailers throughout the United States, at which
Company trainers educate consumers on the latest product and shade offerings.
These vehicles create consumer and retail excitement about the Company's new
and existing products and encourage trial and purchase by consumers. Other marketing materials designed to introduce the
Company's newest products to consumers and encourage trial and purchase include
point-of-sale testers on the Company's display units that provide information
about, and permit consumers to test, the Company's products, thereby achieving
the benefits of an in-store demonstrator without the corresponding cost;cost,
magazine inserts containing samples of the Company's newest products;products, trial size
products and "shade samplers," which are collections of trial size products in
different shades. Additionally, the Company'sCompany has its own website at http://www.revlon.comwhich features
current product and promotional information and was recently recognized by a major
national business magazine as one of the top corporate sites on the World Wide
Web. Revlon was the only cosmetics company to receive this recognition.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 Company's 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.
8
NEW PRODUCT DEVELOPMENT AND RESEARCH AND DEVELOPMENT
The Company believes that it is an industry leader in the development
of innovative and technologically-advanced consumer and professional products.
The Company's marketing and research and development groups identify consumer
needs and shifts in consumer preferences in order to develop new product
introductions, tailor line extensions and promotions and redesign or reformulate
existing products to satisfy such needs or preferences. The Company's Advanced Concept Group consistsresearch
and development group is comprised of a selectdepartments 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 group
that conducts
research on a wide range of areastechnologies to develop new and innovative technology.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.
7
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, 1997,1998, 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 1996 and 19951996, the Company spent
approximately $31.9 million, $29.7 million $26.3 million and $22.3$26.3 million, respectively, on
research and development activities.
In certain instances, proprietary technology developed by the Company
for use in products and packaging is available for licensing to third parties
through the Company's Revlon Technologies division. In 1995, the Company
received the Innovation Award from the Coalition of NorthEast Governors
("CONEG") for its patented and patent-pending ENVIROGLUV glass decorating
technology (which resulted in significant cost reductions in decorating REVLON
AGE DEFYING and COLORSTAY makeup bottles and REVLON nail enamel bottles and
which is being offered for licensing to qualified glass decorators). The CONEG
challenge awards program is a nationwide competition to recognize companies
that make significant contributions to packaging and source reduction.
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
continuing 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 throughin
salons worldwide are manufactured and distributed through the Vista, California
facility. Personal care implementsImplements 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. An ISO-9002
certification is an internationally recognized standard for manufacturing
9
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 has beenis
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 has beenis centralized in Brazil. The MaestegMaestag and IrishIreland
facilities have been certified by the British equivalent of ISO-9002.
8
The Company purchases raw materials and components throughout the
world. The Company continuously pursues reductions in cost of goods through the
global sourcing of raw materials and components from qualified vendors,
utilizing its large purchasing capacity to maximize cost savings. The global
sourcing of raw materials and components from accredited vendors also ensures
the quality of the raw materials and components. The Company believes that
alternate sources of raw materials and components exist and does not anticipate
any significant shortages of, or difficulty in obtaining, such materials.
The Company's improvements in manufacturing, sourcing and related
operations have contributed to improved customer service, including an
improvement in the percentage of timely order fulfillment from most of the
Company's principal manufacturing facilities, and the timeliness and accuracy of
new product and promotion deliveries. To promote the Company's understanding of
and responsiveness to the needs of its retail customers, the Company assigns members of senior operations managementhas
dedicated teams assigned to lead inter-departmental
teams that visit significant accounts, and has provided retail
accounts with a designated customer service representative. TheAs a result of these
efforts, accompanied by stronger and more customer-focused management, the
Company emphasizes safetyhas developed strong relationships with its retailers and increased training of employees
resulting in an improved safety record. The Company anticipates that the
globalization of, and continued improvement in, the quality of its
manufacturing operations will result in lower manufacturing costs.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 onto outside
vendors for improvements to its management information systems were
approximately $12$11 million for 1997,
and the Company anticipates a similar level of expenditure in 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 made an evaluation of steps necessaryalso developed a comprehensive plan intended to address
issues related to required changes in computer systems for theYear 2000 issues. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Year 2000. While
the Company has determined that it currently has computer systems that require
modification to be Year 2000 compliant, many of the modifications are being
accomplished as part of the systems improvements referred to above. As to its
systems which are not impacted by the improvements referred to above, the
Company is identifying those which require modification or replacement to
address the Year 2000 issue. Management believes that there is no material risk
that the Company will fail to address the Year 2000 issues in a timely manner.
Additionally, the Company believes that the Year 2000 issue will not have a
material effect on its financial condition.
10
"
DISTRIBUTION
As a result of its improved customer service and consumer traffic
generated by its products and innovative marketing programs, the Company
believes that its relationships with self-select distribution cosmetic
retailers are the best in the cosmetics industry.
The Company's products are sold in approximately 175 countries and
territories. The Company's worldwide sales force had approximately 2,9001,800 people
as of December 31, 1997,1998, including a dedicated sales forceforces 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, and for retail stores.distribution. In addition, the Company utilizes sales
representatives and independent distributors to serve specialized markets and
related distribution channels.
United States. TheNet sales in the United States operation's net sales accounted for
approximately 60.8%59.4% of the Company's 19971998 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, 1997, 191998, 14
licenses were in effect relating to 2118 product categories to be marketed in the
self-select distribution channel. Pursuant to the licenses, the Company retains
strict control over product design and development, product quality, advertising
and use of its trademarks. These licensing arrangements offer opportunities for
the Company to generate revenues and cash flow through earned royalties, royalty
advances and, in some cases, up-front licensing fees. Products designed for
professional use or resale by beauty salons are sold through wholesale beauty
supply distributors and directly to professional salons. Various hair care
products, such as ethnic hair relaxers, scalp conditioners, shampoos and hair
coloring products and wigs and hairpieces are sold directly and through wholesalers to chain drug stores
and mass volume retailers.
Wigs and hairpieces are also sold through mail order direct
marketing, retail outlet malls, salons and certain department stores.
The Company also operates retail stores through Cosmetic Center. As of
December 31, 1997, Cosmetic Center's retail (or Cosmetic Center) division
operated 66 specialty retail stores in the middle Atlantic region and in
Chicago and its outlet (or Prestige Fragrance & Cosmetics) division operated
201 retail outlet stores throughoutInternational. Net sales outside the United States. The stores in the
Cosmetic Center division offer a broad range of brand name prestige and mass
merchandised cosmetics products at value prices. The stores in the Prestige
Fragrance & Cosmetics division operate in factory outlet malls, rural areas and
other similar locations that are not disruptive to the Company's principal
distribution channels. In these stores, Cosmetic Center sells the Company's
first quality, first quality excess, returned and refurbished, and discontinued
consumer products and retail professional products, as well as similar products
of other cosmetics companies.
International. The International operation's net salesStates accounted for
approximately 39.2%40.6% of the Company's 19971998 net sales. The International
operation's ten largest countries
in terms of these sales, which include, among others, Brazil, Spain, the United
Kingdom, Australia, South Africa Canada and Japan,Canada, accounted for approximately 28%30% of
the Company's net sales in 1997,1998, with Brazil accounting for approximately 5.5%5.4%
of the Company's net sales. The International operationCompany is increasing distribution through the
expanding self-select distribution channels outside the United States, such as
drug stores/chemists, hypermarkets/mass volume retailers and variety stores, as
these channels gain importance. The International operationCompany also distributes outside the United
States through department stores and specialty stores such as perfumeries. The
International operation's9
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. As ofcountries outside the United
States. At December 31, 1997,1998, the Company actively sold its products through
wholly owned subsidiaries established in 26 countries outside of the United
States through
joint ventures in India and Indonesia, and through a large number of distributors and licensees elsewhere around
the world. The Company continues to pursue strategies to establish its presence
in new emerging markets. Such new
and emerging markets include Eastern Europe; Russia; and China, where inthe Company identifies opportunities for growth. In 1996
the Company established a subsidiary in China with a local minority partner. In
addition, the Company is building a franchise through local distributorships in
northern and central Africa, where the Company intends to expand the
distribution of its products by capitalizing on its market strengths in South
Africa.
11
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. The foregoing principal customers eachWal-Mart and its affiliates worldwide accounted for
1% or
moreapproximately 10.1% of the Company's 1998 consolidated net sales in 1997sales. 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 are representative of the
Company's
customers.Company has no reason to believe that Wal-Mart will not continue as a customer.
COMPETITION
The cosmetics and skin care, fragrance, personal care and professional
products business is characterized by vigorous competition throughout the world.
Brand recognition, together with product quality, performance and price and the
extent to which consumers are educated on product benefits, have a marked
influence on consumers' choices among competing products and brands.
Advertising, promotion, merchandising and packaging, and the timing of new
product introductions and line extensions, also have a significant impact on
buying decisions, and the structure and quality of the sales force affect
product reception, in-store position, permanent display space and inventory
levels in retail outlets. The Company competes in most of its product categories
against a number of companies, some of which have substantially greater
resources than the Company. In addition to products sold in the self-select and
demonstrator-assisted distribution channels, the Company's products also compete
with similar products sold door-to-door or through mail order or telemarketing
by representatives of direct sales companies. The Company's principal
competitors include L'Oreal S.A., The Procter & Gamble Company Helene Curtis Industries, Inc. and Joh A. Benckiser GmbHUnilever N.V.
in the self-select distribution channel; L'Oreal S.A., Unilever N.V., and Estee
Lauder, Inc. and Joh A. Benckiser GmbH in the demonstrator-assisted distribution channel; and L'Oreal S.A. andS.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 LIPSEXXXY 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 haircolor, FLEX & GO shampoo,
LENGTHWISE mascara,hair color, classic REVLON
10
nail enamel, TOP SPEED nail enamel, REVLON AGE DEFYING foundation and cosmetics,
NEW COMPLEXION makeup, WONDERWEAR foundation, WONDERWEAR LIPSEXXXY 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 FLEX hairspray and various professional products, including FERMODYL shampoo and
conditioners. The Company also protects certain of its packaging and component
concepts through design patents. The Company considers its proprietary
technology and patent protection to be important to its business.
12
GOVERNMENT REGULATION
The Company is subject to regulation by the Federal Trade Commission
and the Food and Drug Administration (the "FDA") in the United States, as well
as various other federal, state, local and foreign regulatory authorities. The
Phoenix, Arizona, and Oxford, North Carolina 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.packaging
INDUSTRY SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS
The Company operates in a single business segment. Certain geographic, financial
and other information of the Company is set forth in Note 1819 of the Notes to
Consolidated Financial Statements of the Company.
EMPLOYEES
As of December 31, 1997,1998, the Company employed the equivalent of
approximately 16,00013,000 full-time persons.persons (before the effect of the restructuring).
Approximately 2,1002,000 of such employees in the United States are covered by
collective bargaining agreements. The Company will be negotiating collective bargaining agreements or portions
thereof covering employees in eleven countries outside the United States during
1998 (namely, Australia, Brazil, England, France, Ireland, Israel, Italy,
Japan, Mexico, South Africa and Spain). Although there can be no assurance, the
Company expects that such agreements will be renewed in the ordinary course,
and further 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.
1311
ITEM 2. PROPERTIES
The following table sets forth as of December 31, 19971998 the Company's
major manufacturing, research and warehouse/distribution facilities, all of
which are owned except where otherwise noted.
APPROXIMATE FLOOR
LOCATION USE SPACE SQ. FT.
- -------- --- -------------
United States:
Oxford, North Carolina....................Carolina................ Manufacturing, warehousing, distribution and office 1,012,000
Phoenix, Arizona............Arizona...................... Manufacturing, warehousing, distribution and office 706,000
(partially leased) 706,000
Jacksonville, Florida.......Florida................. Manufacturing, warehousing, distribution, research and 526,000
office Columbia, Maryland.......... Warehousing, distribution and office (leased) 200,000526,000
Edison, New Jersey..........Jersey.................... Research and office (leased) 133,000175,000
Irvington, New Jersey.......Jersey................. Manufacturing, warehousewarehousing and office 96,000
International:
Sao Paulo, Brazil...........Brazil..................... Manufacturing, warehousing, distribution, office and research 435,000
research
Maesteg, South Wales........Wales.................. Manufacturing,.distribution distribution and office 316,000
Mississauga, Canada.........Canada................... Manufacturing, warehousing, distribution and office 245,000
Santa Maria, Spain..........Spain.................... Manufacturing and warehousing 173,000
Caracas, Venezuela..........Venezuela.................... Manufacturing, distribution and office 145,000
Kempton Park, South Africa..Africa............ Warehousing, distribution and office (leased) 127,000
Canberra, Austrialia........Australia................... Warehousing, distribution and office 125,000
Isando, South Africa........Africa.................. Manufacturing, warehousing, distribution and office 94,000
Escobar, Argentina..........Buenos Aires, Argentina............... Manufacturing, warehousing, distribution and office 75,000
Argenteuil, France.......... Warehousing and distribution (leased) 73,000
Bologna, Italy..............Italy........................ Manufacturing, warehousing, distribution and office 60,000
Dublin, Ireland.............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 are currentlywas sublet to affiliates of the
Company and approximately 27,000 square feet arewas sublet to an unaffiliated third
party)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. Products Corporation leases from Holdings on
arms' length terms its research and development facility located in Edison, New
Jersey.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various routine legal proceedings incident
to the ordinary course of its business. The Company believes that the outcome of
all pending legal proceedings in the aggregate is unlikely to have a material
adverse effect on the business or consolidated financial condition of the
Company.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Revlon, Inc. beneficially owns all of the outstanding shares of common
stock, par value $1.00 per share, of Products Corporation. MacAndrews & Forbes
Holdings Inc. ("MacAndrews Holdings"), which is indirectly wholly owned by
Ronald O. Perelman, through REV Holdings Inc. ("REV Holdings"), beneficially
owns 11,250,000 shares of Revlon, Inc.'s Class A Common Stock (representing 56.6%56.3%
of the outstanding shares of Class A Common Stock) and all of the outstanding
31,250,000 shares of Class B Common Stock, which together represent
83.1%approximately 83.0% of the outstanding shares of Revlon, Inc.'s Common Stock. common stock. The
remaining 8,637,3508,736,771 shares of Revlon, Inc.'s Class A Common Stock outstanding at
February 2, 199818, 1999 are owned by the public. No dividends were declared or paid
during 19971998 or 1996.1997. The terms of the Credit Agreement, the Senior Subordinated1999 Notes, the
Senior Notes (as hereinafter defined) and Products Corporation's 9 1/2% Seniorthe 9% Notes Due 1999 (the "1999
Notes") currently restrict, and, after the Assumption, the terms of the Notes
will restrict the ability
of Products Corporation to pay dividends or make distributions to Revlon, Inc.
See the Consolidated Financial Statements of the Company and the Notes thereto.
ITEM 6. SELECTED FINANCIAL DATA
The Consolidated Statements of Operations Data for each of the years in
the five-yearfour-year period ended December 31, 19971998 and the Balance Sheet Data as of
December 31, 1998, 1997 1996, 1995, 1994 and 19931996 are derived from the Consolidated Financial
Statements of the Company, which have been audited by KPMG Peat Marwick 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
1993
-------------------- ---------- --------- ---------- ----------- -------------------
(DOLLARS IN MILLIONS)
STATEMENTS OF OPERATIONS DATA:
STATEMENTS OF OPERATIONS DATA:
Net sales.......................... $2,390.9 $2,169.5 $1,940.0 $1,736.7 $1,595.2
=========== ========== ========== =========== ==========sales......................... $ 2,252.2 $ 2,238.6 $ 2,092.1 $ 1,867.3 $ 1,674.0
Operating income................... $ 214.5(a) $ 201.4 $ 145.6 $ 107.4 $ 50.5
=========== ========== ========== =========== ==========
Income (loss) before extraordinary
items and cumulative effect of
accounting changes................ $ 59.7 $ 25.6 $ (41.2) $ (75.0) $ (130.2)
Extraordinary items -early
extinguishments of debt........... (14.9) (6.6) - - (9.5)
Cumulative effect of accounting
changes........................... - - - (28.8)income.................. 126.1 (a) 216.1 (b) (6.0)(c)
----------- ---------- ---------- ----------- ----------
Net200.0 147.5 108.1
(Loss) income (loss).................. $ 44.8 $ 19.0 $ (41.2) $ (103.8) $ (145.7)
=========== ========== ========== =========== ==========
from continuing
operations...................... (25.8) 59.0 25.2 (37.2) (73.0)
DECEMBER 31,
------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
1993--------- ---------- --------- ---------- ---------- ---------- -------------------
(DOLLARS IN MILLIONS)
BALANCE SHEET DATA:
Total assets...................... $1,836.4 $1,622.7 $1,536.0 $1,419.4 $1,551.1$ 1,830.7 $ 1,757.8 $ 1,618.1 $ 1,532.6 $ 1,414.3
Long-term debt, excludingincluding
current portion.......................... 1,458.7 1,352.2 1,467.5 1,327.5 1,203.8portion................. 1,660.0 1,425.2 1,361.0 1,476.7 1,330.4
Total stockholder's deficiency ...deficiency.... (647.3) (456.7) (496.3) (702.3) (656.2) (554.2)
(a) In 1997, the Company incurred business consolidation costs and other,Includes non-recurring charges, net, of approximately $7.6 million in connection with the implementation of its
business strategy to rationalize factory and warehouse operations, including
primarily severance and other related costs in certain operations and the
consolidation of certain warehouse, distribution and headquarter operations
related$35.8 million. See Note 4 to the
Cosmetic Center Merger partially offset by a settlementConsolidated Financial Statements.
(b) Includes non-recurring charges, net, of a
claim of $12.7 million and gains associated with the sale of certain facilities
related$3.6 million. See Note 4 to the
rationalizations.
15Consolidated Financial Statements.
13
(b) Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 112, "Employers' Accounting for
Postemployment Benefits." The Company recognized a charge of $28.8 million in
the first quarter of 1994 to reflect the cumulative effect of the accounting
change, net of income tax benefit.
(c) Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," for its retiree
benefit plan in the United States. Accordingly, the Company recognized a charge
of $6.0 million in the first quarter of 1993 to reflect the cumulative effect
of the accounting change.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(DOLLARS IN MILLIONS)
OVERVIEW
The Company operates in a single business segment with many different products,
which include an extensive array of glamorous, exciting and innovative cosmetics
and skin care, fragrance and personal care products, and professional products,
consisting of hair and nail care products principally for use in and resale by
professional salons. In addition, the Company also
operates retail and outlet stores and has a licensing group.
The Company presents its business geographically as its United States
operation, which comprises the Company's business in the United States, and its
International operation, which comprises its business outside of the United
States.
RESULTS OF OPERATIONS
The following table sets forth the Company's net sales by operation for each of the
last three years:
YEAR ENDED DECEMBER 31,
---------------------------------
1997* 1996* 1995*---------------------------------------
Net sales: 1998 1997 1996
---------- ---------- ----------
Net sales:
United States............................ $1,452.5 $1,259.7 $1,115.4
International............................States.......................... $ 1,338.5 $ 1,300.2 $ 1,182.3
International.......................... 913.7 938.4 909.8 824.6
---------- ---------- ----------
$2,390.9 $2,169.5 $1,940.0$ 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,
---------------------------------
1997** 1996** 1995**---------------------------------------
1998 1997 1996
---------- ---------- ----------
Cost of sales.............................. 34.8% 33.5% 33.7%sales*......................... 34.0% 33.2% 32.9%
Gross profit............................... 65.2 66.5 66.3profit........................... 66.0 66.8 67.1
Selling, general and administrative
expenses.................................. 55.9 57.2 58.8expenses ("SG&A")................... 58.9 57.0 57.5
Business consolidation costs and
other, net 0.3 -- --net......................... 1.5 0.1 -
Operating income........................... 9.0 9.3 7.5income....................... 5.6 9.7 9.6
* The results1998 includes $2.7 (0.1% of Cosmetic Center, after giving effectnet sales) for charges related to
certain
intercompany adjustmentsrestructuring.
14
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, 1996an 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 1995,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 follows,
respectively: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 $152.3, $77.4$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 $72.7,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.
15
Cost of sales
As a percentage of net sales, cost of sales of $89.5,
$37.6 and $38.0, S,G&A expenses of $61.9, $38.4 and $36.5, and operating (loss)
income of ($3.1), $1.4 and ($1.8). 1997 includes business consolidation costs
of $4.0was 34.0% for 1998 compared
to 33.2% for 1997. The increase in the operating (loss).
** Excluding the results of Cosmetic Center, after giving effect to certain
intercompany adjustments for 1997, 1996 and 1995, the above percentages would
have been, respectively: cost of sales as a percentage of 33.2%, 32.9%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 32.9%, gross profitthe inclusion of 66.8%, 67.1%$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
67.1%, S,Gpurchasing.
SG&A expenses
As a percentage of net sales, SG&A expenses were 58.9% for 1998
compared to 57.0% for 1997. SG&A expenses other than advertising and
consumer-directed promotion expenses, as a percentage of net sales, were 40.1%
for 1998 compared to 39.2% 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%, 57.5 % and 59.2%or $422.9, for 1998 compared to 17.8%, businessor
$397.4, for 1997.
Business consolidation costs and other, net
In the fourth quarter of 0.1%, 0%1998 the Company committed to a restructuring
plan to realign and 0%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 $90.0, or
41.6%, to $126.1 for 1998 from $216.1 for 1997.
Other expenses/income
Interest expense was $137.9 for 1998 compared to $133.7 for 1997. The
increase in interest expense for 1998 as compared to 1997 is due to higher
average outstanding borrowings partially offset by lower interest rates.
Foreign currency losses, net, were $4.6 for 1998 compared to $6.4 for
1997. The foreign currency losses for 1998 were comprised primarily of 9.7%, 9.6%losses in
several markets in Latin America. The losses in 1997 were comprised primarily of
losses in several markets in Europe and 7.9%.the Far East.
16
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 associated with the extinguishment of borrowings under the 1996 Credit
Agreement (as hereinafter defined) prior to maturity with proceeds from the
Credit Agreement, and costs of approximately $6.3 in connection with the
redemption of Products Corporation's 10 7/8% Sinking Fund Debentures due 2010
(the "Sinking Fund Debentures").
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
NET SALES
Net sales were $2,390.9$2,238.6 and $2,169.5$2,092.1 for 1997 and 1996, respectively,
an increase of $221.4,$146.5, or 10.2%7.0% or 12.6%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, the impact of the Cosmetic Center
Merger, increased distribution internationally
into the expanding self-select distribution channel and the further development
of new international markets.
United States. TheNet sales in the United States operation's net sales increased to $1,452.5$1,300.2 for
1997 from $1,259.7$1,182.3 for 1996, an increase of $192.8,$117.9, or 15.3%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 and the impact of the Cosmetic Center Merger.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 and concealer, ALMAY ONE COAT, and ALMAY TIME-OFF REVITALIZER.
17
International. The International operation's netNet 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. During 1997,Sales outside the International operation's salesUnited
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 17
impacted by
competitive activity affecting the Company's toiletries business.
Cost of sales
As a percentage of net sales, cost of sales was 34.8% for 1997
compared to 33.5% for 1996. The increase in cost of sales as a percentage of
net sales is due primarily to the impact of the Cosmetic Center Merger.
Excluding the results of Cosmetic Center, as a percentage of net sales, cost of
sales would have been 33.2% for 1997 compared
to 32.9% for 1996. Other factors
which increasedThe 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 Internationalinternational markets.
These factors were partially offset by the benefits of improved overhead
absorption against higher production volumes and more efficient global
production and purchasing.
S,GSG&A expenses
As a percentage of net sales, S,GSG&A expenses were 55.9%57.0% for 1997, an
improvement from 57.2%57.5% for 1996. S,GSG&A expenses other than advertising and
consumer-directed promotion expenses, as a percentage of net sales, improved to
39.3%39.2% for 1997 compared with 40.8%40.5% 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 inoutside the
International operation.United States. Advertising and consumer-directed promotion expenses increased by
11.8% to $397.4, or 16.6%17.8% of net sales, for 1997 from $355.5, or 16.4%17.0% of net
sales, for 1996.
Business consolidation costs and other, net
Business consolidation costs and other, net, in 1997 include severance
and other costs in connection with the consolidation of certain warehouse,
distribution and headquarter operations related to the Cosmetic Center Merger, 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 fromfor 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.
18
Operating income
As a result of the foregoing, operating income increased by $13.1,$16.1, or
6.5%8.1%, to $214.5$216.1 for 1997 from $201.4$200.0 for 1996.
Other expenses/income
Interest expense was $136.2$133.7 for 1997 compared to $133.4 for 1996. The
slight increase in interest expense in 1997 is due to higher average outstanding
borrowings, partially offset by lower interest rates.
Gain on sale of subsidiary stock of $6.0 was recognized in the second
quarter of 1997 as a result of the Cosmetic Center Merger.
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 recurringnon-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.
18
Provision for income taxes
The provision for income taxes was $9.4$9.3 and $25.5 for 1997 and 1996,
respectively. The decrease was primarily attributable to lower taxable income
in certain Internationalwith 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 in certain Internationalwith 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 itemitems
The extraordinary item in 1997 resulted from the write-off in the
second quarter of 1997 of deferred financing costs associated with the early
extinguishment of borrowings under the 1996 Credit Agreement prior to maturity
with proceeds from the Credit Agreement, and costs of approximately $6.3 in
connection with the redemption of Products Corporation's Sinking Fund
Debentures. The extraordinary item in 1996 resulted from the write-off in the
first quarter of 1996 of deferred financing costs associated with the early
extinguishment of borrowings under the 1995credit agreement in effect at that time
(the "1995 Credit AgreementAgreement") prior to maturity with the net proceeds from
the Revlon, IPOInc.'s initial public equity offering (the "Revlon IPO") and proceeds
from the 1996 Credit Agreement.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Net sales
Net sales were $2,169.5 and $1,940.0 for 1996 and 1995, respectively,
an increase of $229.5, or 11.8%, primarily as a result of successful new
product introductions worldwide, increased demand in the United States,
acquisitions of certain exclusive line professional product businesses,
increased distribution internationally into the expanding self-select
distribution channel and the further development of new international markets.
United States. The United States operation's net sales increased to
$1,259.7 for 1996 from $1,115.4 for 1995, an increase of $144.3, or 12.9%. Net
sales improved for 1996 primarily as a result of continued consumer acceptance
of new product offerings, general improvement in consumer demand for the
Company's color cosmetics in the United States and acquisitions of certain
exclusive line professional product businesses, partially offset by overall
softness in the fragrance industry and lower sales of one of the Company's
prestige brands. The Company improved the dollar share of its REVLON brand
cosmetics in the color cosmetics business in the United States self-select
distribution channel to 21.4% for 1996 from 19.5% for 1995, moving into the
leading position in market share. Market share, which is subject to a number of
conditions, can vary from quarter to quarter as a result of such things as
timing of new product introductions and advertising and promotional spending.
New product introductions (including, in 1996, certain products launched during
1995) generated incremental net sales in 1996, principally as a result of
launches of products in the COLORSTAY collection, including COLORSTAY
foundation, lip makeup, eye makeup and COLORSTAY LASHCOLOR mascara, launches of
products in the ALMAY AMAZING collection, including lip makeup, eye makeup,
face makeup and concealer, and launches of Cherish fragrance and MITCHUM CLEAR
and ALMAY CLEAR COMPLEXION line extensions.
International. The International operation's net sales increased to
$909.8 for 1996 from $824.6 for 1995, an increase of $85.2, or 10.3% on a
reported basis or 12.6% on a constant U.S. dollar basis. Net sales improved
principally as a result of successful new product introductions, including the
continued roll-out of the COLORSTAY cosmetics collection and REVLON AGE DEFYING
makeup, increased distribution into the expanding self-select distribution
channel, the further development of new international markets, partially
offset, on a reported basis, by the unfavorable effect on sales of a stronger
U.S. dollar against certain foreign currencies, primarily the South African
rand, Japanese yen, and several European currencies. During 1996, the
International operation's sales were divided into the following geographic
areas: Europe, which is comprised of Europe, the Middle East and Africa (in
which net sales increased to $404.0 for 1996 from $374.6 for 1995, an increase
of $29.4, or 7.8%); the Western Hemisphere, which is comprised of Canada,
Mexico, Central America, South America and Puerto Rico (in which net sales
increased to $311.9 for 1996 from $275.4 for 1995, an increase of $36.5, or
13.3%); and the Far East (in which net sales increased to $193.9 for 1996 from
$174.6 for 1995, an increase of $19.3, or 11.1%).
The Company's operations in Brazil are significant and, along with
operations in certain other countries, have been subject to, and may continue
to be subject to, significant political and economic uncertainties. In Brazil,
net sales,
19
operating income and income before taxes were $132.7, $25.1 and $20.0,
respectively, for 1996 compared to $118.6, $22.8 and $19.8, respectively, for
1995. In Mexico, net sales for 1996 and 1995 were adversely affected by the
December 1994 devaluation of the Mexican peso and related economic weakness. In
Venezuela, net sales and income before taxes for 1996 and 1995 were adversely
affected by high inflation and in the 1996 period by a currency devaluation.
Cost of sales
As a percentage of net sales, cost of sales was 33.5% for 1996
compared to 33.7% for 1995, respectively. The improvement for 1996 resulted
from the benefits of improved overhead absorption against higher production
volumes and more efficient global production and purchasing. This improvement
was partially offset by changes in product mix involving an increase in sales
of the Company's higher cost technology-based products, an increase in export
sales, lower margin products (such as those products sold in Brazil), the
effect of weaker local currencies on the cost of imported purchases and
competitive pressures on the Company's toiletries business in certain
international markets in Europe and the Far East. The aforementioned increases
in sales that negatively impacted cost of sales were, however, more profitable
to the Company's overall operating results.
S,G&A expenses
As a percentage of net sales, S,G&A expenses were 57.2% for 1996, an
improvement from 58.8% for 1995. S,G&A expenses other than advertising and
consumer-directed promotion expenses, as a percentage of net sales, improved to
40.8% for 1996 compared with 43.2% for 1995 primarily as a result of reduced
general and administrative expenses, improved productivity and lower
distribution costs in 1996 compared with 1995, partially offset by additional
costs incurred in Japan in 1996 in connection with the Company's strategy of
exiting the demonstrator-assisted distribution channel. In accordance with its
business strategy, the Company increased advertising and consumer-directed
promotion expenditures in 1996 compared with 1995 to support growth in existing
product lines, new product launches and increased distribution in the
self-select distribution channel in many of the Company's markets in the
International operation. Advertising and consumer-directed promotion expenses
increased by 17.4% to $355.5, or 16.4% of net sales, for 1996 compared to
$302.9, or 15.6% of net sales, for 1995.
Operating income
As a result of the foregoing, operating income increased by $55.8, or
38.3%, to $201.4 for 1996 from $145.6 for 1995.
Other expenses/income
Interest expense was $133.4 for 1996 compared to $142.6 for 1995. The
reduction in interest expense is attributable to lower average outstanding
borrowings as a result of the paydown of debt under the 1996 Credit Agreement
and under the 1995 Credit Agreement with the use of proceeds from the Revlon
IPO in the 1996 period and lower interest rates under the 1996 Credit Agreement
than under the 1995 Credit Agreement.
Foreign currency losses, net, were $5.7 for 1996 compared to $10.9 for
1995. The reduction in the foreign currency loss in 1996 as compared to 1995
was due to lower foreign currency losses primarily in Mexico and Venezuela and
the Company's simplification of its international corporate structure, which
resulted in $2.1 of gains, previously deferred in the currency translation
account, partially offset by the strengthening of the U.S. dollar against the
Spanish peseta and the strengthening of the U.K. pound against several European
currencies.
Miscellaneous, net, was $6.3 for 1996 compared to $1.8 for 1995. The
increase relates primarily to the Company's continued investment in certain
emerging markets.
20
Extraordinary item
The extraordinary item resulted from the write-off recorded in the
first quarter of 1996 of deferred financing costs associated with the early
extinguishment of the 1995 Credit Agreement prior to its maturity with the net
proceeds from the Revlon IPO and borrowings under the 1996 Credit Agreement.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash (used for) provided by (used for) operating activities was $7.1, ($9.6)$(50.4), $8.9
and ($52.1)$(10.3) for 1998, 1997 and 1996, respectively. The increase in net cash used
for operating activities for 1998 compared with cash provided in 1997 resulted
primarily from lower operating income and 1995, respectively.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 continued expansion into the self-select
distribution channel. The decrease in net cash used for operating activities
for 1996 compared with 1995 resulted primarily from higher operating income,
lower restructuring payments ($13.3 for 1996 compared with $24.2 for 1995) and
improved management of inventory relative to business growth, partially offset
by higher trade receivable balances as a result of higher net sales and
increased spending on merchandise display units in connection with the
Company's continued expansion into the self-select distribution
channel.
Net cash used for investing activities was $108.4, $65.1$91.0, $84.3 and $72.5$61.8 for
1998, 1997 1996 and 1995,1996, respectively. Net cash used for investing activities for
1998 and 1997 1996includes cash paid in connection with acquisitions of businesses
and 1995capital expenditures, partially offset by the proceeds from the sale of the
wigs and hairpieces portion of the Company's business in the United States in
1998 and from the sale of certain assets in 1998 and 1997. Net cash used for
investing activities for 1998, 1997 and 1996 included capital expenditures of
$56.5, $58.0$60.8, $52.3 and $54.3,$54.7, respectively, and $60.4,$57.6, $40.5 and $7.1, and $21.2, respectively,
used for acquisitions.
Net cash used for acquisitions in 1997 consisted primarily of cash paid to the
CCI shareholders in connection with the cash election pursuant to the Cosmetic
Center Merger and cash paid for the acquisition of a South American hair care
manufacturer and its distributor.
Net cash provided by financing activities was $109.1,$158.0, $84.7 and $77.9
for 1998, 1997 and $125.61996, respectively. Net cash provided by financing activities
for 1998 included proceeds from the issuance of the 9% Notes, the 8 1/8% Notes
(as hereinafter defined) and the 8 5/8% Notes (as hereinafter defined) and cash
drawn under the Credit Agreement, partially offset by the payment of fees and
expenses related to the issuance of the 9% Notes, the 8 1/8% Notes and the 8
5/8% Notes, the redemption of the Senior Subordinated Notes (as hereinafter
defined) 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"). During 1998, 1997 and 1996, net cash used by
discontinued operations was $17.3, $3.4 and 1995,$2.7, respectively. Net cash
provided by financing activities for 1997 included cash drawn under the 1996
Credit Agreement and the Credit Agreement, and Cosmetic Center's credit facility, partially offset by the repayment of
borrowings under the 1996 Credit Agreement, the payment of fees and expenses
related to entering into the Credit Agreement, the repayment of borrowings under
the Company's Japanese yen-denominated credit agreement (the
"YenYen Credit Agreement"), the repayment of borrowings under CCI's former credit
agreementAgreement 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.
Net
cash provided by financing activitiesOn 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 1995 consisted primarily of
borrowingsgeneral corporate purposes, including to temporarily
reduce indebtedness under the credit agreementworking capital lines under the Credit Agreement.
Pending the refinancing of the 1999 Notes, such net proceeds will be retained by
Products Corporation and a portion of such proceeds will be used to temporarily
reduce indebtedness under the working capital lines under the Credit Agreement
and under other short-term facilities. On February 24, 1999, substantially all
of the 9% Notes were exchanged for registered notes with substantially identical
terms.
On February 2, 1998, Revlon Escrow Corp., an affiliate of Products
Corporation, issued and sold in effect priora 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 1995 Credit Agreement and borrowingsholders 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 1995 Credit Agreement,
partially offset by repayments8 5/8% Notes and the
related indenture (the "8 5/8% Notes Assumption"), and to the holders of cash drawn under those credit agreements,
repaymentsthe
Senior Notes for the redemption of the Senior Notes on April 1, 1998, at which
time Products Corporation assumed the obligations under the Yen Credit Agreement8 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
20
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 debt issuance costs
undercall premiums on
the 1995 Credit Agreement.Senior Subordinated Notes and the Senior Notes. On May 7, 1998,
substantially all of the Notes were exchanged for registered notes with
substantially identical terms (the Notes and the registered exchange notes shall
each be referred to as the "Notes").
In May 1997, Products Corporation entered into the Credit Agreementa 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 1996credit
agreement in effect at that time (the "1996 Credit AgreementAgreement") and to redeem
theProducts Corporation's Sinking Fund Debentures and were and will be used for
general corporate purposes or,and, in the case of the Acquisition Facility (as
hereinafter defined), the financing of acquisitions. See Note 10(a)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 Consolidated Financial Statements.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, 1997 Products Corporation1998, the Company had approximately $200.0$199.0
outstanding under the Term Loan Facilities, $102.7$9.7 outstanding under the
Multi-Currency Facility, $41.9$63.5 outstanding under the Acquisition Facility and
$34.8$29.0 of issued but undrawn letters of credit under the Special LC Facility. In
connection with the issuance of the 9% Notes, Products Corporation amended the
Credit Agreement to provide that it can retain the net proceeds of such issuance
which exceed the amount of the 1999 Notes refinanced plus related costs and
expenses. Additionally, Products Corporation agreed that until the 1999 Notes
are refinanced, $200.0 of the Multi-Currency Facility available under the Credit
Agreement (reduced by the amount of 1999 Notes actually repurchased or
refinanced), which would otherwise be available for working capital purposes,
will be used solely to refinance the 1999 Notes. In December 1998, Products
Corporation amended the Credit Agreement to modify the terms of certain of the
financial ratios and tests to account for, among other things, the expected
charges in connection with the Company's restructuring effort. In addition, the
amendment increased the applicable margin and provides that Products Corporation
may use the proceeds of the Acquisition Facility for general corporate purposes
as well as for acquisitions.
A subsidiary of Products Corporation is the borrower under the Yen
Credit Agreement, which had a principal balance of approximately Yen 4.3(yen)1.5
billion as of December 31, 19971998 (approximately $33.3$13.6 U.S. dollar equivalent as
of December 31, 1997)1998) (after giving effect to the repayments described below).
In accordance with the terms of the Yen Credit
Agreement, approximately Yen Approximately (yen)539 million (approximately $5.2$4.2 U.S. dollar equivalent) was
paid in January 1996 andMarch 1998, approximately Yen (yen)539 million (approximately $4.6$4.7 U.S.
dollar equivalent) was paid in January 1997. In
June 1997, Products Corporation amended and restated the Yen Credit Agreement
to extend the term toequivalent as of December 31, 1998) is due in each of March 1999 and 2000
subject to earlier termination under
certain circumstances. In accordance with the terms of the Yen Credit
Agreement, as amended and restated, approximately Yen 539(yen)474 million (approximately $4.2 U.S. dollar equivalent as
of December 31, 1997)1998) is 21
due on December 31, 2000. On December 10, 1998, in
eachconnection with the disposition of March 1998, 1999 and 2000 andthe stock of Cosmetic Center, which had
served as collateral under the Yen 2.7Credit Agreement, Products Corporation repaid
(yen)2.22 billion (approximately $20.7$19.0 U.S. dollar equivalent as of December 31, 1997) is due on
December 31, 2000.10,
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, 1997.
On February 2, 1998, Revlon Escrow issued and sold the Notes in a
private placement, with the net proceeds deposited into escrow. The proceeds
from the sale of the Notes will be used to finance the redemptions of 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 consummated 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 will
consummate the 8 1/8% Notes Assumption. On or before March 19, 1998 either
Revlon Escrow or Products Corporation is required to file a registration
statement with the Commission with respect to the Exchange Offer, which is
expected to occur on or before July 2, 1998. In connection with the early
redemptions of the Old Notes, the Company expects to record an extraordinary
loss of up to $52 in 1998. The indentures governing the 8 5/8% Notes (the "8
5/8% Notes Indenture") and the 8 1/8% Notes (the "8 1/8% Notes Indenture" and,
together with the 8 5/8% Notes Indenture, the "Notes Indentures") contain
covenants that, after the Assumption 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, (v) the sale of assets and subsidiary stock, (vi)
transactions with affiliates, (vii) consolidations, mergers and transfers of
all or substantially all Products Corporation assets and (viii) in the case of
the 8 5/8% Notes Indenture, the issuance of additional subordinated debt that
is senior in right of payment to the 8 5/8% Notes. The Notes Indentures also
prohibit certain restrictions on distributions from Products Corporation and
subsidiaries of Products Corporation. All of these limitations and
prohibitions, however, are subject to a number of important qualifications.
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, and the Senior Notes, the
1999 Notes, the Notes and the Senior Subordinated9% Notes currently contain, and, following
the Assumption, the Notes will contain certain provisions that by their
terms limit Products Corporation's and/or its subsidiaries' ability to, among
other things, incur additional debt. The Company's principal uses of funds are
expected to be the payment of operating expenses, working capital and capital
expenditure requirements, expenses in connection with the Company's
restructuring referred to above and debt service payments.payments (including purchase
and repayment of the 1999 Notes).
21
The Company estimates that capital expenditures for 19981999 will be
approximately $65,$60, including upgrades to the Company's management information
systems. The Company estimates that cash payments related to the 1998
restructuring charge will be approximately $35, of which approximately $22 will
be paid in 1999. Pursuant to a tax sharing agreement (see "Certain Relationships
and Related Transactions-TaxTransactions - Tax Sharing Agreement"), Products Corporation may be
required to make tax sharing payments to Revlon, Inc. (which in turn may be
required to make tax sharing payments to Mafco Holdings Inc.) as if Products
Corporation were filing separate income tax returns, except that no payments are
required by Products Corporation (or 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. Products Corporation currently anticipates that, as a
result of net operating tax losses and prohibitions under the Credit Agreement,
no cash federal tax payments or cash payments in lieu of taxes pursuant to the
tax sharing agreement will be required for 1998.1999.
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 22
into these
agreements in 1993 and 1994 (and in the first quarter of 1996 extended a portion
equal to a notional amount of $125.0 through December 2001) to convert the
interest rate on $225.0 of fixed-rate indebtedness to a variable rate. If Products Corporation had terminated these agreements, which Products
Corporation considered to be held for other than trading purposes, on December
31, 1997 and 1996, a loss of approximately $0.1 and $3.5, respectively, would
have been realized. Certain other swap agreements were terminated in 1993 for a
gain of $14.0 and were amortized over the original lives of the agreements
through 1997. The amortization of the 1993 realized gain in 1997, 1996, and
1995 was approximately $3.1, $3.2 and $3.2, respectively. Cash flow from the
agreements outstanding at December 31, 1997 was approximately break even for
1997. Products
Corporation terminated these agreements in January 1998 and realized a gain of
approximately $1.6, which will bewas recognized upon repayment of the hedged
indebtedness.indebtedness and is included in the 1998 extraordinary item for the early
extinguishment of debt.
Products Corporation enters into forward foreign exchange contracts and
option contracts from time to time to hedge certain cash flows denominated in
foreign currencies. At December 31, 1997 and 1996, 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 $62.0,1997, respectively, and option
contracts of approximately $51.0 and $94.9 outstanding at December 31, 1997.1998 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 andor the contracts then
outstanding on December 31, 1996, no material gain or loss would have been
realized.
Based upon the Company's current level of operations and anticipated
growth in net sales and earnings as a result of its business strategy, the
Company expects that cash flows from operations and funds from currently
available credit facilities and refinancings of existing indebtedness will be
sufficient to enable the Company to meet its anticipated cash requirements for
the foreseeable future on a consolidated basis, including for debt service.service
(including refinancing the 1999 Notes). However, there can be no assurance that
cash flow from operations and funds from existing credit facilities and
refinancing of existing indebtedness will be sufficient to meet the Company's
cash requirements on a consolidated basis. If the Company is unable to satisfy
such cash requirements, the Company could be required to adopt one or more
alternatives, such as reducing or delaying capital expenditures, restructuring
indebtedness, selling assets or operations, or seeking capital contributions or
loans from Revlon, Inc. or other affiliates of the Company. There can be no
assurance that any of such actions could be effected, that they would enable the
Company to continue to satisfy its capital requirements or that they would be
permitted under the terms of the Company's various debt instruments then in
effect. The terms of the Credit Agreement, the Senior Subordinated1999 Notes, the 1999 Notes and the Senior9%
Notes generally
restrict and, after the Assumption, the terms of the Notes generally will 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.
22
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.
23
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, 19971998 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, and the effect on sales of
retail inventory balancing and consolidationreductions, the effect on sales of political
and/or economic conditions in international markets, the chain drugstore
industry in the U.S.,Company's estimate of
restructuring activities, costs and benefits, cash flowsflow from operations,
improvedinformation systems upgrades, the Company's plan to address the Year 2000 issue,
the costs associated with the Year 2000 issue and the results from
business consolidations, information system upgrades and globalizationof Year 2000
non-compliance by the Company or by one or more of the Company's manufacturing operations,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 Revlon, Inc. or other
affiliates of the Company or the sale of assets and the cost and timely implementation ofor operations. Statements that
are not historical facts, including statements about the Company's Year 2000 compliance modifications. Readersbeliefs and
expectations, are urged to consider
thatforward-looking statements. Forward-looking statements whichcan be
identified by, among other things, the use the terms "believes," "does not believe," "no reason
to believe,of forward-looking language, such as
"believe," "expects," "may," "will," "should," "seeks," "plans," "intends," "estimates," "anticipated,"scheduled to,"
"anticipates" and similar expressions,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 relate toare made,
and the Company or the
Company's management, are intendedundertakes no obligation to identifyupdate them. A number of important
factors could cause actual results to differ materially from those contained in
any forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events and are subject to certain risks, uncertainties and assumptions.statement. In addition to factors that may be described in
the Company's filings with the Commission, filings, including this filing, the following
factors, among others, could cause the Company's actual results to differ
materially from those expressed in any forward-looking statements made by the
Company: (i) difficulties or delays in developing and introducing new products
or failure of customers to accept new product offerings; (ii) changes in
consumer preferences, including reduced consumer demand for the Company's color
cosmetics and other current products; (iii) difficulties or delays in the
Company's continued expansion into the self-select distribution channel and 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, and to globalize its
manufacturing operations;upgrades; (v) the inability to refinance indebtedness, secure capital
contributions or loans from Revlon, Inc. or other affiliates of the Company or
sell assets;assets or operations; (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 countries outside of the U.S. in which the Company operates,international markets, including but not
limited to Brazil; (vii) actions by competitors, including business
combinations, technological breakthroughs, new productproducts offerings and marketing
and promotional successes; (viii) combinations among significant customers or
the loss, insolvency or failure to pay its debts by a significant customer or
customers; (ix) difficulties or delays in realizing improved results from
business consolidations; (x) lower than expected sales as a result of a longer than expected
duration of retail inventory balancing and consolidation in the chain drugstore industry in the U.S.; and
(xi)reductions; (x) difficulties, delays
or unanticipated costs or difficulties or delays in implementingless than expected benefits resulting from the
Company's restructuring activities; (xi) interest rate or foreign exchange rate
changes affecting the Company's market sensitive financial instruments; (xii)
difficulties, delays or unanticipated
24
costs associated with the transition to the Euro; and (xiii) difficulties,
delays or unanticipated costs in achieving Year 2000 compliance modifications. Theor unanticipated
consequences from non-compliance by the Company assumes no
responsibility to update forward-looking information contained herein.
Effector one or more of New Accounting Standardthe Company's
customers, suppliers or other strategic business partners.
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1997,1998, the Financial Accounting Standards Board issued SFAS 130
"Reporting Comprehensive Income,Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for reportingderivative instruments, including certain derivative instruments
embedded in other contracts, and displaying comprehensive incomefor hedging activities. The effect of adopting
the statement and its components in a full setthe date of general-purpose financial statements. Thesuch adoption by the Company will adopt SFAS 130 in fiscal
1998.
24
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.
25
The Company does not hold or issue financial instruments for trading
purposes.
AVERAGE EXPECTED MATURITY DATE FOR YEAR ENDED DECEMBER 31, FAIR VALUE
CONTRACTUAL ---------------------------------------------------------- DEC. 31,
RATE (a) 1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
---------- -------- ------- ------ -------- --------------- ------ ---------
DEBT (US dollar equivalent in millions)
Short-term variable rate (various currencies) .. $ 27.8 $ 27.8 $ 27.8
Average interest rate ....................... 6.7%
Long-term fixed rate ($US) ..................... 200.0 $ 1,149.1 1,349.1 1,286.0
Average interest rate ....................... 9.5% 8.6%
Long-term variable rate ($US) .................. 1.0 $ 1.0 $ 39.5 $ 227.6 269.1 269.1
Average interest rate ....................... 7.9% 7.9% 7.9% 8.0%
Long-term variable rate (various currencies) ... 5.0 9.3 0.3 3.1 0.1 17.8 17.8
Average interest rate ....................... 3.8% 3.9% 7.3% 7.7% 7.3%
FORWARD AND OPTION CONTRACTS (b)
British Pound Forward contracts ....... 0.60 55.0 55.0 -
Option contracts ........ 0.60 8.5 8.5 -
Canadian Dollar Forward contracts ....... 1.53 41.2 41.2 0.1
Option contracts ........ 1.56 17.5 17.5 (0.2)
Japanese Yen Forward contracts ....... 118.39 36.4 36.4 (1.5)
Option contracts ........ 116.28 4.8 4.8 0.1
French Franc Forward contracts ....... 5.60 17.7 17.7 -
South African Rand Forward contracts ....... 6.40 11.2 11.2 (0.2)
Netherland Guilder Forward contracts ....... 1.88 9.5 9.5 -
Hong Kong Dollar Forward contracts ....... 7.82 6.1 6.1 -
Australian Dollar Forward contracts ....... 1.61 9.9 9.9 0.1
Option contracts ........ 1.64 10.9 10.9 -
German Deutschemark Forward contracts ....... 1.65 4.8 4.8 -
Option contracts ........ 1.67 9.3 9.3 -
New Zealand Dollar Forward contracts ....... 1.92 4.6 4.6 (0.1)
Switzerland Franc Forward contracts ....... 1.34 1.1 1.1 -
(a) Stated in units of local currency per U.S. dollar.
(b) Maturity amounts for forward and option contracts are stated in
contract notional amounts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index on page F-1 of the Consolidated
Financial Statements of the Company and the Notes thereto contained herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
2526
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 Products Corporation.the Company. Each Director holds office
until his successor is duly elected and qualified or until his resignation or
removal, if earlier.
NAME POSITION
- ---- --------
Ronald O. Perelman Chairman of the Board, Chairman of the Executive
Committee of the Board and Director
George Fellows President, Chief Executive Officer and Director
Jerry W. LevinIrwin Engelman Vice Chairman, of the BoardChief Administrative Officer and
Director
William J. FoxM. Katherine Dwyer Senior Executive Vice President and Director
Frank J. Gehrmann Executive Vice President and Chief Financial Officer
Wade H. Nichols III Executive Vice President and General Counsel
M. Katherine Dwyer Senior Vice President
Ronald H. DunbarD. Eric Pogue Senior Vice President, Human Resources
Donald G. Drapkin Director
Irwin Engelman Director
Howard Gittis Director
Edward J. Landau Director
The name, age (as of February 18, 1999), principal occupation for the
last five years and selected biographical information for each of the Directors
and executive officers of Products Corporationthe Company are set forth below.
Information is as of
February 13, 1998.
Mr. Perelman (55)(56) has been Chairman of the Board of Directors of
Products Corporation and of Revlon, Inc. since June 1998, Chairman of the
Executive Committee of the Board of Products Corporation and of Revlon, Inc.
since November 1995, and a Director of Products Corporation and of Revlon, Inc.
since their respective formations in 1992. Mr. Perelman was Chairman of the
Board of Products Corporation and of Revlon, Inc. from their respective
formations in 1992 until November 1995. Mr. Perelman has been Chairman of the
Board and Chief Executive Officer of Mafco Holdings Inc. ("Mafco Holdings" and,
collectively with MacAndrews Holdings, "MacAndrews & Forbes") and MacAndrews
Holdings and various of its affiliates for more than the past five years.since 1980. Mr. Perelman is also
is Chairman
of the Executive Committees of the Boards of The Coleman Company,
Inc. ("Coleman"), Consolidated Cigar Holdings Inc. ("Cigar Holdings") andDirectors 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"): California Federal Bank, a Federal
Savings BankGolden State Bancorp Inc.
("Cal Fed"Golden State"), Cigar Holdings, CLNGolden State Holdings Inc. ("CLN"), Coleman,
Coleman Worldwide Corporation ("Coleman Worldwide"), Consolidated Cigar
Corporation ("Consolidated Cigar"), First Nationwide Holdings Inc. ("FNGolden State Holdings"), First Nationwide (Parent) Holdings Inc. ("First Nationwide Parent"), M&F
Worldwide, Meridian, Revlon, Inc.Panavision and REV Holdings. (On December 27, 1996, Marvel
Entertainment Group, Inc. ("Marvel"), Marvel Holdings Inc. ("Marvel Holdings"),
Marvel (Parent) Holdings Inc. ("Marvel Parent") and Marvel III Holdings Inc.
("Marvel III"), of which 26
Mr. Perelman was a Director on such date, and several subsidiaries of Marvel filed
voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code.)
Mr. Fellows (55)(56) has been President and Chief Executive Officer of
Products Corporation and of Revlon, Inc. since January 1997. He was President
and Chief Operating Officer of Products Corporation and of Revlon, Inc. from
November 1995 until January 1997 and has been a Director of Products Corporation
since September 1994 and a Director of Revlon, Inc. since November 1995. Mr.
Fellows was Senior Executive Vice President of Products
27
Corporation and of Revlon, Inc. and President and Chief Operating Officer of
Products Corporation's Consumer Group from February 1993 until November 1995.
From 1989 through January 1993, he was a senior executive officer of Mennen
Corporation and then Colgate-Palmolive Company, which acquired Mennen
Corporation in 1992. From 1986 to 1989 he was Senior Vice President of Holdings.
Mr. Fellows is also a Director of Cosmetic Center, Revlon, Inc. and VF Corporation, each of which files reports pursuant
to the Exchange Act.
Mr. Levin (53)Engelman (64) has been Vice Chairman of the Boardand Chief Administrative
Officer of Products Corporation and of Revlon, Inc. since November 19951998 and a Director of Products
Corporation since 1993 and has been Vice Chairman, Chief Administrative Officer
and a Director of Revlon, Inc. since their respective formations in 1992.November 1998. Mr. Levin was
Chief Executive Officer of Products Corporation and of Revlon, Inc. from their
respective formations in 1992 to January 1997 and President of Products
Corporation and Revlon, Inc. from their respective formations in 1992 to
November 1995. Mr. LevinEngelman has been
Executive Vice President, Chief Financial Officer and a Director of MacAndrews
Holdings and various of its affiliates since March 1989. Mr. Levin has been Chairman1992. 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 BoardBlackstone Group LP from
1987 to 1988 and Director, Executive Vice President and Chief ExecutiveFinancial Officer
of Coleman since February 1997 and has been Chairman of the
Board of Cosmetic Center since April 1997. For 15General Foods Corporation for more than five years prior to joining
MacAndrews1987. (On
December 27, 1996, Marvel III, Marvel Parent and Marvel Holdings, he held various seniorof which
Mr. Engelman was an executive positions with The
Pillsbury Company. Mr. Levin is a Directorofficer on such date, filed voluntary petitions
for reorganization under Chapter 11 of the following corporations which
file reports pursuant to the Exchange Act: Coleman, Coleman Worldwide, Cosmetic
Center, Ecolab, Inc., U.S. Bancorp, Inc., Meridian and Revlon, Inc.
Mr. Fox (41)United States Bankruptcy Code.)
Ms. Dwyer (49) was appointed President Strategic and Corporate
Development, Revlon Worldwide, of Products Corporation and of Revlon, Inc. and
Chief Executive Officer, Revlon TechnologiesCorporation's United
States Consumer Products business in January 1998. He has beenMs. Dwyer was elected Senior Executive
Vice President of Products Corporation and of Revlon, Inc. since January 1997. Mr. Fox was Chief Financial Officer ofin December 1996.
Prior to December 1996, she served in various appointed senior executive
positions for Products Corporation and of Revlon, Inc., including President of
Products Corporation's United States Cosmetics unit from their respective formations in 1992 until January 1998November 1995 to
December 1996 and was also Executive Vice President and General Manager of Products
CorporationCorporation's Mass Cosmetics unit from June 1993 to November 1995. From 1991 to
1993, Ms. Dwyer was Vice President, Marketing, of Clairol, a division of
Bristol-Myers Squibb Company. Prior to 1991, she served in various senior
positions for Victoria Creations, Avon Products Inc., Cosmair, Inc. and of Revlon,
Inc. from their respective formations in 1992 until January 1997. Mr. Fox was
elected asThe
Gillette Company. Ms. Dwyer is a Director of Products Corporation in September 1994 and of Revlon,
Inc. in November 1995. He has been Senior Vice President of MacAndrews Holdings
since August 1990. He was Vice President of MacAndrews Holdings from February
1987 to August 1990 and was Treasurer of MacAndrews Holdings from February 1987
to September 1992. Prior to February 1987, he was Vice President and Assistant
Treasurer of MacAndrews Holdings. Mr. Fox joined MacAndrews & Forbes Group,
Incorporated in 1983 as Assistant Controller, prior to which time he was a
certified public accountant at the international auditing firm of Coopers &
Lybrand. Mr. Fox is Vice Chairman of the Board and a Director of Cosmetic
Center, and a Director of The Hain Food Group,WestPoint Stevens Inc. and Revlon, Inc.Reebok
International Ltd., each of which files reports pursuant to the Exchange Act.
Mr. Gehrmann (43)(44) was elected as Executive Vice President and Chief
Financial Officer of Products Corporation and of Revlon, Inc. in January 1998.
From January 1997 until January 1998 he had been Vice President of Products
Corporation and of Revlon, Inc. Prior to January 1997 he served in various
appointed senior executive positions for Products Corporation and Revlon, Inc.,
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 accountingauditing firm of Ernst & Young.
Mr. Nichols (55)(56) has been Executive Vice President and General Counsel
of Products Corporation and of Revlon, Inc. since January 1998 and served as
Senior Vice President and General Counsel of Products Corporation and of Revlon,
Inc. from their respective formations in 1992 until January 1998. Mr. Nichols
has been Vice 27
President of MacAndrews Holdings since 1988.
Mr. Nichols is a Director of
Cosmetic Center, which files reports pursuant to the Exchange Act.
Ms. Dwyer (48)Pogue (50) was appointed President of Products Corporation's
United States Consumer Products business in January 1998. Ms Dwyer was elected
Senior Vice President of Products Corporation and of Revlon, Inc. in December
1996. Prior to December 1996 she served in various appointed senior executive
positions for Products Corporation and 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 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, as of
February 24, 1998, Reebok International Ltd., each of which files reports
pursuant to the Exchange Act.
Mr. Dunbar (60) has been Senior Vice President, Human Resources of
Products Corporation and of Revlon, Inc. since their respective formations in 1992.November 1998. He was elected Senior Vice
President, Human Resources, of Holdings inU.S. Operations for Products Corporation from July
1991. Mr. Dunbar1997 until November 1998. From December 1994 until July 1997 he was Vice
President, Human Resources and General ManagerAdministration of Arnold Menn and
Associates, a New York City career managementMarvel. From September 1992 to
November 1994 he was President of Next Phase Ventures, an independent consulting
and executive
outplacement firm, from 1989venture capital business. From 1988 to 1991 and Executive1992 he was Vice President and Chief
Human Resources Officer of Ryder System,Philip
Morris Companies, Inc., a highway transportation firm,
from 1978 to 1989. Prior to that, Mr. Dunbar served1988 he held various positions in senior executive human resources positions at Xerox Corporation and Ford Motor Company.resource
management.
28
Mr. Drapkin (49)(50) has been a Director of Products Corporation and of
Revlon, Inc. since their respective formations in 1992. He has been Vice
Chairman of the Board of MacAndrews Holdings& Forbes and various of its affiliates since March
1987. Mr. Drapkin was a partner in the law firm of Skadden, Arps, Slate, Meagher
& Flom for more than five years prior to March 1987. Mr. Drapkin is also a Director of
the following corporations which file reports pursuant to the Exchange Act:
Algos Pharmaceutical Corporation, Anthracite Capital, Inc., BlackRock Asset
Investors, Cardio Technologies, Inc., Coleman, Coleman Worldwide, Cosmetic Center, Genta,
Inc.,The Molson Companies Limited, Playboy
Enterprises, Inc., Revlon, Inc., VIMRx Pharmaceuticals Inc. and Weider Nutrition
International, Inc. (On December 27, 1996, Marvel, Marvel Holdings, Marvel
Parent and Marvel III, of which Mr. Drapkin was a Director on such date, and several subsidiaries of Marvel filed
voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code.)
Mr. Engelman (63) has been a Director of Products Corporation since
1993. Mr. Engelman has been Executive Vice President, Chief Financial Officer
and 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. Mr. Engelman is a Director of Cal Fed, which files reports
pursuant to the Exchange Act.
Mr. Gittis (63)(65) has been a Director of Products Corporation and of
Revlon, Inc. since their respective formations in 1992. He has been Vice
Chairman of the Board of MacAndrews Holdings& Forbes and various of its affiliates for
more than five years.since
1985. Mr. Gittis is also a Director of the following corporations which file
reports pursuant to the Exchange Act: Cal Fed, CLN, Cigar Holdings,
Consolidated Cigar, First Nationwide Parent, FNGolden State, Golden State Holdings, Jones
Apparel Group, Inc., Loral Space & Communications Ltd., M&F Worldwide,
Revlon, Inc.,Panavision, REV Holdings, and Rutherford-Moran Oil Corporation and Sunbeam
Corporation.
Mr. Landau (68)(69) has been a Director of Products Corporation since June
1992 and a Director of Revlon, Inc. since June 1996. Mr. Landau has been a
Senior Partner in the law firm of Wolf, Block, Schorr and Solis-Cohen LLP
(previously Lowenthal, Landau, Fischer & Bring, P.C.) for more than the past
five years. Mr. Landau is also a Director of Offitbank Investment Fund, Inc. and
Revlon, Inc., each of
which files reports pursuant to the Exchange Act.
28
COMPENSATION OF DIRECTORS
Directors who currently are not receiving compensation as officers or
employees of the Company or any of its affiliates are paid an annual retainer
fee of $25,000, payable in quarterly installments, and a fee of $1,000 for each
meeting of the Board of Directors or any committee thereof they attend.
29
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information for the years indicated
concerning the compensation awarded to, earned by or paid to the persons who
served as Chief Executive Officer of Products Corporation during 19971998 and the four most highly paid
executive officers, other than the Chief Executive Officer, who served as
executive officers of Products Corporationthe Company as of December 31, 19971998 (collectively, the
"Named Executive Officers"), for services rendered in all capacities to Products Corporationthe
Company and its subsidiaries during such periods.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION (a) LONG-TERM
COMPENSATION
-------------- ------------- -----------
AWARDS
------------------------------------------------------------------- ------
OTHER ANNUAL SECURITIES ALL OTHER
COMPEN- UNDER- COMPEN-
NAME AND PRINCIPAL SALARY BONUS SATION LYING SATION
PRINCIPALCOMPENSATION UNDERLYING COMPENSATION
POSITION YEAR ($) ($) ($) 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
President and Chief 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 (b) 1995 841,667 531,700 68,559 0 4,500
- ----------------------------------- ---------- -------------- ------------- ----------- ------------------ -------------
Jerry W. Levin(d)
Wade H. Nichols III 1998 555,000 83,600 19,457 40,000 33,195
Executive Vice President 1997 825,000 0 20,811 170,000 160,871
Chairman of the Board (c)525,000 274,600 24,215 30,000 23,089
and General Counsel (e) 1996 1,500,000 1,500,000 93,801 170,000 307,213
1995 1,450,000 1,450,000 42,651 0 308,002
- ----------------------------------- ---------- -------------- ------------- ----------- ------------------ -------------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
Senior Executive Vice President (f) 1996 750,000 598,600 50,143 50,000 56,290
and Chief Financial Officer (d) 1995 660,000 455,000 54,731 0 56,290
- ----------------------------------- ---------- -------------- ------------- ----------- ------------------ -------------
M. Katherine Dwyer 1997 500,000 800,000 5,948 125,000 18,377
Senior Vice President (e) 1996 500,000 326,100 90,029 45,000 4,500
- ----------------------------------- ---------- -------------- ------------- ----------- ------------------ -------------
Carlos Colomer 1997 700,000 330,700 0 37,000 62,645
Executive Vice President (f) 1996 700,000 192,600 0 37,000 3,062
1995 600,000 135,200 0 0 0
- ----------------------------------- ---------- -------------- ------------- ----------- ------------------ -------------
(a) The amounts shown in Annual Compensation for 1998, 1997 1996 and 19951996
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 Products
Corporationthe Company and its
subsidiaries. The CompanyProducts Corporation has a bonus plan (the "Executive
Bonus Plan") in which executives participate (including the Chief
Executive Officer and the other Named Executive Officers)Officers other than Mr.
Fox (see "--Employment Agreements and Termination of Employment
Arrangements")). The Executive Bonus Plan provides for payment of cash
compensation upon the achievement of predetermined corporate and/or
business unit and individual performance goals during the calendar year
established pursuant to the Executive Bonus Plan or by the Compensation Committee.
(b) Mr. Fellows became Chief Executive Officer of Products Corporation and
of Revlon, Inc. in January 1997.'s
Compensation and Stock Plan Committee (the "Compensation Committee").
Mr. Gehrmann's compensation is reported for 1998 only because he did
not serve as an executive officer of the Company prior to 1998.
30
(b) The amount shown for Mr. Fellows under Other Annual Compensation for
1997 reflects1998 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 by the Company
30
in respect of life insurance. The amount shown for Mr. Fellows under All
Other Compensation for 19971998 reflects $11,117$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 amountamounts shown for Mr. Fellows under Other Annual Compensation for 1997 and 1996
reflectsreflect payments in respect of gross ups for taxes on imputed income
arising out of personal use of a Company-provided automobile and for
taxes on imputed income arising out of premiums paid or reimbursed by the Company in
respect of life insurance. The amount shown under All Other
Compensation for Mr. Fellows1997 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 amountamounts shown for Mr. FellowsMs. Dwyer under Other Annual Compensation for
1995 includes $43,251 in respect of membership fees1998, 1997 and related expenses for personal use of a health and country club
and $9,4581996 reflect payments in respect of gross ups for taxes
on imputed income arising out of personal use of a Company-provided
automobile.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 for Mr. Fellows under All Other Compensation for 19951998 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.
(c)(d) Mr. Levin was Chief Executive Officer of Products Corporation and of
Revlon, Inc. during 1995, 1996 and January 1997 and ChairmanGehrmann became an executive officer of the Board during the remainder of 1997.Company in January
1998. The amount shown for Mr. LevinGehrmann under Other Annual Compensation
for 19971998 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 for Mr. Levin under All Other Compensation for 19971998 reflects $150,971 in respect of
split-dollar life insurance premiums (under which the Company is
entitled to reimbursement of such premiums or the cash surrender value
of such insurance, whichever is less), $2,400$4,800
in respect of matching contributions under the 401(k) Plan and $7,500$12,497
in respect of matching contributions under the Excess Plan.
(e) The amountamounts shown for Mr. LevinNichols 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 includes $26,400 in respect
of personal use of a Company-provided automobile, payments in respect
of gross ups for taxes on imputed income arising out of personal use
of such Company-provided automobile and payments for taxes on imputed
income arising out of premiums paid or reimbursed by the Company in
respect of life insurance. The amount shown for Mr. Levin under All
Other Compensation for 1996 reflects $302,713 in respect of life
insurance premiums and $4,500 in respect of matching contributions
under the 401(k) Plan. The amount shown for Mr. Levin under Other
Annual Compensation for 1995 reflects payments in respect of gross ups
for taxes on imputed income arising out of personal use of a
Company-provided automobile and for taxes on imputed income arising
out of premiums paid or reimbursed by the Company in respect of life
insurance. The amount shown for Mr. Levin under All Other Compensation
for 1995 reflects $303,502 in respect of life insurance premiums and
$4,500 in respect of matching contributions under the 401(k) Plan.
(d) Mr. Fox became Senior Executive Vice President of Products Corporation
and of Revlon, Inc. in January 1997. Mr. Fox served as Chief Financial
Officer of Products Corporation and of Revlon, Inc. during 1995, 1996
and 1997. In January 1998 Mr. Fox was appointed President, Strategic
and Corporate Development, Revlon Worldwide, and Mr. Gehrmann was
elected Chief Financial Officer of Products Corporation and of Revlon,
Inc. The amount shown for Mr. Fox under Bonus for 1997 includes an
additional payment of $125,000 based upon Mr. Fox's performance. The
amount shown for Mr. Fox under Other Annual Compensation for 1997
reflectsreflect 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 by the Company in respect of life insurance. The amount
shown under All Other Compensation for 1998 reflects $9,990 in respect
of life insurance premiums, $4,800 in respect of matching contributions
under the 401(k) Plan, $10,463 in respect of matching contributions
under the Excess Plan and $7,942 in respect of above-market earnings on
compensation deferred under the Deferred Compensation Plan that were
earned but not paid or payable during 1998. The amount shown under All
Other Compensation for 1997 reflects $4,252 in respect of life
insurance premiums, $4,800 in respect of matching contributions under
the 401(k) Plan, $11,606 in respect of matching contributions under the
Excess Plan and $2,431 in respect of above-market earnings on
compensation deferred under the Deferred Compensation Plan that were
earned but not paid or payable during 1997. The amount shown under All
Other Compensation for 1996 reflects $4,500 in respect of matching
contributions under the 401(k) Plan and $1,453 in respect of
above-market earnings on compensation deferred under the Deferred
Compensation Plan that were earned but not paid or payable during 1996.
31
(f) Mr. Fox was an executive officer of the Company during 1996, 1997 and
1998 and resigned from the Company effective January 31, 1999. The
amounts shown for Mr. Fox under Other Annual Compensation for 1998,
1997 and 1996 reflect payments in respect of gross ups for taxes on
imputed income arising out of personal use of a Company-provided
automobile and payments for taxes on imputed income arising out of
premiums paid or reimbursed in respect of life insurance. The amount
shown under All Other Compensation for 1998 reflects $51,790 in respect
of life insurance premiums, $4,800 in respect of matching contributions
under the 401(k) Plan and $15,000 in respect of matching contributions
under the Excess Plan. The amount shown under Bonus for 1997 includes
an additional payment of $125,000 based upon Mr. Fox's performance. The
amount shown under All Other Compensation for 1997 reflects $51,790 in
respect of life insurance premiums, $4,800 in respect of matching
contributions under the 401(k) Plan and $15,000 in respect of matching
contributions under the Excess Plan. The amount shown for Mr.
Fox under Other Annual Compensation for 1996 reflects payments in
respect of gross ups for taxes on imputed income arising out of
personal use of a Company-provided automobile and for taxes on imputed
income arising out of premiums paid or reimbursed by the Company in
respect of life insurance. The amount shown for Mr. Fox under All Other
Compensation for 1996 reflects $51,790 in respect of life insurance
premiums and $4,500 in respect of matching contributions under the
401(k) Plan.
The amount shown for Mr. Fox under Other Annual
Compensation for 1995 reflects payments in respect of gross ups for
taxes on imputed income arising out of personal use of a Company-
provided automobile and for taxes on imputed income arising out of
premiums paid or reimbursed by the Company in respect of life
insurance. The amount shown for Mr. Fox
31
under All Other Compensation for 1995 reflects $51,790 in respect of
life insurance premiums and $4,500 in respect of matching
contributions under the 401(k) Plan.
(e) Ms. Dwyer became an executive officer of Products Corporation and of
Revlon, Inc. in December 1996. The amount shown for Ms. Dwyer under
Bonus for 1997 includes an additional payment of $300,000 pursuant to
her employment agreement. The amount shown for Ms. Dwyer under Other
Annual Compensation for 1997 reflects 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 by the Company in respect
of life insurance. The amount shown for Ms. Dwyer under All Other
Compensation for 1997 reflects $4,800 in respect of matching
contributions under the 401(k) Plan, $10,857 in respect of matching
contributions under the Excess Plan and $2,720 in respect of life
insurance premiums. The amount shown for Ms. Dwyer under Other Annual
Compensation for 1996 reflects $57,264 in expense reimbursements and
payments in respect of gross ups for taxes on imputed income arising
out of personal use of a Company-provided automobile. The amount shown
for Ms. Dwyer under All Other Compensation for 1996 reflects matching
contributions under the 401(k) Plan.
(f) Mr. Colomer was an executive officer of Products Corporation and of
Revlon, Inc. during 1995, 1996 and 1997. The amount shown for Mr.
Colomer under Bonus for 1997 includes $148,815 which is being deferred
at Mr. Colomer's election. The amount shown for Mr. Colomer under All
Other Compensation for 1997 reflects $59,583 in respect of an
expatriate travel and hardship allowance and $3,062 in respect of life
insurance premiums. The amount shown for Mr. Colomer under All Other
Compensation for 1996 reflects life insurance premiums.
32
OPTION GRANTS IN THE LAST FISCAL YEAR
During 1997,1998, the following grants of stock options were made pursuant
to the Revlon, Inc. Amended and Restated 1996 Stock Plan (the "Stock Plan") to
the executive officers named in the Summary Compensation Table:
GRANT
INDIVIDUAL GRANTS DATE
VALUE INDIVIDUAL GRANTS (A)
- ------------------------------- ------------------- ------------------- ---------------- ------------------ --------------------(a)
--------------------------------------------------------- ---------
NUMBER OF SECURITIES PERCENT OF
UNDERLYINGSECURITIES TOTAL OPTIONS EXERCISE GRANT
UNDERLYING GRANTED TO OR GRANTBASE DATE
PRESENT
OPTIONS GRANTED GRANTED BASEEMPLOYEES IN PRICE EXPIRATION VALUEPRESENT
NAME GRANTED (#) TO EMPLOYEES INFISCAL YEAR ($/SH) DATE VALUE $
FISCAL YEAR
- ------------------------------- ------------------- ------------------- ---------------- ------------------ ----------------------------------- ----------- ------------- -------- ---------- -------
George Fellows President and Chief Executive
Officer (b) 170,000 11% $31.37510% $34.00 1/08/07 $2,703,255
- ------------------------------- ------------------- ------------------- ---------------- ------------------ --------------------
Jerry W. Levin
Chairman of the Board (b) 170,000 11% $31.37507/08 $ 3,475,157
M. Katherine Dwyer 75,000 4% $34.00 1/08/07 $2,703,255
- ------------------------------- ------------------- ------------------- ---------------- ------------------ --------------------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 Senior Executive Vice
President and Chief Financial
Officer (b) 50,000 3% $31.37575,000 $34.00 1/08/07 $795,075
- ------------------------------- ------------------- ------------------- ---------------- ------------------ --------------------
M. Katherine Dwyer
Senior Vice President (b) 125,000 8% $31.375 1/08/07 $1,987,688
- ------------------------------- ------------------- ------------------- ---------------- ------------------ --------------------
Carlos Colomer
Executive Vice President 37,000 2% $31.375 1/08/07 $588,356
- ------------------------------- ------------------- ------------------- ---------------- ------------------ --------------------07/08 1,533,158
{6%
25,000 $48.50 6/16/08 725,658
The grants made during 19971998 under the Stock Plan to Messrs. Fellows,
Levin, FoxGehrmann and ColomerNichols and Ms. Dwyer were made on January 9, 19978, 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 New York
Stock Exchange ("NYSE") closing price per share of Revlon, Inc.'s Class A Common
Stock on the grant date, as indicated in the table above. During 1997,1998, Revlon,
Inc. also granted an option to purchase 300,000 shares of its Class A Common
Stock pursuant to the Stock Plan to Mr. Perelman, Chairman of the Executive Committee.Board of
Directors of the Company. The option will vest in full on the fifth anniversary
of the grant date and has an exercise price of $34.875,$50.00, the NYSE closing price
per share of Revlon, Inc.'s Class A Common Stock on April 4, 1997,27, 1998, the date of
the grant.
(a) Grant Date Present valuesValues were calculated using the Black-Scholes
option pricing model. The model as applied used the grant date of
January 9, 1997.8, 1998 with respect to the options granted on such date
32
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 model also assumesfollowing
assumptions were made for purposes of calculating Grant Date Present
Values: (i) a risk-free rate of return of 6.41%,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 waswere the raterates as of the
applicable grant datedates for the U.S. Treasury Zero Coupon Bond issues
with a remaining term similar to the expected term of the options,options; (ii)
stock price volatility of 39.34%55.93% based upon the volatility of the stock
price of Revlon, Inc.'s Class A Common Stock,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.
33
(b) Mr. Fellows served as President during all of 1997 and became Chief
Executive Officer in January 1997. Mr. Levin served as ChairmanThe real value of the Boardoptions in the table depends upon the actual
performance of Revlon, Inc. Class A Common Stock during all of 1997the applicable
period and as Chief Executive Officer during
January 1997. Mr. Fox was appointed President, Strategic and
Corporate Development, Revlon Worldwide in January 1998. Ms. Dwyer
was appointed President of Products Corporation's United States
Consumer Products business in January 1998.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
19971998 and the 19971998 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 VALUE OF UNEXERCISED UNEXERCISEDMONEY OPTIONS
SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT FISCAL SHARESYEAR-END
ACQUIRED VALUE YEAR-END (#) YEAR-END EXERCISABLE/
ACQUIREDNAME ON REALIZED EXERCISABLE/ UNEXERCISABLE (A)
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE UNEXERCISABLE (a)($)
- ------------------------------- -------------- -------------- ------------------------------------- ------------------------------------ --------------- ------------ ------------------------- --------------------
George Fellows President and
Chief Executive Officer 0 0 42,500/417,500 0/290,000 0/2,026,875
- ------------------------------- -------------- -------------- ------------------------------------- --------------------------------
Jerry W. Levin
Chairman of the Board0
M. Katherine Dwyer 0 0 31,250/213,750 0/340,0000
Frank J. Gehrmann 0 0 8,000/44,000 0/2,592,500
- ------------------------------- -------------- -------------- ------------------------------------- --------------------------------0
Wade H. Nichols III 0 0 7,500/92,500 0/0
William J. Fox Senior Executive Vice
President and
Chief Financial Officer 0 0 12,500/187,500 0/100,000 0/762,500
- ------------------------------- -------------- -------------- ------------------------------------- --------------------------------
M. Katherine Dwyer
Senior Vice President 0 0 0/170,000 0/1,001,250
- ------------------------------- -------------- -------------- ------------------------------------- --------------------------------
Carlos Colomer
Executive Vice President 0 0 0/74,000 0/564,250
- ------------------------------- -------------- -------------- ------------------------------------- --------------------------------
(a) Amounts shown represent theThe market value of the underlying shares of Revlon, Inc.'s Class A Common
Stock at year-endyear end calculated using $16 3/8, the December 31, 19971998 NYSE
closing price per share of Revlon, Inc. Class A Common Stock, of $35 5/16 minuswas less than
the exercise price of all stock options listed in the stock option.table. The actual
value, if any, an executive may realize is dependentupon exercise of a stock option
depends upon the amount by which the market price of shares of Revlon, Inc.'s
Class A Common Stock exceeds the exercise price per share when the stock
options are exercised.
The actual value realized may be greater or less than the
value shown in the table.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
Each of the Chief Executive OfficerMessrs. Fellows, Nichols and the other Named Executive
OfficersFox and Ms. Dwyer has entered into
an executive employment agreement with Products Corporation (except Mr. Colomer, who entered into an executive employment
agreement with a subsidiary of Products Corporation), which became effective
upon consummation of the Revlon IPO, providing for their continued employment.
Effective January 1, 1997,Corporation. Mr. Fellows'
employment agreement, wasas amended, to
provideprovides that he will serve as the President
and Chief Executive Officer of
Products Corporation and of Revlon, Inc. at a base salary of $1,250,000not less than $1,800,000 for
1997; $1,350,000 for 1998; $1,450,000 for 1999; $1,550,000 for 2000 and
$1,700,000 for 20011998 and thereafter, and that management recommend to Revlon,
Inc.'sthe Compensation Committee (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. In connection with his assumption of management responsibility for
an affiliate, Mr. Levin and Products Corporation agreed to terminate his
employment agreement as of June 30, 1997, with Mr. Levin continuing as Chairman
of the
34
Board of Products Corporation and of Revlon, Inc. (the "Levin Amendment").
Pursuant to the Levin Amendment, Mr. Levin received a base salary of $825,000
for services provided to Products Corporation and Revlon, Inc. in 1997.
Effective January 1, 1998, Mr. Colomer's employment agreement was amended to
provide that he will serve as Chairman, Revlon Professional Worldwide Strategic
Committee and Chairman, Revlon Professional International at a base salary of
not less than $700,000 for 1998 and thereafter, and that management recommend
to the Compensation Committee that he be granted options to purchase 37,000
shares of Class A Common Stock each year during the term of the agreement. Mr.
Colomer's agreement further provides that at any time on or after the second
anniversary of the effective date of his agreement, Products Corporation may
terminate the term by 12 months' prior notice of non-renewal. Mr. Fox's
agreement provides for a base salary of not less than $750,000 and that
management recommend to the Compensation Committee that Mr. Fox be granted
options to purchase 50,000 shares of Class A Common Stock each year during the
term of the agreement, and further provides that at any time on or after the
second anniversary of the effective date of his agreement, Products Corporation
may terminate the term by 12 months' prior notice of non-renewal. Effective
January 1, 1998, Mr. Fox was appointed President, Strategic and Corporate
Development, Revlon Worldwide, and Chief Executive Officer, Revlon
Technologies. Effective January 1, 1998, Ms. Dwyer's employment
agreement was
amended to provideprovides that she will serve as President of Products Corporation's
United States Consumer Products business at a base salary of not less than
$875,000 per annum for 1998 to be increased as of January 1 of each year by not
less than $75,000, and that management recommend to the Compensation Committee
that she be granted options to purchase 75,000 shares of Revlon, Inc. Class A
Common Stock each year during the term of the agreement. At any time on or after
the fourth anniversary of the
effective date of her agreement,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
33
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. Pursuant to the Levin Amendment, Mr. Levin is entitled to continued disability
insurance and life insurance as well as certain other benefits. The agreements with
Messrs. Fellows and ColomerNichols and Ms. Dwyer provide for Company-paid supplemental
term life insurance during employment in the amount of three times base salary,
while the termsand all of the agreements withcurrently in effect provide for Company-paid
supplemental disability insurance. Mr. Levin and Mr. Fox
provideFox'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 in the case of Mr. Levin, whole life insurance
policies on his life in the amount of $14,100,000 under a split dollar
arrangement pursuant to which Products Corporation would be repaid the amount
of premiums it paid up to the cash surrender value of the policies from
insurance proceeds payable under the policies and, in the case of Mr. Fox, a whole life insurance policy on his life in the
amount of $5,000,000 under an arrangement providing for all insurance proceeds
to be paid to the designated beneficiary under such policy. The agreements
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 as in effect on January 1, 1997 (see "--Executive
Severance Policy") (or, at his or her election, to continued base salary
payments throughout the term in the case of Mr. Fellows and Ms. Dwyer)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.
As of December 31, 1997, 1996, and 1995, Mr. Colomer had a loan
outstanding from Products Corporation's subsidiary in Spain in the amount of
25.0 million Spanish pesetas (approximately $165,050 U.S. dollar equivalent as
of December 31, 1997) dating from 1991 pursuant to a management retention
program grandfathered under a 1992 change in the Spanish tax law which
currently covers certain executives of such
35
subsidiary, including Mr. Colomer. Pursuant to this management retention
program, outstanding loans do not bear interest but an amount equal to the
one-year government bond interest rate in effect at the beginning of the year
is deducted from the executives' annual compensation, and loans must be repaid
in full upon termination of employment. The amount deducted from Mr. Colomer's
compensation was 1.4 million Spanish pesetas (approximately $9,210 U.S. dollar
equivalent as of December 31, 1997) for 1997; 2.15 million Spanish pesetas
(approximately $16,988 U.S. dollar equivalent as of December 31, 1996) for 1996
and 2.25 million Spanish pesetas (approximately $18,097 U.S. dollar equivalent
as of December 31, 1995) for 1995.
EXECUTIVE SEVERANCE POLICY
Products Corporation's Executive Severance Policy as amended
effective January 1, 1996, provides that upon
termination of employment of eligible executive employees, including the 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 Agreement as to Confidentiality and Non-Competition (the
"Non-Competition Agreement"),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, Levin, FoxGehrmann and ColomerNichols and Ms.
Dwyer would be entitled to severance pay equal to two years of base salary at
the rate in effect on the date of employment termination plus continued
participation in the medical and dental plans for two years on the same terms as
active employees.
34
DEFINED BENEFIT PLANS
The following table shows the estimated annual retirement benefits
payable (as of December 31, 1997)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:
36
below.
HIGHEST CONSECUTIVE FIVE-YEAR
AVERAGE COMPENSATION DURING 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 $151,974 $202,632 $253,290 $303,948 $303,948$151,881 $202,508 $253,135 $303,762 $303,762
700,000 177,974 237,299 296,623 355,948 355,948177,881 237,175 296,468 355,762 355,762
800,000 203,974 271,965 339,957 407,948 407,948203,881 271,841 339,802 407,762 407,762
900,000 229,974 306,632 383,290 459,948 459,948229,881 306,508 383,135 459,762 459,762
1,000,000 255,974 341,299 426,623255,881 341,175 426,468 500,000 500,000
1,100,000 281,974 375,965 469,957281,881 375,841 469,802 500,000 500,000
1,200,000 307,974 410,632307,881 410,508 500,000 500,000 500,000
1,300,000 333,974 445,299333,881 445,175 500,000 500,000 500,000
1,400,000 359,974 479,965359,881 479,841 500,000 500,000 500,000
1,500,000 385,974385,881 500,000 500,000 500,000 500,000
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 only 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 January 1, 1996,December 14, 1998, is a
non-qualified benefit arrangement designed to provide for the payment by
the
CompanyProducts 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 Agreementnon-competition agreement and in any case, on the participant not competing with Products
Corporation for one year after termination of employment.
35
The number of years of credited service under the Retirement Plan and
the Pension Equalization Plan as of January 1, 19981999 (rounded to full years) for
Mr. Fellows is nineten years (which includes credit for prior service with
Holdings), for Ms. Dwyer is five years, for Mr. FoxGehrmann is 14five years, for
Mr. Nichols is 20 years (which includes credit for prior service with
MacAndrews Holdings)
and for Ms. DwyerMr. Fox is four years, and as of June 30, 1997
for Mr. Levin is eight15 years (which includes credit for prior service with
MacAndrews Holdings). Pursuant to the Levin Amendment, Mr. Levin retains all benefits
under the Retirement Plan and the Pension Equalization Plan accrued by him as
of June 30, 1997. Mr. Colomer does not participate in the Retirement Plan or
the Pension Equalization Plan. Mr. Colomer participates in the Revlon Foreign
Service Employees Pension Plan (the "Foreign Pension Plan"). The Foreign
Pension Plan is a non-qualified defined benefit plan. The Foreign Pension Plan
is designed to provide an employee with 2% of final average salary for each
year of
37
credited service, up to a maximum of 30 years, reduced by the sum of all other
Company-provided retirement benefits and social security or other
government-provided retirement benefits. Credited service includes all periods
of employment with the Company or a subsidiary prior to retirement. Final
average salary is defined as average annual base salary during the five
consecutive calendar years in which base salary was highest out of the last 10
years prior to retirement. The normal form of payment under the Foreign Pension
Plan is a life annuity. Mr. Colomer's credited service as of January 1, 1998
(rounded to full years) under the Foreign Pension Plan is 18 years (which
includes credit for service with Holdings).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
For 1997, the executive officers of Products Corporation were
compensated for services rendered to Products Corporation and its subsidiaries,
participated in benefit plans sponsored by Products Corporation and received
grants of options under the Stock Plan. Revlon, Inc.'s Compensation Committee
(of which Messrs. Drapkin and Gittis are members) performed the functions of a
Compensation Committee for Products Corporation with respect to determining
compensation of executive officers of Products Corporation.
Products Corporation has used an airplane which is owned by a
corporation of which Messrs. Gittis and Drapkin are the sole stockholders. See
"Certain Relationships and Related Transactions - Other."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Revlon, Inc. beneficially owns all of the outstanding shares of common
stock of Products Corporation. No other director, executive officer or other
person beneficially owns any shares of Products Corporation's common stock. Through REV Holdings, the parent of Revlon, Inc.,
Ronald O. Perelman, 35 East 62nd Street, New York, New York 10021, through
MacAndrews Holdings, a corporation wholly owned indirectly through Mafco
Holdings, (Mafco Holdings,
together with MacAndrews Holdings, "MacAndrews & Forbes"), beneficially owns 11,250,000 shares of Class A Common Stock of Revlon,
Inc. (representing 56.6%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 83.1%83.0% of the outstanding shares
of Revlon, Inc.'s common stock and have approximately 97.4% of the combined voting
power of the outstanding shares of Revlon, Inc.'s common stock. No other director,
executive officer or other person beneficially owns any shares of Products
Corporation's common stock. All of the shares of Revlon, Inc. common stock owned
by REV Holdings are pledged by REV Holdings to secure obligations, and shares of
intermediate holding companies are or may from time to time be pledged to secure
obligations of Mafco Holdings or its affiliates.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Revlon, Inc. beneficially owns all of the outstanding shares of common
stock of Products Corporation. MacAndrews & Forbes beneficially owns shares of
Revlon, Inc.'s common stock having approximately 97.4% of the combined voting
power of the outstanding shares of Revlon, Inc.'s common stock. As a result,
MacAndrews & Forbes is able to elect the entire Board of Directors of Products
Corporation and control the vote on all matters submitted to a vote of Products
Corporation's stockholder, including extraordinary transactions such as mergers
or sales of all or substantially all of Products Corporation's assets.
MacAndrews & Forbes is wholly owned by Ronald O. Perelman, who is Chairman of
the Executive CommitteeBoard of the Board and a DirectorDirectors of Products Corporation.
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.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 38
Products
Corporation. The amount reimbursed by Holdings to Products Corporation for the
Excluded Liabilities for 19971998 was $0.4$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 manufactures, markets, distributes, warehouseshas manufactured, marketed, distributed, warehoused and
administers,administered, including the collection of accounts receivable, the Retained
Brands for Holdings. Pursuant to the Operating Services Agreement, Products
Corporation iswas 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 reimbursed bydue from Holdings to Products
Corporation for such direct and indirect costs for 1997 was $1.4
million. Holdings also pays Products Corporation1998 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 quarterly. The fees paid by Holdings to Products Corporation pursuant to the Operating Services Agreement for services
with respect to the Retained Brands for 1997 was approximately $0.3 million.Holdings.
36
REIMBURSEMENT AGREEMENTS
Revlon, Inc., Products Corporation and MacAndrews Holdings have entered
into reimbursement agreements (the "Reimbursement Agreements") pursuant to which
(i) MacAndrews Holdings is obligated to provide (directly or through affiliates)
certain professional and administrative services, including employees, to
Revlon, Inc. and its subsidiaries, including Products Corporation, and purchase
services from third party providers, such as insurance and legal and accounting
services, on behalf of Revlon, Inc. and its subsidiaries, including Products
Corporation, to the extent requested by Products Corporation, and (ii) Products
Corporation is obligated to provide certain professional and administrative
services, including employees, to MacAndrews Holdings (and its affiliates) and
purchase services from third party providers, such as insurance and legal and
accounting services, on behalf of MacAndrews Holdings (and its affiliates) to
the extent requested by MacAndrews Holdings, provided that in each case the
performance of such services does not cause an unreasonable burden to MacAndrews
Holdings or Products Corporation, as the case may be. The Company reimburses
MacAndrews Holdings for the allocable costs of the services purchased for or
provided to the Company and its subsidiaries and for reasonable out-of-pocket
expenses incurred in connection with the provision of such services. MacAndrews
Holdings (or such affiliates) reimburses the Company for the allocable costs of
the services purchased for or provided to MacAndrews Holdings (or such
affiliates) and for the reasonable out-of-pocket expenses incurred in connection
with the purchase or provision of such services. In addition, in connection with certain insurance coverage
provided by MacAndrews Holdings, Products Corporation obtained letters of
credit (which aggregated approximately $27.7 million as of December 31, 1997)
to support certain self-funded risks of MacAndrews Holdings and its affiliates,
including the Company, associated with such insurance coverage. The costs of
such letters of credit are allocated among, and paid by, the affiliates of
MacAndrews Holdings, including the Company, which participate in the insurance
coverage to which the letters of credit relate. The Company expects that these
self-funded risks will be paid in the ordinary course and, therefore, it is
unlikely that such letters of credit will be drawn upon. MacAndrews Holdings
has agreed to indemnify Products Corporation to the extent amounts are drawn
under any of such letters of credit with respect to claims for which neither
Revlon, Inc. nor Products Corporation is responsible. The net amount reimbursed by
MacAndrews Holdings to the Company for the services provided under the
Reimbursement Agreements for 19971998 was $4.0 million.$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. The Company does not
intend to request services under the Reimbursement Agreements unless their costs
would be at least as favorable to the Company as could be obtained from
unaffiliated third parties.
TAX SHARING AGREEMENT
Revlon, Inc. and Products Corporation, for federal income tax purposes,
are included in the affiliated group of which Mafco Holdings is the common
parent, and Revlon, Inc.'s and Products Corporation's federal taxable
39
income and
loss are included in such group's consolidated tax return filed by Mafco
Holdings. Revlon, Inc. and Products Corporation also may be included in certain
state and local tax returns of Mafco Holdings or its subsidiaries. In June 1992,
Holdings, Revlon, Inc., Products Corporation and certain of its subsidiaries,
and Mafco Holdings entered into a tax sharing agreement (as subsequently
amended, the "Tax Sharing Agreement"), pursuant to which Mafco Holdings has
agreed to indemnify Revlon, Inc. and Products Corporation against federal, state
or local income tax liabilities of the consolidated or combined group of which
Mafco Holdings (or a subsidiary of Mafco Holdings other than Revlon, Inc. and
Products Corporation or its subsidiaries) is the common parent for taxable
periods beginning on or after January 1, 1992 during which Revlon, Inc. and
Products Corporation or a subsidiary of Products Corporation is a member of such
group. Pursuant to the Tax Sharing Agreement, for all taxable periods beginning
on or after January 1, 1992, Products Corporation will pay to Revlon, Inc.,
which in turn will pay to Holdings, amounts equal to the taxes that Products
Corporation would otherwise have to pay if it were to file separate federal,
state or local income tax returns (including any amounts determined to be due as
a result of a redetermination arising from an audit or otherwise of the
consolidated or combined tax liability relating to any such period which is
attributable to Products Corporation), except that Products Corporation will not
be entitled to carry back any losses to taxable periods ending prior to January
1, 1992. No payments are required by Products Corporation or Revlon, Inc. if and
to the extent Products Corporation is prohibited under the Credit Agreement from
making tax sharing payments to Revlon, Inc. The Credit Agreement prohibits
Products Corporation from making such tax sharing payments other than in respect
of state and local income taxes. Since the payments to be made by Products
Corporation under the Tax Sharing Agreement will be determined by the amount of
taxes that Products Corporation would otherwise have to pay if it were to file
separate federal, state or local income tax returns, the Tax Sharing Agreement
will benefit Mafco Holdings to the extent Mafco Holdings can offset the taxable
income generated by Products Corporation against losses and tax credits
generated by Mafco Holdings and its other subsidiaries. There were no cash
payments in respect of federal taxes made by Products Corporation pursuant to
the Tax Sharing Agreement for 1997. Products Corporation has a liability of $0.9 million to
Revlon, Inc. in respect of federal taxes for 1997 under the Tax Sharing
Agreement.1998.
37
OTHER
Pursuant to a lease dated April 2, 1993 (the "Edison Lease"), Holdings
leasesleased 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, arewere 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 iswas
responsible under the Edison Lease and (ii) environmental claims and compliance
costs relating to matters which occurred prior to January 1, 1993 up to an
amount not to exceed $8.0 million (the amount of such claims and costs for which
Products Corporation is responsible, the "Environmental Limit"). In addition,
pursuant to such assumption agreement, Products Corporation agreed to indemnify
Holdings for environmental claims and compliance costs relating to matters which
occurred prior to January 1, 1993 up to an amount not to exceed the
Environmental Limit and Holdings agreed to indemnify Products Corporation for
environmental claims and compliance costs relating to matters which occurred
prior to January 1, 1993 in excess of the Environmental Limit and all such
claims and costs relating to matters occurring on or after January 1, 1993.
Pursuant to an occupancy agreement, during 19971998 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.Corporation's now discontinued retail
operation. During 1998, Products Corporation providesprovided certain administrative
services, including accounting, for Holdings with respect to the Edison facility
pursuant to which Products Corporation payspaid on behalf of Holdings costs
associated with the Edison facility and iswas 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
for
such costs with respect to the Edison facility for 19971998 was $0.7$0.5 million.
During 1997, a subsidiary of Products Corporation sold an inactive
subsidiary to an affiliate for approximately $1.0 million.
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
40
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 June 1997, Products Corporation borrowed from Holdings
approximately $0.5 million, representing certain amounts received by Holdings
from the sale of a brand and inventory relating thereto. Such amount is
evidenced by a noninterest bearing promissory note. Holdings agreed not to
demand payment under such note so long as any indebtedness remains outstanding
under Products Corporation's Credit Agreement.
On February 2, 1998, Revlon Escrow issued and sold the Notes 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 will bewere used to
finance the redemptionsredemption of the OldProducts 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
consummatedassumed the 8-5/obligations under the 8 5/8% Notes Assumption,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 will
consummateassumed the 8-1/8% Notes Assumption. On or before March 19, 1998 either
Revlon Escrow or Products Corporation is required to file a registration
statement with the Commission with respect to the Exchange Offer, which is
expected to occur on or before July 2, 1998. In connection with these matters,
Products Corporation entered into a Purchase Agreement and a Registration
Agreement with Revlon Escrow and the initial purchasers of the Notes and
entered into an agreement with Revlon Escrow pursuant to which each of Products
Corporation and Revlon Escrow agree to take all actions requiredobligations under the Purchase Agreement, the Registration Agreement and the other documents
governing the sale of the Notes, the redemptions of the Old8
1/8% Notes and the Assumption within the periods prescribed in order to effect such transactions
in accordance with their terms.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 theProducts Corporation's 1999 Notes.
During 1997,1998, 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 by
MacAndrews & Forbes or its affiliates to Products Corporation for such leases
and agreements for 19971998 was $3.8$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 Holdings'the
Edison New Jersey facility.
38
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, 1997.1998. 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 facilityfacilities in effect at the time of such borrowing. The
amount of interest paid by Products Corporation for such borrowings for 19971998 was
$0.6$0.8 million.
During 1997,1998 Products Corporation used an airplane owned by a
corporationmade advances of which Messrs. Gittis$0.25 million and
Drapkin are the sole stockholders, for
which$0.3 million to Mr. Fellows and Ms. Dwyer, respectively. During 1998, Products
Corporation paid approximately $0.2 million.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 1997,1998, Products Corporation purchased products from ana company
that was its affiliate during part of 1998, for which it paid approximately $0.9$0.4
million.
During 1997,Prior to 1998, Products Corporation provided licensing services to ana
company that was its affiliate for whichduring part of 1998. In connection with the
termination of the licensing arrangement and its agreement to provide consulting
services during 1998, Products Corporation has been paid approximately $0.7
million.
Anreceived 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
assemblesduring 1998 assembled lipstick cases for Products Corporation. Products
Corporation paid approximately $0.9$1.1 million for such services in 1997.
41
1998.
Products Corporation believes that the terms of the foregoing
transactions are at least as favorable to Products Corporation 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 of Products Corporation.
(Incorporated by reference to Exhibit 3.3 to the Form 10 of
Products Corporation filed with the Securities and Exchange
Commission on August 7, 1992
(File No. 1-11334)).
3.2 Certificate of Amendment of Certificate of Incorporation as filed
on February 18, 1993. (Incorporated by reference to Exhibit 3.4 to
the Annual Report on Form 10-K for the year ended December 31,
1992 of Products Corporation (the "Products Corporation 1992
10-K")).
3.3 Amended and Restated By-Laws of Products Corporation dated January
30, 1997 (Incorporated by reference to Exhibit 3.3 to the Annual
Report on Form 10-K for the year ended December 31, 1996 of
Products Corporation).
4. INSTRUMENTS DEFINING THE RIGHTSRIGHT OF SECURITY HOLDERS, INCLUDING
INDENTURES.
4.1 Indenture, dated as of February 15, 1993,1, 1998, between Products
CorporationRevlon Escrow and
TheU.S. Bank of New York,Trust National
39
Association (formerly known as First Trust National Association),
as Trustee, relating to Products Corporation's 10the 8 1/2 % Series B8% Senior Subordinated
Notes Due 2003.due 2006 (the "8
1/8% Senior Notes Indenture"). (Incorporated by reference to
Exhibit 4.314.1 to the Registration Statement on Form S-1 of Products
Corporation filed with the Securities and Exchange Commission on March 17, 1993, File12, 1998 (File No.
33-59650)333-47875) (the "Products Corporation 1998 Form S-1")).
4.2 Indenture, dated as of February 1, 1998, between Revlon Escrow and
U.S. Bank Trust National Association (formerly known as First
Trust National Association), as Trustee, relating to the 8 5/8%
Senior Notes Due 2006 (the "8 5/8% Senior Subordinated Notes
Indenture"). (Incorporated by reference to Exhibit 4.3 to the
Products Corporation 1998 Form S-1).
4.3 First Supplemental Indenture, dated April 1, 1993,1998, 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 NationsBank of Georgia,U.S. Bank Trust National Association, as Trustee,
relating to the Products Corporation's 9 3/8 %9% Senior Notes Due 2001 and Products Corporation's 9 3/8 %
Series B Senior Notes Due 2001.due 2006.
(Incorporated by reference to Exhibit 4.284.13 to the Amendment No. 1 to the Registration
StatementQuarterly Report
on Form S-110-Q for the quarterly period ended September 30, 1998 of
Products Corporation as filed with
the Securities and Exchange Commission on April 13, 1993,
(File No. 33-59650)Revlon, Inc. (the "Revlon 1998 Third Quarter Form 10-Q")).
4.34.6 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 %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).
4.4 Second4.7 Third Amended and Restated Credit Agreement dated as of December 22, 1994,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
4.32 to the Annual Report on Form 10-K for the year ended
December 31, 1994 of Products Corporation (the "Products
Corporation 1994 10-K")).
42
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.5 First Amendment and Consent, dated as of March 10, 1997, with
respect to the Yen Credit Agreement. (Incorporated by
reference to Exhibit 4.8 to the Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1997 of Revlon, Inc.
(the "Revlon 1997 First Quarter 10-Q")).
4.6 Third Amended and Restated Credit Agreement, dated as of June
30, 1997, between Pacific Finance and Development Corporation
and the Long-Term Credit Bank, Ltd.
(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
"Revlon 1997 Second Quarter 10-Q""Products Corporation 1998 Form S-4")).
4.74.9 Amended and Restated Credit Agreement, dated as of May 30, 1997,
among Products Corporation, The Chase Manhattan Bank, Citibank
N.A., Lehman CommericalCommercial 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 Securities and Exchange Commission on June 26, 1997. (File1997, File No. 333-23451))33-23451).
4.84.10 First Amendment, dated as of January 29, 1998, to the Credit
Agreement.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")).
10. MATERIAL CONTRACTS.
10.1 Purchase and Sale Agreement and4.11 Second Amendment, thereto by and
between Products Corporation and Holdings, each dated as of February 18, 1993, relatingNovember 6, 1998, to the Edison, New Jersey
facility.Credit
Agreement (Incorporated by reference to Exhibit 4.224.12 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 1992 10-K)1998 Form S-4 as filed with the
Commission on January 22, 1999).
10.210. MATERIAL CONTRACTS.
10.1 Asset Transfer Agreement, dated as of June 24, 1992, among
Holdings, National Health Care Group, Inc., Charles of the Ritz
Group Ltd., Products Corporation and Revlon, Inc. (Incorporated by
reference to Exhibit 10.1 to the Amendment No. 1 to the Revlon, Inc.
Registration Statement on Form S-1 filed with the
Securities and
Exchange40
Commission on June 29, 1992. (File1992, File No. 33-47100)33-47100 (the "Revlon 1992
Amendment No. 1")).
10.3 Real Property Asset Transfer Agreement, dated as of June 24,
1992, among Holdings, Revlon, Inc. and Products Corporation.
(Incorporated by reference to Exhibit 10.2 to the Revlon 1992
Amendment No. 1).
10.4 Assumption Agreement and Amendment thereto by and between
Products Corporation and Holdings, each dated as of February
18, 1993, relating to the Edison, New Jersey facility.
(Incorporated by reference to Exhibit 4.23 to the Products
Corporation 1992 10-K).
10.5 Tax Sharing Agreement, dated as of June 24, 1992, among Mafco
Holdings, Revlon, Inc., Products Corporation and certain
subsidiaries of Products Corporation (the "Tax Sharing
Agreement"). (Incorporated by reference to Exhibit 10.5 to the
Revlon 1992 Amendment No. 1).
10.610.3 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 1994 10-K)Corporation).
10.710.4 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")).
10.8 Agreement by The Cosmetic Center, Inc. to be bound by the Tax
Sharing Agreement, dated April 25, 1997. (Incorporated by
reference to Exhibit 10.8 to the Revlon 1997 10-K).
10.910.5 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).
43
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1010.6 Amendment to the Operating Services Agreement, dated as of July 1,
1997.1997 (Incorporated by reference to Exhibit 10.10 to the Revlon
1997 10-K).
10.1110.7 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 Jerry W. LevinWilliam J. Fox (the "Levin"Fox Employment Agreement")
(Incorporated by reference to Exhibit 10.1010.12 to the Annual Report
on Form 10-K for the year ended December 31, 1995 of Products
Corporation (the "Products
Corporation 1995 10-K")Corporation).
10.1210.10 Amendment, effective June 30, 1997,1, 1998, to the LevinFox Employment
Agreement.Agreement (Incorporated by reference to Exhibit 10.1210.28 to the
Quarterly Report on Form 10-Q for quarterly period ended June 30,
1998 of Revlon, 1997 10-K)Inc.).
10.13 Employment Agreement dated as of January 1, 1997 between
Products Corporation and George Fellows. (Incorporated by
reference to Exhibit 10.10 to the Revlon 1997 First Quarter
10-Q).
10.14 Employment Agreement dated as of January 1, 1996 between
Products Corporation and William J. Fox. (Incorporated by
reference to Exhibit 10.12 to the Products Corporation 1995
10-K).
10.15 Employment Agreement dated as of January 1, 1996 between
RIROS Corporation and Carlos Colomer Casellas. (the "Colomer
Employment Agreement") (Incorporated by reference to Exhibit
10.13 to the Products Corporation 1995 10-K).
10.16 Amendment, effective January 1, 1998, to the Colomer
Employment Agreement. (Incorporated by reference to Exhibit
10.16 to the Revlon 1997 10-K).
10.1710.11 Employment Agreement dated as of January 1, 1998 between Products
Corporation and M. Katherine Dwyer.Dwyer (the "Dwyer Employment
Agreement") (Incorporated by reference to Exhibit 10.17 to the
Revlon 1997 10-K).
10.18 Revlon Employees' Savings, Investment and Profit Sharing Plan10.12 Amendment, effective as of January 1, 1997.1998 to the Dwyer Employment
Agreement. (Incorporated by reference to Exhibit 10.1810.12 to the
Revlon 19971998 10-K).
10.1910.13 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 Employees' Retirement1998 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, as amended and
restated as of December 19, 1994.14, 1998. (Incorporated by reference to
Exhibit 10.15 to the Products Corporation 1994Revlon 1998 10-K).
10.20 Amended and Restated Revlon Pension Equalization Plan,
effective January 1, 1996. (Incorporated by reference to
Exhibit 10.17 to the Amendment No. 4 to the Revlon Form S-1
filed with the Securities and Exchange Commission on February
26, 1996 (File No. 33-99558)).
10.2110.16 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
Securities and
Exchange Commission on May 22, 1992, (FileFile No. 33-47100)33-47100 (the "Revlon 1992
Form S-1")).
10.2210.17 Description of Post Retirement Life Insurance Program for Key
Executives. (Incorporated by reference to Exhibit 10.19 to the
Revlon 1992 Form S-1).
10.2310.18 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 Products
41
Corporation 1992 10-K).
10.2410.19 Revlon Executive Bonus Plan effective January 1, 1997.
(Incorporated by reference to Exhibit 10.20 to the Revlon 1996
10-K).
10.2510.20 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.
10.26Corporation).
10.21 Revlon Executive Severance Policy effective January 1, 1996.
(Incorporated by reference to Exhibit 10.23 to the Amendment No. 3
to the Revlon 1995Registration Statement on Form S-1 of Revlon, Inc. filed
with the Securities
and Exchange Commission on February 5, 1996)1996 (File No. 33-99558)).
10.2710.22 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).
44
EXHIBIT NO. DESCRIPTION
- ----------- -----------
21. SUBSIDIARIES.
*21.1 Subsidiaries of the Registrant.
24. POWERS OF ATTORNEY.
*24.1 Power of Attorney of Ronald O. Perelman.
*24.2 Power of Attorney of Donald G. Drapkin.
*24.3 Power of Attorney of Jerry W. Levin.Irwin Engelman.
*24.4 Power of Attorney of Howard Gittis.
*24.5 Power of Attorney of Edward J. Landau, Esq.
*24.6 Power of Attorney of Irwin Engelman.
*24.7 Power of Attorney of William J. Fox.*27. Financial Data Schedule.
- --------------------
*Filed* Filed herewith.
(b) Reports on Form 8-K
Revlon ConsumerOn November 5, 1998, Products Corporation filed no reportsa report on Form 8-K
duringregarding its intent to dispose of its entire equity interest in Cosmetic Center
and its offering of $250,000,000 aggregate principal amount of 9% Senior Notes
due 2006, a portion of the fiscal year endedproceeds of which would be used to refinance its 9
1/2% Senior Notes due 1999.
On December 31, 1997.
4511, 1998, Products Corporation filed a report on Form 8-K
relating to the announcement of its disposal of its entire equity interest in
Cosmetic Center.
42
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
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Independent Auditors' Report..........................................................F-2
AUDITED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1997 and 1996......................F-3
Consolidated Statements of Operations for each of the years in the three-year
period ended December 31, 1997.................................................F-4
Consolidated Statements of Stockholder's Deficiency for each of the years in
the three-year period ended December 31, 1997.................................F-5
Consolidated Statements of Cash Flows for each of the years in the three-year
period ended December 31, 1997................................................F-6
Notes to Consolidated Financial Statements........................................F-7
FINANCIAL STATEMENT SCHEDULE:
Schedule II--Valuation and Qualifying Accounts....................................F-31
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-31
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Revlon Consumer Products Corporation:
We have audited the accompanying consolidated balance sheets of Revlon Consumer
Products Corporation and its subsidiaries as of December 31, 19971998 and 1996,1997, 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, 1997.1998. In connection with our audits of the consolidated
financial statements we have also audited the financial statement schedule as
listed on the index on page F-1. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Revlon Consumer
Products Corporation and its subsidiaries as of December 31, 19971998 and 19961997 and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997,1998, 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 PEAT MARWICK LLP
New York, New York
January 23, 199825, 1999
F-2
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except per share data)(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
DECEMBER 31, DECEMBER 31,
ASSETS 1998 1997
1996
-------------- ---------------------------
Current assets:
Current assets:
Cash and cash equivalents..........................................equivalents....................................... $ 42.834.7 $ 38.637.4
Trade receivables, less allowances of $28.5
and $25.9, and $24.9,
respectively..................................................... 493.9 426.8
Inventories........................................................ 349.3 281.1respectively.................................... 536.0 492.5
Inventories..................................................... 264.1 260.7
Prepaid expenses and other......................................... 99.3 75.3other...................................... 70.6 96.2
-------------- ---------------------------
Total current assets.............................................. 985.3 821.8assets....................................... 905.4 886.8
Property, plant and equipment, net.................................. 378.2 381.1net................................... 378.9 364.0
Other assets........................................................ 143.7 139.2assets......................................................... 173.5 142.7
Intangible assets, net.............................................. 329.2 280.6net............................................... 372.9 319.2
Net assets of discontinued operations................................ - 45.1
-------------- ---------------------------
Total assets...................................................... $1,836.4 $1,622.7assets............................................... $ 1,830.7 $ 1,757.8
============== ===========================
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current liabilities:
Short-term borrowings - third parties..............................parties........................... $ 42.727.9 $ 27.142.7
Current portion of long-term debt-third parties....................debt - third parties............... 6.0 5.5
8.8
Accounts payable................................................... 195.5 161.9payable................................................ 134.8 178.8
Accrued expenses and other......................................... 366.1 366.2
--------------other...................................... 389.7 356.0
--------------- --------------
Total current liabilities......................................... 609.8 564.0liabilities.................................. 558.4 583.0
Long-term debt-third parties........................................ 1,427.8 1,321.8debt - third parties....................................... 1,629.9 1,388.8
Long-term debt-affiliates...........................................debt - affiliates.......................................... 24.1 30.9 30.4
Other long-term liabilities......................................... 224.6 202.8liabilities.......................................... 265.6 211.8
Stockholder's deficiency:
Preferred stock, par value $1.00 per share; 1,000 shares
authorized, 546 issued and outstanding............................outstanding..................... 54.6 54.6
Common stock, par value $1.00 per share; 1,000 shares
authorized, issued and outstanding............................................outstanding......................... - -
Capital deficiency.................................................deficiency.............................................. (230.8) (231.1)(230.8)
Accumulated deficit since June 24, 1992............................1992......................... (398.5) (256.8)
(301.6)
Adjustment for minimum pension liability........................... (4.5) (12.4)
Currency translation adjustment.................................... (19.2) (5.8)
--------------Accumulated other comprehensive loss............................ (72.6) (23.7)
--------------- --------------
Total stockholder's deficiency....................................deficiency............................. (647.3) (456.7)
(496.3)
----------------------------- --------------
Total liabilities and stockholder's deficiency.................... $1,836.4 $1,622.7
==============deficiency............. $ 1,830.7 $ 1,757.8
=============== ==============
See Accompanying Notes to Consolidated Financial Statements.
F-3
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in millions)(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1998 1997 1996
1995
---------- ---------- ----------------------- ------------- -------------
Net sales ......................................... $2,390.9 $2,169.5 $1,940.0sales............................................... $ 2,252.2 $ 2,238.6 $ 2,092.1
Cost of sales ..................................... 832.1 726.5 653.0
---------- ---------- ----------sales........................................... 765.7 743.1 688.9
-------------- -------------- --------------
Gross profit...................................... 1,558.8 1,443.0 1,287.0profit........................................ 1,486.5 1,495.5 1,403.2
Selling, general and administrative expenses ..... 1,336.7 1,241.6 1,141.4expenses............ 1,327.3 1,275.8 1,203.2
Business consolidation costs and other, net ...... 7.6net............. 33.1 3.6 -
-
---------- ---------- ------------------------ -------------- --------------
Operating income................................. 214.5 201.4 145.6
---------- ---------- ----------income.................................... 126.1 216.1 200.0
-------------- -------------- --------------
Other expenses (income):
Interest expense ................................. 136.2expense.................................... 137.9 133.7 133.4
142.6
Interest and net investment income ............... (3.0) (3.4) (4.9)
Gain on sale of subsidiary stock ................. (6.0) - -income..................................... (5.2) (4.2) (4.4)
Amortization of debt issuance costs .............. 6.7costs................. 5.1 6.6 8.3 11.0
Foreign currency losses, net .....................net........................ 4.6 6.4 5.7
10.9
Miscellaneous, net ............................... 5.1net.................................. 4.5 5.3 6.3
1.8
---------- ---------- ------------------------ -------------- --------------
Other expenses, net ............................. 145.4 150.3 161.4
---------- ---------- ----------
Income (loss)net............................. 146.9 147.8 149.3
-------------- -------------- --------------
(Loss) income from continuing operations before
income taxes ................. 69.1 51.1 (15.8)taxes........................................ (20.8) 68.3 50.7
Provision for income taxes ........................ 9.4taxes.............................. 5.0 9.3 25.5
25.4
---------- ---------- ----------
Income (loss) before extraordinary item .......... 59.7 25.6 (41.2)-------------- -------------- --------------
(Loss) income from continuing operations................ (25.8) 59.0 25.2
(Loss) income from discontinued operations.............. (16.5) 0.7 0.4
Loss from disposal of discontinued operations........... (47.7) - -
Extraordinary items-early extinguishmentitems - early extinguishments of debt ..debt..... (51.7) (14.9) (6.6)
-
---------- ---------- ------------------------ -------------- --------------
Net income (loss) .................................income....................................... $ (141.7) $ 44.8 $ 19.0
$ (41.2)
========== ========== ======================== ============== ==============
See Accompanying Notes to Consolidated Financial Statements.
F-4
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIENCY (dollars in millions)AND COMPREHENSIVE LOSS
(DOLLARS IN MILLIONS)
CURRENCYACCUMULATED
OTHER TOTAL
PREFERRED CAPITAL ACCUMULATED OTHER TRANSLATIONCOMPREHENSIVE STOCKHOLDER'S
STOCK DEFICIENCY DEFICIT (a) ADJUSTMENTS ADJUSTMENTLOSS (b) DEFICIENCY
--------- ---------- ----------- ------------ ------------- ------------- -------------
Balance, January 1, 1995........ $54.6 $(414.7) $(279.4) $(10.9)1996 ................ $ (5.8)54.6 $ (414.3) $ (320.6) $ (22.0) $ (702.3)
Contribution from parent ............. 187.8 (c) 187.8
Net loss ...................... (41.2)capital distribution ............. (0.5)(d) (0.5)
Acquisition of business .............. (4.1)(e) (4.1)
Comprehensive income:
Net income ..................... 19.0 19.0
Adjustment for minimum
pension liability .................... (6.1)
Net capital contribution ...... 0.4 (d).......... 4.6 4.6
Currency translation adjustment.................... 0.8adjustment (0.8)(f) (0.8)
-------------
Total comprehensive income ........... 22.8
--------- ---------- ----------- ------------ ------------- ------------- -------------
Balance, December 31, 1995 ..... 54.6 (414.3) (320.6) (17.0) (5.0)
Net income .................... 19.0
Contribution from parent ...... 187.8 (e)
Adjustment for minimum pension
liability .................... 4.6
Net capital distribution ...... (0.5)(d)
Currency translation
adjustment.................... (0.8)(c)
Acquisition of business ....... (4.1)(b)
----------- ------------ ------------- ------------- -------------
Balance, December 31, 1996 ................... 54.6 (231.1) (301.6) (12.4) (5.8)(18.2) (496.3)
Net capital contribution 0.3(d) 0.3
Comprehensive income:
Net income ......................................... 44.8 44.8
Adjustment for minimum
pension liability .............................. 7.9 Net capital contribution ...... 0.3 (d)7.9
Currency translation adjustment....................adjustment (13.4) (13.4)
-------------
Total comprehensive income ........... 39.3
--------- ---------- ----------- ------------ ------------- ------------- -------------
Balance, December 31, 1997 ..... $54.6 $(230.8) $(256.8).............. 54.6 (230.8) (256.8) (23.7) (456.7)
Comprehensive loss:
Net loss ....................... (141.7) (141.7)
Adjustment for minimum
pension liability .......... (28.0) (28.0)
Revaluation of marketable
securities ................. (3.0) (3.0)
Currency translation adjustment (17.9)(g) (17.9)
-------------
Total comprehensive loss ............. (190.6)
--------- ---------- ----------- ------------- -------------
Balance, December 31, 1998 .............. $ (4.5) $(19.2)54.6 $ (230.8) $ (398.5) $ (72.6) $ (647.3)
========= ========== =========== ============ ============= ============= =============
- --------------------------------
(a) Represents net loss since June 24, 1992, the effective date of the
transfer agreements referred to in Note 15.16.
(b) Represents amounts paid to Revlon Holdings Inc.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 Tarlow
Advertising Division ("Tarlow") (See Note 15).minimum pension liability of $32.5, $4.5 and $12.4 for 1998, 1997 and
1996, respectively.
(c) Includes $2.1 of gains related to the Company's simplification of its
international corporate structure.
(d) Represents changes in capital from the acquisition of the Bill Blass
business (See Note 15).
(e) Represents the capital contribution from Revlon, Inc. with the funds from
its initial public equity offering (the "Revlon IPO").
(d) Represents changes in capital from the acquisition of the Bill Blass
business (See Note 16).
(e) Represents amounts paid to Revlon Holdings Inc. for the Tarlow Advertising
Division ("Tarlow") (See Note 16).
(f) Includes $2.1 of gains related to the Company's simplification of its
corporate structure outside the United States.
(g) Accumulated other comprehensive loss and comprehensive loss each include a
reclassification adjustment of $2.2 for realized gains associated with the
sale of certain assets outside the United States.
See Accompanying Notes to Consolidated Financial Statements.
F-5
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
---------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997 1996
------------ ------------- ------------
Net income (loss) .........................................income........................................... $ (141.7) $ 44.8 $ 19.0
$ (41.2)
Adjustments to reconcile net (loss) income (loss) to net cash
(used for) provided by (used for) operating activities:
Depreciation and amortization ............................ 103.8 90.9 88.4amortization........................... 111.3 99.7 88.7
Loss (income) from discontinued operations.............. 64.2 (0.7) (0.4)
Extraordinary item .......................................items..................................... 51.7 14.9 6.6 -
Gain on sale of subsidiary stock ......................... (6.0) - -
Gain on sale of certain fixed assets, net ................net..................... (8.4) (4.4) - (2.2)
Change in assets and liabilities:
Increase in trade receivables ........................... (70.3)receivables....................... (43.0) (70.0) (67.7) (44.1)
Increase in inventories ................................. (21.4) (5.3) (15.1)
Decrease (increase)inventories............................. (4.6) (16.9) (2.7)
Increase in prepaid expenses and
other current assets ......................................... 1.3 (7.9) 4.5
Increaseassets...................... (11.8) (0.6) (8.0)
(Decrease) increase in accounts payable ............................ 21.6 10.8 10.2
Decreasepayable............. (49.2) 17.9 9.4
Increase (decrease) in accrued expenses and other
current liabilities ............................................ (4.2) (10.2) (12.2)liabilities....................... 52.5 (2.8) (10.0)
Other, net ..............................................net.......................................... (71.4) (73.0) (45.8) (40.4)
--------- --------- ---------(45.2)
------------ ------------- ------------
Net cash (used for) provided by (used for) operating activities ..... 7.1 (9.6) (52.1)
--------- --------- ---------activities........ (50.4) 8.9 (10.3)
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ...................................... (56.5) (58.0) (54.3)expenditures........................................ (60.8) (52.3) (54.7)
Acquisition of businesses, net of cash acquired .......... (60.4)acquired............. (57.6) (40.5) (7.1) (21.2)
Proceeds from the sale of certain fixed assets ............assets.................... 27.4 8.5 -
3.0
--------- --------- --------------------- ------------- ------------
Net cash used for investing activities .................... (108.4) (65.1) (72.5)
--------- --------- ---------activities...................... (91.0) (84.3) (61.8)
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase (decrease) in short-term borrowings-third
parties .................................................borrowings - third
parties.................................................. (16.3) 18.0 5.8 (122.9)
Proceeds from the issuance of long-term debt-third parties 802.3debt - third
parties.................................................. 1,469.1 760.2 266.4 493.7
Repayment of long-term debt-third parties ................. (707.5)debt - third parties................. (1,270.9) (690.2) (366.6) (236.3)
Net contribution from parent ..............................parent................................ - 0.3 187.3 0.4
Proceeds from the issuance of debt-affiliates .............debt - affiliates............. 105.9 120.7 115.0
157.4
Repayment of debt-affiliates ..............................debt - affiliates.............................. (105.9) (120.2) (115.0) (151.0)
Acquisition of business from affiliate ....................affiliate...................... - - (4.1) -
Payment of debt issuance costs ............................ (4.5)costs.............................. (23.9) (4.1) (10.9)
(15.7)
--------- --------- --------------------- ------------- ------------
Net cash provided by financing activities ................. 109.1activities................... 158.0 84.7 77.9
125.6
--------- --------- --------------------- ------------- ------------
Effect of exchange rate changes on cash and cash
equivalents .............................................equivalents.............................................. (2.0) (3.6) (0.9)
(0.1)
--------- --------- --------------------- ------------- ------------
Net cash used by discontinued operations.................... (17.3) (3.4) (2.7)
------------ ------------- ------------
Net (decrease) increase in cash and cash equivalents ................ 4.2equivalents.... (2.7) 2.3 0.92.2
Cash and cash equivalents at beginning of period ........ 38.6 36.3 35.4
--------- --------- ---------period........ 37.4 35.1 32.9
------------ ------------- ------------
Cash and cash equivalents at end of period ...............period.............. $ 42.834.7 $ 38.637.4 $ 36.3
========= ========= =========35.1
============ ============= ============
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest ................................................Interest............................................ $ 142.2133.4 $ 139.0139.6 $ 148.2139.0
Income taxes, net of refunds ............................ 10.6refunds........................ 10.9 10.5 15.4 18.8
Supplemental schedule of noncash investing activities:
In connection with business acquisitions, liabilities
were assumed (including minority interest)interest and
discontinued operations) as follows:
Fair value of assets acquired ...........................acquired....................... $ 74.5 $ 132.7 $ 9.7
$ 27.3
Cash paid ...............................................paid........................................... (57.6) (64.5) (7.2)
(21.6)
--------- --------- --------------------- ------------- ------------
Liabilities assumed .....................................assumed................................. $ 16.9 $ 68.2 $ 2.5
$ 5.7
========= ========= ===================== ============= ============
See Accompanying Notes to Consolidated Financial Statements.
F-6
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION:
Revlon Consumer Products Corporation ("Products Corporation" and
together with its subsidiaries, the "Company") was formed in April 1992. The
Company operates in a single business segment with many different products, which include
an extensive array of glamorous, exciting and innovative cosmetic and skin care,
fragrance and personal care products, and professional products (products for
use in and resale by professional salons). In the United States and increasingly
in international markets, the Company's products are sold principally in the
self-select distribution channel. The Company also sells certain products in the
demonstrator-assisted distribution channel, sells consumer and professional
products to United States military exchanges and commissaries operates retail outlet stores and has a
licensing group. Outside the United States, the Company also sells such consumer
products through department stores and specialty stores, such as perfumeries.
On June 24, 1992, Products Corporation 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.
The Consolidated Financial Statements of the Company presented herein
relate to the business to which the Company succeeded and include the assets,
liabilities and results of operations of such business. Assets, liabilities,
revenues, other income, costs and expenses which were identifiable specifically
to the Company are included herein and those identifiable specifically to the
retained and divested businesses of Holdings have been excluded. Amounts which
were not identifiable specifically to either the Company or Holdings are
included herein to the extent applicable to the Company pursuant to a method of
allocation generally based on the respective proportion of the business of the
Company to the applicable total of the businesses of the Company and Holdings.
The operating results of the Retained Brands and divested businesses of Holdings
have not been reflected in the Consolidated Financial Statements of the Company.
Management of the Company believes that the basis of allocation and presentation
is reasonable.
Although the Retained Brands were not transferred to 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, 19971998 and 1996,1997, the amounts reflected in
the Company's Consolidated Balance Sheets aggregated a net liability of $23.3 and $23.6, respectively,$25.9,
of which $4.9 and $5.2,
respectively, are$7.5 is included in accrued expenses and other and $18.4 as of both
dates is included in
other long-term liabilities.liabilities as of both dates.
The Consolidated Financial Statements include the accounts of Products
Corporation 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.
F-7
Products Corporation is a direct wholly owned subsidiary of Revlon,
Inc., which is an indirect majority owned subsidiary of MacAndrews & Forbes
Holdings Inc. ("MacAndrews Holdings"), a corporation wholly owned indirectly
through Mafco Holdings Inc. ("Mafco Holdings" and, together with MacAndrews
Holdings, "MacAndrews & Forbes") by Ronald O. Perelman.
CASH AND CASH EQUIVALENTS:
Cash equivalents (primarily investments in time deposits which have
original maturities of three months or less) are carried at cost, which
approximates fair value.
INVENTORIES:
Inventories are stated at the lower of cost or market value. Cost is
principally determined by the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT AND OTHER ASSETS:
Property, plant and equipment is recorded at cost and is depreciated on
a straight-line basis over the estimated useful lives of such assets as follows:
land improvements, 20 to 40 years; buildings and improvements, 5 to 50 years;
machinery and equipment, 3 to 17 years; and office furniture and fixtures and
capitalized software, development costs, 2 to 12 years. Leasehold improvements are amortized over
their estimated useful lives or the terms of the leases, whichever is shorter.
Repairs and maintenance are charged to operations as incurred, and expenditures
for additions and improvements are capitalized.
During 1998, the Company adopted Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which requires capitalization of certain development costs of
software to be used internally. The adoption of this statement did not have a
material effect on the Company's financial condition or results of operations.
Included in other assets are permanent displays amounting to
approximately $107.7$129.0 and $81.8$107.7 (net of amortization) as of December 31, 19971998
and 1996,1997, respectively, which are amortized over 3 to 5 years. In addition, the
Company has included in other assets charges related to the issuance of its debt
instruments amounting to approximately $23.6 and $20.5 (net of amortization) as
of December 31, 1998 and 1997, respectively, which are amortized over the term
of the debt instruments.
INTANGIBLE ASSETS RELATED TO BUSINESSES ACQUIRED:
Intangible assets related to businesses acquired principally represent
goodwill, the majority of which is being amortized on a straight-line basis over
40 years. The Company evaluates, when circumstances warrant, the recoverability
of its intangible assets on the basis of undiscounted cash flow projections and
through the use of various other measures, which include, among other things, a
review of its image, market share and business plans. Accumulated amortization
aggregated $104.4$115.6 and $94.2$104.2 at December 31, 19971998 and 1996,1997, 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."
F-8
The Company is included in the affiliated group of which Mafco Holdings
is the common parent, and the Company's federal taxable income and loss will be
included in such group's consolidated tax return filed by Mafco Holdings. The
Company also may be included in certain state and local tax returns of Mafco
Holdings or its subsidiaries. For all periods presented, federal, state and
local income taxes are provided as if the Company filed its own income tax
returns. On June 24, 1992, Holdings, Revlon, Inc., Products Corporation and
certain of its subsidiaries and Mafco Holdings entered into a tax sharing
agreement, which is described in Notes 1213 and 15.
F-8
16.
PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS:
Products CorporationThe Company sponsors pension and other retirement plans in various
forms covering substantially all employees who meet eligibility requirements.
For plans in the United States, the minimum amount required pursuant to the
Employee Retirement Income Security Act, as amended, is contributed annually.
Various subsidiaries outside the United States have retirement plans under
which funds are deposited with trustees or reserves are provided.
Products CorporationThe Company accounts for benefits such as severance, disability and
health insurance provided to former employees prior to their retirement, if
estimable, on a terminal basis in accordance with the provisions of SFAS No. 5,
"Accounting for Contingencies," as amended by SFAS No. 112, "Employers'
Accounting for Postemployment Benefits," which requires companies to accrue for
postemployment benefits when it is probable that a liability has been incurred
and the amount of such liability can be reasonably estimated,
which Products Corporation has concluded is generally when an employee is
terminated.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
1995 were $29.7, $26.3, and
$22.3, 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.
CLASSES OF STOCK:
Products Corporation designated 1,000 shares of Preferred Stock as the
Series A Preferred Stock, of which 546 shares are outstanding and held by
Revlon, Inc. The holder of Series A Preferred Stock is not entitled to receive
any dividends. The Series A Preferred Stock is entitled to a liquidation
preference of $100,000 per share before any distribution is made to the holdersholder
of Common Stock.Products Corporation's common stock. The holder of the Series A Preferred
Stock does not have any voting rights, except as required by law. The Series A
Preferred Stock may be redeemed at any time by Products Corporation, at its
option, for $100,000 per share. However, the terms of
F-9
Products Corporation's various debt agreements currently restrict Products
Corporation's ability to effect such redemption.
F-9
STOCK-BASED COMPENSATION:
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages,
but does not require companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to account for
stock-based compensation plans using the intrinsic value method prescribed in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related Interpretations.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 14)15).
DERIVATIVE FINANCIAL INSTRUMENTS:
Derivative financial instruments are utilized by the Company to reduce
interest rate and foreign exchange risks. The Company maintains a control
environment which includes policies and procedures for risk assessment and the
approval, reporting and monitoring of derivative financial instrument
activities. The Company does not hold or issue derivative financial instruments
for trading purposes.
The differentials to be received or paid under interest rate contracts
designated as hedges are recognized in income over the life of the contracts as
adjustments to interest expense. Gains and losses on terminations of interest
rate contracts designated as hedges are deferred and amortized into interest
expense over the remaining life of the original contracts or until repayment of
the hedged indebtedness. Unrealized gains and losses on outstanding contracts
designated as hedges are not recognized.
Gains and losses on contracts designated to hedge identifiable foreign
currency commitments are deferred and accounted for as part of the related
foreign currency transaction. Gains and losses on all other foreign currency
contracts are included in income currently. Transaction gains and losses have
not been material.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The effect of adopting the statement and the date of such
adoption by the Company have not yet been determined.
2. DISCONTINUED OPERATIONS
During 1998, the Company completed the disposition of its approximately
85% equity interest in The Cosmetic Center, Inc. (the "Cosmetic Center"), along
with certain amounts due from Cosmetic Center to the Company for working capital
and inventory, to a newly formed limited partnership controlled by an unrelated
third party. The Company received a minority limited partnership interest in the
limited partnership as consideration for the disposition. Based upon the
Company's expectation that it will receive no future cash flows from the limited
partnership, as well as other factors, the Company has assigned no value to such
interest. As a result, the Company recorded a loss on disposal of $47.7 during
1998. All prior periods have been restated to reflect the results of operations
of Cosmetic Center as discontinued operations. As of December 31, 1997, the net
assets of the discontinued operations consisted primarily of inventory and
intangible assets, offset by liabilities, including third party debt and
minority interest.
3. EXTRAORDINARY ITEMS
The extraordinary item of $51.7 in 1998 resulted primarily from the
write-off of deferred financing costs and payment of call premiums associated
with the redemption of the Senior Notes (as hereinafter defined) and the Senior
Subordinated Notes (as hereinafter defined). The extraordinary item in 1997
resulted from the write-off in the second quarter of 1997 of deferred financing
costs associated with the early extinguishment of borrowings under a prior
credit agreement and costs of approximately $6.3 in connection with the
redemption of Products Corporation's 10 7/8% Sinking Fund Debentures due 2010
(the "Sinking Fund Debentures"). The early extinguishment of borrowings under a
prior credit agreement and the redemption of the Sinking Fund Debentures
F-10
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.
3.4. BUSINESS CONSOLIDATION COSTS AND OTHER, NET
BusinessIn 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 and other, net in 1997 include severance
and other costsof $20.6 in
connection with the consolidationimplementation of certain warehouse,
distributionits business strategy to rationalize
factory operations. These costs primarily included severance for 415 factory and
headquarter operationsadministrative employees and other costs related to the Cosmetic Center Merger
(See Note 4); severance, writedownsrationalization of
certain assets to their estimated net
realizable value and other related costs to rationalize factory and warehouse operations in certain United States and International operations,worldwide. Such costs were partially
offset by related gains from the sales of certain factory operations of
approximately $4.3 and an approximately $12.7 settlement of a claim in the
second quarter of 1997. The business consolidation costs include $15.5 for the
terminationand related gains of
approximately 475$4.3 on the sales of certain factory and administrative employees. By
December 31, 1997operations outside the Company terminated approximately 260 employees, made cash
payments for such terminations of approximately $7.7, and made cash payments
for other business consolidation costs of approximately $5.4.United
States. As of December 31, 1997, the unpaid balance of the business consolidation accrual approximated
$11.5, which amount is included in accrued expenses1998 and other.
F-10
4. ACQUISITIONS
On April 25, 1997 Prestige Fragrance & Cosmetics, Inc. ("PFC"), a
wholly owned subsidiary of Products Corporation, and The Cosmetic Center, Inc.
("CCI") completed the merger of PFC with and into CCI (the "Cosmetic Center
Merger") with CCI (subsequent to the Cosmetic Center Merger, "Cosmetic Center")
surviving the Cosmetic Center Merger. In the Cosmetic Center Merger, Products
Corporation received in exchange for all of the capital stock of PFC newly
issued Class C Common Stock of Cosmetic Center constituting approximately 85.0%
of Cosmetic Center's outstanding common stock. Accordingly, the Cosmetic Center
Merger was accounted for as a reverse acquisition using the purchase method of
accounting, with PFC considered the acquiring entity for accounting purposes
even though Cosmetic Center is the surviving legal entity. The deemed purchase
consideration for the acquisition was approximately $27.9 and the goodwill
associated with the Cosmetic Center Merger was approximately $10.5. The Company
recognized a gain of $6.0 resulting from the sale of subsidiary stock pursuant
to the Cosmetic Center Merger. The results of the Company for the period ended
December 31, 1997 include the results of operations of Cosmetic Center since
the effective date of the Cosmetic Center Merger.
The following represents certain summary unaudited pro forma
information as if the Cosmetic Center Merger had occurred as of the beginning
of the respective periods presented. The summary unaudited pro forma
information below combines the actual results of the Company (including
Cosmetic Center after the Cosmetic Center Merger) and the results of CCI prior
to the Cosmetic Center Merger, excluding non-recurring business consolidation
costs directly attributable to the Cosmetic Center Merger of $4.0 in 1997, and
reflects increased amortization of goodwill, increased interest expense and
certain income tax adjustments related to the Cosmetic Center Merger that would
have been incurred had the Cosmetic Center Merger occurred at such dates. The
unaudited summary pro forma information is not necessarily indicative of the
results of operations of the Company had terminated 415 and 200
employees, respectively, relating to the Cosmetic Center Merger occurred at
such dates, nor is it necessarily indicative1997 charge.
Details of future results.the charges are as follows:
BALANCE (UTILIZED) RECEIVED BALANCE
BEGINNING EXPENSE --------------------------- END
OF YEAR ENDED
DECEMBER 31,
----------------------
1997 1996(INCOME) CASH NONCASH OF YEAR
----------- ---------- ---------- ------------ ----------
1998
- ----------------------------------------------
Net sales........................ $2,426.5 $2,303.3
Operating income................. 216.4 195.1
Income before extraordinary
item............................ 60.6 16.3
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-11
5. ACQUISITIONS
In 1998 and 1997 the Company consummated other acquisitions for a combined
purchase price of $62.6 and $51.6 (excluding the acquisition of Cosmetic
Center), respectively, with resulting goodwill of $35.8.$63.7 and $35.8, respectively.
These acquisitions were not significant to the Company's results of operations.
Acquisitions consummated in 1996 and 1995 were also not significant to the Company's
results of operations.
5.6. INVENTORIES
DECEMBER 31,
------------------
1997 1996
------ ------
Raw materials and
supplies........................ $ 82.6 $ 76.6
Work-in-process.................. 14.9 19.4
Finished goods................... 251.8 185.1
------ ------
$349.3 $281.1
====== ======
F-11
6.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,
----------------
1997 1996
------- -------
Prepaid expenses............................................ $40.9 $43.1
Other....................................................... 58.4 32.2
------- -------
$99.3 $75.3
======= =======
7.DECEMBER 31,
------------------------
1998 1997
---------- ----------
Prepaid expenses................ $ 42.4 $ 40.7
Other........................... 28.2 55.5
---------- ----------
$ 70.6 $ 96.2
========== ==========
8. PROPERTY, PLANT AND EQUIPMENT, NET
DECEMBER 31,
--------------------
1997 1996
--------- ---------
Land and improvements....................................... $ 32.5 $ 37.5
Buildings and improvements.................................. 193.2 207.6
Machinery and equipment..................................... 208.5 194.9
Office furniture and fixtures and software development
costs...................................................... 85.5 59.4
Leasehold improvements...................................... 44.9 37.5
Construction-in-progress.................................... 30.6 43.7
--------- ---------
595.2 580.6
Accumulated depreciation.................................... (217.0) (199.5)
--------- ---------
$ 378.2 $ 381.1
========= =========
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 1995 was $42.1, $39.1 and $38.6,$37.0, respectively.
8.9. ACCRUED EXPENSES AND OTHER
DECEMBER 31,
------------------
1997 1996
-------- --------
Advertising and promotional costs and accrual for sales
returns..................................................... $ 148.0 $ 137.4
Compensation and related benefits............................ 76.6 95.5
Interest..................................................... 32.3 36.7
Taxes, other than federal income taxes....................... 32.1 35.0
Restructuring and business consolidation costs............... 18.6 6.9
Net liabilities assumed from Holdings........................ 4.9 5.2
Other........................................................ 53.6 49.5
-------- --------
$ 366.1 $ 366.2
======== ========
9.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-12
10. SHORT-TERM BORROWINGS
Products Corporation maintained short-term bank lines of credit at
December 31, 19971998 and 19961997 aggregating approximately $82.3$88.3 and $72.7,$82.3,
respectively, of which approximately $42.7$27.9 and $27.1$42.7 were outstanding at
December 31, 19971998 and 1996,1997, 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 1996 varied from 2.5% to 12.0%, respectively, excluding Latin American countries in
which the Company had outstanding borrowings of approximately $3.5 and 2.2% to 12.1%,$7.5 at
December 31, 1998 and 1997, respectively. Compensating balances at December 31,
19971998 and 19961997 were approximately $6.2$5.1 and $7.4,$6.2, respectively. Interest rates on
compensating balances at December 31, 19971998 and 19961997 varied from 0.4%3.3% to 8.1%5.0% and
0.4% to 7.9%8.1%, respectively.
F-12
10.11. LONG-TERM DEBT
DECEMBER 31,
---------------------------------------------
1998 1997
1996
---------- -------------------
Working capital lines (a)................................................................. $ 344.6272.2 $ 187.2344.6
Bank mortgage loan agreement due 2000 (b)................................. 13.6 33.3 41.7
9 1/2% Senior Notes due 1999 (c)................................................... 200.0 200.0
9 3/8% Senior Notes due 2001 (d)................................................... - 260.0
260.08 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 (e).................(g)...... - 555.0
555.0
10 7/8 5/8% Sinking Fund DebenturesSenior Subordinated Notes due 2010 (f)...................2008 (h)....... 649.8 - 79.6
Advances from Holdings (g).....................................(i).......................... 24.1 30.9
30.4
Other mortgages and notesNotes payable (8.6%-13.0%) due through 2001..........................................................2004 (7.2%)............... 1.0 1.4
7.1
Cosmetic Center facility (h)................................... 39.0 -
---------- ---------
1,464.2 1,361.0----------
1,660.0 1,425.2
Less current portion...........................................portion................................ (6.0) (5.5)
(8.8)
---------- ---------
$1,458.7 $1,352.2----------
$ 1,654.0 $ 1,419.7
========== ===================
(a) In May 1997, Products Corporation entered into the Credit Agreement
with a syndicate of lenders, whose individual members change from time to time.
The proceeds of loans made under the Credit Agreement were used to repay the
loans outstanding under the 1996 Credit Agreementcredit agreement in effect at that time and to
redeem the Sinking Fund Debentures.
The Credit Agreement provides up to $750.0$749.0 and is comprised of five
senior secured facilities: $200.0$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, 19971998,
Products Corporation had approximately $200.0$199.0 outstanding under the Term Loan
Facilities, $102.7$9.7 outstanding under the Multi-Currency Facility, $41.9$63.5
outstanding under the Acquisition Facility and $34.8$29.0 of issued but undrawn
letters of credit under the Special LC Facility.
The Credit Facilities (other than loans in foreign currencies) bear
interest as of December 31, 19971998 at a rate equal to, at Products Corporation's
option, either (A) the Alternate Base Rate plus 1/4 of 1%1.75% (or 1.25%2.75% for Local
Loans); or (B) the Eurodollar Rate plus 1.25%2.75%. Loans in foreign currencies bear
interest as of December 31, 19971998 at a rate equal to the Eurocurrency Rate or, in
the case of Local Loans, the local lender rate, in each case plus 1.25%2.75%. The
applicable margin is reduced (or increased, but not above 3/4 of 1% for
Alternate Base Rate Loans not constituting Local Loans and 1.75% for other
loans) in the event Products Corporation attains (or fails to attain) certain
leverage ratios. Products Corporation pays the lender a commitment fee as of
December 31, 19971998 of 3/81/2 of 1% of the unused portion of the Credit Facilities,
subject to reduction (or increase, but not above 1/2 of 1%) based on attaining
(or failing to attain) certain leverage ratios.Facilities.
F-13
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 will commencecommenced 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
F-13
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% per annum, respectively, as of December 31,
1997.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
facilities;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 (other than Cosmetic Center) and (y) certain subsidiaries of
Holdings; (iv) domestic inventory and accounts receivable of (x) Products
Corporation and its domestic subsidiaries (other than Cosmetic Center) 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-denominatedyen-denominated credit agreement
(the "Yen Credit Agreement").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
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.
In January 1996,The events of default under the Credit Agreement include a Change of
Control (as defined in the Credit Agreement) of Products Corporation, entered into a credit agreement
(the "1996the
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.
F-14
In December 1998, Products Corporation amended the Credit Agreement"), which became effective upon consummationAgreement to
modify the terms of certain of the Revlon IPO on March 5, 1996. The 1996 Credit Agreement included,financial ratios and tests to account for,
among other things, (i) a termthe expected charges in connection with the Company's
restructuring effort. In addition, the amendment increased the applicable margin
to December 31, 2000 (subject to earlier terminationthe levels set forth in certain circumstances),the description above and (ii) credit facilitiesprovides that Products
Corporation may use the proceeds of $600.0 comprised of four
senior secured facilities: a $130.0 term loan facility, a $220.0 multi-currency
facility, a $200.0 revolving acquisition facility and a $50.0 standby letter of
credit facility. The weighted average interest rates on the term loan facility
and multi-currency facility were 8.1% and 7.0% per annum, respectively,Acquisition Facility for general
corporate purposes as of
December 31, 1996.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 4.3(yen)1.5
billion as of December 31, 19971998 (approximately $33.3$13.6 U.S. dollar equivalent as
of December 31, 1997)1998) (after giving effect to the repayments described below).
In accordance with the terms of the
Yen Credit Agreement, approximately Yen Approximately (yen)539 million (approximately $5.2$4.2 U.S. dollar equivalent) was
paid in January 1996 andMarch 1998, approximately Yen (yen)539 million (approximately $4.6$4.7 U.S.
dollar equivalent) was paid in
January 1997. In June 1997, Products Corporation amended and restated the
Yen Credit Agreement to extend the term
F-14
toequivalent as of December 31, 1998) is due in each of March 1999 and 2000
subject to earlier termination under certain
circumstances. In accordance with the terms of the Yen Credit Agreement, as
amended and restated, approximately Yen 539(yen)474 million (approximately $4.2 U.S. dollar equivalent as
of December 31, 1997)1998) is due on December 31, 2000. On December 10, 1998, in
eachconnection with the disposition of March 1998, 1999
and 2000 andthe stock of Cosmetic Center, which had
served as collateral under the Yen 2.7Credit Agreement, Products Corporation repaid
(yen)2.22 billion (approximately $20.7$19.0 U.S. dollar equivalent as of December 31, 1997) is due on December 31, 2000.10,
1998) principal amount. The applicable interest rate at December 31, 19971998 under
the Yen Credit Agreement was the Euro-Yen rate plus 1.25%2.75%, which approximated
1.9%3.5%. The interest rate at December 31, 1996,1997 was the Euro-Yen rate plus 2.5%1.25%,
which approximated 3.1%1.9%.
(c) The 9 1/2% Senior Notes due 1999 (the "1999 Senior Notes") are senior
unsecured obligations of Products Corporation and rank pari passu in right of
payment to all existing and future Senior Debt (as defined in the indenture
relating to the 1999 Senior Notes (the "1999 Senior NoteNotes Indenture")). The 1999
Senior Notes bear
interest at 9 1/2% per annum. Interest is payable on June 1 and December 1.
The 1999 Senior Notes may not be redeemed prior to maturity. Upon a Change of
Control (as defined in the 1999 Senior NoteNotes Indenture) and subject to certain
conditions, each holder of 1999 Senior Notes will have the right to require Products
Corporation to repurchase all or a portion of such holder's 1999 Senior Notes at 101%
of the principal amount thereof plus accrued and unpaid interest, if any, to the
date of repurchase. In addition, under certain circumstances in the event of an
Asset Disposition (as defined in the 1999 Senior NoteNotes Indenture), Products Corporation
will be obligated to make offers to purchase the 1999 Senior Notes.
The 1999 Senior NoteNotes Indenture contains various restrictive covenants that,
among other things, limit (i) the issuance of additional debt and redeemable
stock by Products Corporation, (ii) the issuance of debt and preferred stock by
Products Corporation's subsidiaries, (iii) the incurrence of liens on the assets
of Products Corporation and its subsidiaries which do not equally and ratably
secure the 1999 Senior Notes, (iv) the payment of dividends on and redemption of
capital stock of Products Corporation and its subsidiaries and the redemption of
certain subordinated obligations of Products Corporation, except that the 1999
Senior NoteNotes 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 Senior NoteNotes Indenture also prohibits certain
restrictions on distributions from subsidiaries. All of these limitations and
prohibitions, however, are subject to a number of important qualifications.
On November 6, 1998, Products Corporation issued and sold in a private
placement $250.0 aggregate principal amount of 9% Senior Notes due 2006 (the "9%
Notes"), receiving net proceeds of $247.2. Products Corporation intends to use
$200.0 of the net proceeds from the sale of the 9% Notes to refinance the 1999
Notes, including through open market purchases. Such proceeds have temporarily
been used to reduce borrowings under the Credit Agreement. As a result of the
refinancing, the Company has classified the 1999 Notes as "Long-term debt-third
parties" in its consolidated balance sheet as of December 31, 1998. On January
22, 1999, Products Corporation filed a registration statement with the
Commission with respect to an offer to exchange the 9% Notes
F-15
for registered notes with substantially identical terms (the "Exchange Offer").
The Exchange Offer will expire on February 24, 1999, unless extended.
(d) TheDuring 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 "Senior"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 towith all existing and future
Senior Debt (as defined in the indenture relating to the Senior8 1/8% Notes (the "Senior Note"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 Senior8 1/8% Notes bear interest at 9 3/8% per annum.are
effectively subordinated to the outstanding indebtedness and other liabilities
of Products Corporation's subsidiaries. Interest is payable on AprilFebruary 1 and
OctoberAugust 1.
The Senior8 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 AprilFebruary 1, 19982002
at the redemption prices set forth in the Senior Note8 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 Senior Note8 1/8% Notes Indenture),
Products Corporation will have the option to redeem the Senior8 1/8% Notes in whole or in part 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 Senior Note8 1/8% Notes Indenture), plus accrued and unpaid interest, if any, to the
date of redemption, and, subject to certain
conditions, each holder of Seniorthe 8 1/8% Notes will have the right to require
Products Corporation to repurchase all or a portion of such holder's Senior8 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.
In addition, under certain circumstances in the event of an Asset Disposition
(as defined in the Senior Note Indenture), Products Corporation will be
obligated to make offers to purchase the Senior Notes.
The Senior Note8 1/8% Notes Indenture contains various restrictive covenants that, among other things,
limit (i) the issuance of additional indebtednessdebt and redeemable stock by Products
Corporation, (ii) the incurrence of liens, (iii) the issuance of indebtednessdebt and
preferred stock by Products Corporation's subsidiaries, (iii) the incurrence of
liens on the assets of Products Corporation and its subsidiaries which do not
equally and ratably secure the Senior Notes, (iv) the payment of
F-15
dividends on capital stock of Products Corporation and its subsidiaries and the
redemption of capital stock of Products Corporation and certain subordinated
obligations, of Products
Corporation, except that the Senior Note 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 Senior Note8 1/8% Notes Indenture also
prohibits certain restrictions on distributions from subsidiaries of Products Corporation.subsidiaries. All of these
limitations and prohibitions, however, are subject to a number of important
qualifications (See Note 19).
(e)qualifications.
(f) The Senior Subordinated9% Notes due 2003 (the "Senior Subordinated
Notes") are senior unsecured obligations of Products
Corporation and are subordinatedrank pari passu in right of payment towith all existing and future
Senior Debt (as defined in the indenture relating to the Senior Subordinated9% Notes (the "Senior Subordinated
Note"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 Senior Subordinated9% Notes bear interest at 10 1/2% per
annum.are effectively
subordinated to outstanding indebtedness and other liabilities of Products
Corporation's subsidiaries. Interest is payable on February 15May 1 and August 15.November 1.
The Senior Subordinated9% 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 15,
1998November 1, 2002 at
the redemption prices set forth in the Senior Subordinated Note9% 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
F-16
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 ofin Control (as defined in the Senior Subordinated Note9% Notes Indenture),
Products Corporation will have the option to redeem the Senior
Subordinated9% Notes in whole or in part 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 Senior
Subordinated Note9% Notes Indenture), plus accrued and unpaid interest, if any, to the
date of redemption, and, subject to certain conditions, each
holder of Senior
Subordinatedthe 9% Notes will have the right to require Products Corporation to
repurchase all or a portion of such holder's Senior Subordinated9% 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.
In addition, under certain circumstances in the event
of an Asset Disposition (as defined in the Senior Subordinated Note Indenture),
Products Corporation will be obligated to make offers to purchase the Senior
Subordinated Notes.
The Senior Subordinated Note9% Notes Indenture contains various restrictive covenants that, among other things,
limit (i) the issuance of additional indebtednessdebt and redeemable stock by Products
Corporation, (ii) the incurrence of liens, (iii) the issuance of indebtednessdebt and
preferred stock by Products Corporation's subsidiaries, (iii)
the incurrence of liens on the assets of Products Corporation and its
subsidiaries to secure debt other than Senior Debt (as defined in the Senior
Subordinated Note Indenture) or debt of a subsidiary, unless the Senior
Subordinated Notes are equally and ratably secured, (iv) the payment of
dividends on capital stock of Products Corporation and its subsidiaries and the
redemption of capital stock of Products Corporation and certain subordinated
obligations, of Products
Corporation, except that the Senior Subordinated Note 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 Senior Subordinated Note9% Notes Indenture also
prohibits certain restrictions on distributions from subsidiaries of Products Corporation.subsidiaries. All of these
limitations and prohibitions, however, are subject to a number of important
qualifications (See Note 19).
(f)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 $85.0indebtedness 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 Sinking Fund Debentures during 1997the 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 borrowings
underone or more
Public Equity Offerings (as defined in the Credit Agreement.
(g)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.
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
F-17
distributions from subsidiaries. All of these limitations and prohibitions,
however, are subject to a number of important qualifications.
The 1999 Notes Indenture, the 8 1/8% Notes Indenture, the 8 5/8% Notes
Indenture and the 9% Notes Indenture contain customary events of default for
debt instruments of such type.
(i) During 1992, Holdings made an advance of $25.0 to Products
Corporation. This advance wasCorporation, evidenced by asubordinated noninterest-bearing demand note
payablenotes. The
notes were subsequently adjusted by offsets of amounts due from Holdings to
Products Corporation, the payment of which was subordinatedand additional amounts loaned by Holdings to the
obligations of Products
Corporation, undersuch that the credit agreement in effect at
that time. Holdings agreed not to demand payment under the note so long as any
indebtedness remainedamount outstanding under the credit agreement in effect at that
F-16
time. In February 1995, the $13.3 in notes due to Products Corporation under
the Financing Reimbursement Agreement, referred to in Note 15, was offset
against the $25.0 note and Holdings agreed not to demand payment under the
resulting $11.7 note so long$41.3 as certain indebtedness remains outstanding. In
October 1993, Products Corporation borrowed from Holdings approximately $23.2
(as adjusted and subject to further adjustment for certain expenses)
representing amounts received by Holdings from an escrow account relating to
divestiture by Holdings of
certain of its predecessor businesses. In July 1995,
Products Corporation borrowed from Holdings approximately $0.8, representing
certain amounts received by Holdings relating to an arbitration arising out of
the sale by Holdings of certain of its businesses. In 1995, Products
Corporation borrowed from Holdings approximately $5.6, representing certain
amounts received by Holdings from the sale by Holdings of certain of its
businesses.December 31, 1995. In June 1996, $10.9 in notes due to Products Corporation from
Holdings under the Financing Reimbursement Agreement from Holdings was offset against the
$11.7
demand note (referred to above) payable by Products Corporation to Holdings.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, 19971998 the balance of $30.9$24.1 is evidenced by noninterest-bearing
promissory notes payable to Holdings that are subordinated to Products
Corporation's obligations under the Credit Agreement.
(h) In connection with the Cosmetic Center Merger, on April 25, 1997
Cosmetic Center entered into a loan and security agreement (the "Cosmetic
Center Facility"). Cosmetic Center paid the then outstanding balance of $14.0
on CCI's former credit agreement with borrowings under the Cosmetic Center
Facility. On April 28, 1997, Cosmetic Center used approximately $21.2 of
borrowings under the Cosmetic Center Facility to fund the cash election
associated with the Cosmetic Center Merger. The Cosmetic Center Facility, which
expires on April 30, 1999, provides up to $70.0 of revolving credit tied to a
borrowing base of 65% of Cosmetic Center's eligible inventory, as defined in
the Cosmetic Center Facility. Borrowings under the Cosmetic Center Facility are
collateralized by Cosmetic Center's accounts receivable and inventory and
proceeds therefrom. Under the Cosmetic Center Facility, Cosmetic Center may
borrow at the London Inter-Bank Offered Rate ("LIBOR") plus 2.25% or at the
lending bank's prime rate plus 0.5%. Cosmetic Center also pays a commitment fee
equal to one-quarter of one percent per annum. Interest is payable on a monthly
basis except for interest on LIBOR rate loans with a maturity of less than
three months, which is payable at the end of the LIBOR rate loan period and
interest on LIBOR rate loans with a maturity of more than three months, which
is payable every three months. If Cosmetic Center terminates the Cosmetic
Center Facility, Cosmetic Center is obligated to pay a prepayment penalty of
$0.7 if the termination occurs before the first anniversary date of the
Cosmetic Center Facility and $0.2 if the termination occurs after the first
anniversary date. The Cosmetic Center Facility contains various restrictive
covenants and requires Cosmetic Center to maintain a minimum tangible net worth
and an interest coverage ratio. At December 31, 1997, approximately $39.0 was
outstanding under the Cosmetic Center Facility with an interest rate of 8.1%.
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, 19971998 or 1996.1997.
The aggregate amounts of long-term debt maturities and sinking fund
requirements (at December 31,
1997)1998), in the years 19981999 through 20022003 are $5.5,
$244.4, $26.2, $278.5$206.0, $10.2, $39.8, $254.8 and $354.6,$0,
respectively, and $555.0$1,149.2 thereafter.
11.12. 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. If
Products
Corporation had terminated these agreements which Products
Corporation considered to be held for other than trading purposes, on December
31, 1997in January 1998 and 1996,realized a lossgain of
approximately $0.1$1.6, which was recognized upon repayment of the hedged
indebtedness and $3.5, respectively would
have been realized.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 1996 and 19951996 was
approximately $3.1 $3.2 and $3.2, respectively. Cash flow from the
agreements
F-17
outstanding at December 31, 1997 was approximately break even for 1997. In
anticipation of repayment of the hedged indebtedness, Products Corporation
terminated these agreements in January 1998 and realized a gain of
approximately $1.6, which will be recognized upon repayment of the hedged
indebtedness.
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, 19971998 and 1996,1997, Products Corporation had
outstanding forward foreign exchange contracts denominated in various currencies
of approximately $90.1$197.5 and $62.0,$90.1, respectively, and outstanding option
contracts of approximately $51.0 and $94.9, outstanding at December 31, 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 andor 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, 19971998 and 19961997 was approximately $(63.1) and
$39.0 and
$37.3(less) more than the carrying value of $1,464.2$1,660.0 and $1,361.0,$1,425.2,
respectively. Because considerable judgment is required in interpreting market
data to develop estimates of fair value, the estimates are not necessarily
indicative of the amounts that could be realized or would be paid in a current
market exchange. The effect of using different market assumptions or estimation
methodologies may be material to the estimated fair value amounts.
F-18
Products Corporation also maintains standby and trade letters of credit
with certain banks for various corporate purposes under which Products
Corporation is obligated, of which approximately $40.6$30.7 and $40.9$40.6 (including
amounts available under credit agreements in effect at that time) were
maintained at December 31, 19971998 and 1996,1997, respectively. Included in these
amounts are $27.7$26.9 and $26.4,$27.7, respectively, in standby letters of credit, which
support Products Corporation's self-insurance programs (See Note 15).programs. The estimated liability
under such programs is accrued by Products Corporation.
The carrying amounts of cash and cash equivalents, marketable
securities, trade receivables, accounts payable and short-term borrowings
approximate their fair values.
12.13. 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 "Tax Sharing Agreement"), pursuant to which Mafco
Holdings has agreed to indemnify Revlon, Inc. and Products Corporation against
federal, state or local income tax liabilities of the consolidated or combined
group of which Mafco Holdings (or a subsidiary of Mafco Holdings other than
Revlon, Inc. and Products Corporation or its subsidiaries) is the common parent
for taxable periods beginning on or after January 1, 1992 during which Revlon,
Inc. and Products Corporation or a subsidiary of Products Corporation is a
member of such group. Pursuant to the Tax Sharing Agreement, for all taxable
periods beginning on or after January 1, 1992, Products Corporation will pay to
Revlon, Inc., which in turn will pay Mafco Holdings, amounts equal to the taxes
that such corporation would otherwise have to pay if they were to file separate
federal, state or local income tax returns (including any amounts determined to
be due as a result of a redetermination arising from an audit or otherwise of
the consolidated or combined tax liability relating to any such period which is
attributable to Products Corporation), except that Products Corporation will not
be entitled to carry back any losses to taxable periods ending prior to January
1, 1992. No payments are required by Products Corporation or Revlon, Inc. if and
to the extent that Products Corporation is prohibited under the Credit Agreement
from making tax sharing payments to Revlon, Inc. The Credit Agreement prohibits
Products Corporation from making any tax sharing payments other than in respect
of state and local income taxes. Since the payments to be made by Products
Corporation under the Tax Sharing Agreement will be determined by the amount of
taxes that Products Corporation would otherwise have to pay if it were to file
separate federal, state or local income tax returns, the Tax Sharing Agreement
will benefit Mafco Holdings to the extent Mafco Holdings can offset the taxable
income generated by Products Corporation against losses and tax credits
generated by Mafco Holdings and its other subsidiaries. As a result of net
operating tax losses and prohibitions under the Credit Agreement there were no
federal tax payments or payments in lieu of taxes pursuant to the Tax Sharing
Agreement for 1998, 1997 1996 or 1995.1996. Products Corporation has a liability of $0.9
to Revlon, Inc. in respect of federal taxes for 1997 under the Tax Sharing
Agreement.
F-18
Pursuant to the asset transfer agreement referred to in Note 15,16,
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-19
The Company's (loss) income (loss)from continuing operations before income
taxes and the applicable provision (benefit) for income taxes are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
(Loss) income from continuing operations from income taxes 1998 1997 1996
1995
------ ------ -------------- -------- --------
Income (loss) before income taxes:
Domestic.....................................................Domestic.......................................... $ 84.6 $10.6 $(39.4)
Foreign......................................................16.8 $ 83.8 $ 10.2
Foreign........................................... (37.6) (15.5) 40.5
23.6
------ ----- -------------- -------- --------
$ 69.1 $51.1 $(15.8)
====== ===== ======(20.8) $ 68.3 $ 50.7
======== ======== ========
Provision (benefit) for income taxes:
Federal......................................................Federal........................................... $ - $ 0.9 $ -
$ -
State and local..............................................local................................... 0.6 1.1 1.2
1.2 3.4
Foreign......................................................Foreign........................................... 4.4 7.3 24.3
22.0
------ ----- -------------- -------- --------
$ 9.4 $25.55.0 $ 25.4
====== ===== ======
Current......................................................9.3 $ 30.5 $22.725.5
======== ======== ========
Current........................................... $ 37.1
Deferred.....................................................12.1 $ 32.3 $ 22.7
Deferred.......................................... 0.2 10.4 6.6 3.0
Benefits of operating loss carryforwards .................... (32.6)carryforwards.......... (8.2) (34.5) (4.7) (15.4)
Carryforward utilization applied to goodwill....................................................goodwill...... 0.5 1.1 1.0 0.8
Effect of enacted change of tax rates .......................rates............. 0.4 - (0.1)
(0.1)
------ ----- -------------- -------- --------
$ 9.4 $25.55.0 $ 25.4
====== ===== ======9.3 $ 25.5
======== ======== ========
The effective tax rate on (loss) income (loss)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
1995
-------- -------- -----------------
Statutory federal income tax rate..............................rate........................... (35.0)% 35.0% 35.0% (35.0)%
State and local taxes, net of federal income tax benefit ...... 1.2benefit.... 1.9 1.1 1.6 14.0
Foreign and U.S.U S tax effects attributable to
operations outside the U.S. ............................................. 12.9 35.4 87.0U.S.............................. 80.6 13.1 35.7
Tax write-off of U.S investment in foreign subsidiary...... (249.7) - -
Nondeductible amortization expense............................. 4.4 5.7 15.7
U.S. loss without benefit...................................... - - 79.1expense.......................... 14.5 4.5 5.8
Change in domestic valuation allowance......................... (40.2) (29.0) -
Nontaxable gain on sale of subsidiary stock.................... (3.1) - -
Other.......................................................... 3.4 1.2 -allowance...................... 212.2 (43.3) (29.2)
Other....................................................... (0.4) 3.2 1.4
-------- -------- -----------------
Effective rate.................................................rate.............................................. 24.1% 13.6% 49.9% 160.8%50.3%
======== ======== =================
F-19F-20
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
19971998 and 19961997 are presented below:
DECEMBER 31,
---------------------------------------
Deferred tax assets: 1998 1997
1996
--------- ----------------- --------
Deferred tax assets:
Accounts receivable, principally due to doubtful accounts ....accounts... $ 4.2 $ 3.3
$ 3.9
Inventories................................................... 11.7 12.5Inventories................................................. 12.1 10.5
Net operating loss carryforwards.............................. 222.2 269.2
Restructuringcarryforwards - domestic................. 188.9 106.8
Net operating loss carryforwards - foreign.................. 111.0 100.1
Accruals and related reserves............................reserves............................... 22.6 9.4
10.2
Employee benefits............................................. 29.0 31.7benefits........................................... 32.5 28.7
State and local taxes.........................................taxes....................................... 13.1 12.8
Self-insurance................................................13.1
Self-insurance.............................................. 2.2 3.8 3.6
Advertising, sales discounts and returns and coupon
redemptions..................................................redemptions............................................. 30.5 26.0
23.6
Other......................................................... 26.2 23.9
--------- ---------Other....................................................... 27.5 25.3
-------- --------
Total gross deferred tax assets.............................. 344.7 391.4assets.......................... 444.6 327.0
Less valuation allowance..................................... (298.9) (347.0)
--------- ---------allowance................................. (381.6) (279.3)
-------- --------
Net deferred tax assets...................................... 45.8 44.4assets.................................. 63.0 47.7
Deferred tax liabilities:
Plant, equipment and other assets............................. (49.7) (43.0)
Inventories................................................... (0.2) (0.2)
Other......................................................... (4.5) (7.2)
--------- ---------assets........................... (58.4) (50.8)
Other....................................................... (8.2) (5.5)
-------- --------
Total gross deferred tax liabilities......................... (54.4) (50.4)
--------- ---------liabilities..................... (66.6) (56.3)
-------- --------
Net deferred tax liability...................................liability............................... $ (3.6) $ (8.6)
$ (6.0)
========= ================= ========
The valuation allowance for deferred tax assets at January 1, 19971998 was
$347.0.$279.3. The valuation allowance increased by $102.3 during 1998 and decreased by
$48.1$54.5 and $10.2 during the years
ended December 31, 1997 and 1996, respectively,respectively.
During 1998, 1997 and increased by $19.2 during
the year ended December 31, 1995.
During 1997, 1996, and 1995, certain of the Company's foreign
subsidiaries used operating loss carryforwards to credit the current provision
for income taxes by $2.4, $4.0, $4.7 and $15.4,$4.7, respectively. Certain other foreign
operations generated losses during the years1998, 1997 1996 and 19951996 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 $5.8 and $12.0, respectively. During 1997, the
Company applied domestic operating loss carryforwards to credit the current
provision for income taxes by $16.6 and the deferred provision for income taxes
by $12.0.$18.5. At December 31, 1997,1998, the Company had tax
loss carryforwards of approximately $826.3 as compared with $578.9 whichat 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:
1998-$21.1;
1999-$25.3;29.9; 2000-$9.3;14.2; 2001-$15.9;17.1; 2002-$32.5; 2003 and beyond-$386.4;589.7;
unlimited-$120.9.142.9. The Company willcould receive athe 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 $18.7$14.3 at December 31, 1997,1998, excluding those
amounts which, if remitted in the near future, would not result in significant
additional taxes under tax statutes currently in effect.
F-20F-21
13.14. POSTRETIREMENT BENEFITS
PENSIONS:
Products Corporation uses a September 30 date for measurement of plan
obligations and assets.
The following tables reconcile the funded status of Products
Corporation's significant pension plans with the respective amounts recognized
in the Consolidated Balance Sheets at the dates indicated:
DECEMBER 31, 1997
---------------------------------------
OVERFUNDED UNDERFUNDED
PLANS PLANS TOTAL
------------ ------------- ----------
Actuarial present value of benefit obligation:
Accumulated benefit obligation as of September 30,
1997, includes vested benefits of $304.5............... $(269.3) $(45.2) $(314.5)
============ ============= ==========
Projected benefit obligation as of September 30, 1997
for service rendered................................... $(309.3) $(55.5) $(364.8)
Fair value of plan assets as of September 30, 1997 ...... 305.0 1.9 306.9
------------ ------------- ----------
Plan assets less than projected benefit obligation ...... (4.3) (53.6) (57.9)
Amounts contributed to plans during fourth quarter 1997 . 0.3 0.6 0.9
Unrecognized net (assets) obligation..................... (1.3) 0.2 (1.1)
Unrecognized prior service cost.......................... 6.5 3.2 9.7
Unrecognized net loss.................................... 0.2 12.7 12.9
Adjustment to recognize additional minimum liability .... - (6.5) (6.5)
------------ ------------- ----------
Prepaid (accrued) pension cost......................... $ 1.4 $(43.4) $ (42.0)
============ ============= ==========
DECEMBER 31, 1996
---------------------------------------
OVERFUNDED UNDERFUNDED
PLANS PLANS TOTAL
------------ ------------- ----------
Actuarial present value of benefit obligation:
Accumulated benefit obligation as of September 30,
1996, includes vested benefits of $286.9............... $(163.7) $(131.4) $(295.1)
============ ============= ==========
Projected benefit obligation as of September 30, 1996
for service rendered................................... $(198.1) $(141.4) $(339.5)
Fair value of plan assets as of September 30, 1996 ...... 173.3 81.6 254.9
------------ ------------- ----------
Plan assets less than projected benefit obligation ...... (24.8) (59.8) (84.6)
Amounts contributed to plans during fourth quarter 1996 . 0.2 0.5 0.7
Unrecognized net (assets) obligation..................... (1.5) 0.2 (1.3)
Unrecognized prior service cost.......................... 5.2 3.9 9.1
Unrecognized net loss.................................... 20.2 20.5 40.7
Adjustment to recognize additional minimum liability .... - (15.3) (15.3)
------------ ------------- ----------
Accrued pension cost................................... $ (0.7) $ (50.0) $ (50.7)
============ ============= ==========
The weighted average discount rate assumed was 7.75% for 1997 and 1996
for domestic plans. For foreign plans, the weighted average discount rate was
7.1% and 7.9% for 1997 and 1996, respectively. The rate of future compensation
increases was 5.3% for 1997 and 1996 for domestic plans and was a weighted
average of 5.3% and 5.1% for 1997 and 1996, respectively, for foreign plans.
The expected long-term rate of return on assets was 9.0% for 1997 and 1996 for
domestic plans and a weighted average of 10.1% for 1997 and 10.4% for 1996 for
foreign plans.
F-21
Plan assets consist primarily of common stock, mutual funds and fixed
income securities, which are stated at fair market value and cash equivalents
which are stated at cost, which approximates fair market value.
In accordance with the provisions of SFAS No. 87, "Employers'
Accounting for Pensions," the Company recorded an additional liability to the
extent that, for certain U.S. plans, the unfunded accumulated benefit
obligation exceeded recorded liabilities. At December 31, 1997, the additional
liability was recognized by recording an intangible asset to the extent of
unrecognized prior service costs of $1.0, a due from affiliates of $1.0 and a
charge to stockholder's deficiency of $4.5. At December 31, 1996, the
additional liability was recognized by recording an intangible asset to the
extent of unrecognized prior service costs of $1.8, a due from affiliates of
$1.1, and a charge to stockholder's deficiency of $12.4.
Net periodic pension cost for the pension plans consisted of the
following components:
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
Service cost-benefits earned during the
period........................................ $ 11.7 $ 10.6 $ 8.2
Interest cost on projected benefit obligation . 26.0 24.3 21.7
Actual return on plan assets................... (55.8) (30.4) (27.3)
Net amortization and deferrals................. 35.6 15.1 13.4
-------- -------- --------
17.5 19.6 16.0
Portion allocated to Holdings.................. (0.3) (0.3) (0.3)
-------- -------- --------
Net periodic pension cost of the Company ...... $ 17.2 $ 19.3 $ 15.7
======== ======== ========
Pension:
A substantial portion of the Company's employees in the United
States are covered by defined benefit retirementpension plans. To the extent that aggregate
pension costs could be identifiedThe Company uses
September 30 as relating to the Company or to Holdings,
such costs have been so apportioned. The components of the net periodic pension
cost applicable solely to the Company are not presented as it is not practical
to segregate such information between Holdingsits measurement date for plan obligations and the Company. In 1997 and
1996, there was a settlement loss of $0.2 and $0.3, respectively, and a
curtailment loss of $0.1 and $1.0, respectively, resulting from workforce
reductions.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS: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. NetThe 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-22
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 postretirement benefit cost for each of the years ended
December 31, 1997, 1996 and 1995 was $0.7 which consists primarily of interestplans 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 postretirement benefit obligation. The Company's date of
measurement of Plan obligations is September 30. At December 31, 1997 and 1996,
the portion of accumulated benefit obligation attributable to retirees was $7.3
and $6.9, respectively, and to other fully eligible participants, $1.4 and
$1.3, respectively. The amountexceeded the related fair
value of unrecognized gain at December 31, 1997 and
1996 was $1.9 and $1.2, respectively. At December 31, 1997 and 1996,plan assets, the accrued postretirementprojected benefit obligation, recorded onaccumulated benefit
obligation, and fair value of plan assets for the Company's Consolidated Balance Sheets was $10.6 and $9.4, respectively. Of these amounts,
$1.9 and $2.0 was attributable to Holdings and was recordedpension plans are
as a receivable
from affiliates at Decemberfollows:
DECEMBER 31,
------------------------
1998 1997 and 1996
respectively. The weighted
average discount rate used in determining the accumulated postretirement------ ------ ------
Projected benefit obligation at September 30, 1997 and 1996 was 7.75%.
F-22
14.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
At December 31, 1997 andSince March 5, 1996, Revlon, Inc. has had a stock-based compensation
plan (the "Plan"), which is described below. Products Corporation applies APB
Opinion No. 25 and its related Interpretationsinterpretation in accounting for the Plan. Under
APB Opinion No. 25, because the exercise price of Revlon, Inc.'s
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 Revlon, Inc.'sthe Plan
been determined consistent with SFAS No. 123, Products Corporation's net (loss)
income of $(141.7) for 1998, $44.8 for 1997 of $44.8 ($19.0 in 1996)and $19.0 for 1996 would have been
reducedchanged to the pro forma amounts of $(165.3) for 1998, $32.5 for 1997 ($15.8 in 1996).and $15.8
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, Revlon, Inc.options may grant optionsbe granted to its 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
F-23
years during which the holder can purchase shares of Revlon, Inc. Class A Common
Stock at an exercise price which must be not less than the market price on the
date of the grant. Options granted in 1996 to certain executive officers will
not vest as to any portion until the third anniversary of the grant date and
will thereupon become 100% vested, except that upon termination of employment
by Revlon, Inc.between the second and third anniversary of the grant other than for "cause,"
death or "disability" under the applicable employment agreement, such options
will vest with respect to 25% of the shares subject thereto (if the
termination is between the first and second anniversaries of the grant) and 50% of the shares subject thereto (if the termination is between the second and
third anniversaries of the grant).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 Executive Committee, an optionBoard, options to purchase 300,000 shares of Revlon, Inc.'s Class
A Common Stock, which grants will vest in full on the fifth anniversary of the
grant date.dates. At December 31, 1998 and 1997 there were 403,950 and 98,450 options
exercisable under the Plan.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 2/28/96 . - -
Granted................. 1,010.2 $24.37
Exercised............... - -
Forfeited............... (119.1) 24.00
---------
Outstanding at
12/31/96............... 891.1 24.37
Granted................. 1,485.5 32.64
Exercised............... (12.1) 24.00
Forfeited............... (85.1) 29.33
---------
Outstanding at
12/31/97............... 2,279.4 29.57
=========
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.
F-23
The following table summarizes information about the Plan's options
outstanding at December 31, 1997 :
YEAR ENDED DECEMBER 31, 1997
- -----------------------------------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED
RANGE OF OUTSTANDING YEARS AVERAGE
EXERCISE PRICES (000) REMAINING EXERCISE PRICE
- ---------------- ------------- ----------- --------------
$24.00 to $29.88 817.9 8.17 $ 24.05
31.38 to 33.88 1,067.8 9.02 31.40
34.88 to 50.75 393.7 9.38 36.10
-------------
24.00 to 50.75 2,279.4 8.78 29.57
=============
15.1998:
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-24
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 1995 were $0.4, $1.4, and $4.0, 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 manufactures, markets, distributes, warehouseshas manufactured, marketed, distributed, warehoused and
administers,administered, including the collection of accounts receivable, the Retained
Brands for Holdings. Pursuant to the Operating Services Agreement, Products
Corporation iswas 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 reimbursed bydue from Holdings to
Products Corporation for such direct and indirect costs for 1997, 1996 and 1995
were $1.4, $5.1 and $8.6, respectively. Holdings also pays Products Corporationplus 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 quarterly.
The fees paid by Holdings to Products Corporation pursuant to the Operating
Services Agreement for services with respect to the Retained Brands for 1997,
1996Holdings), $1.7 and 1995 were approximately $0.3, $0.6 and $1.7,$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 F-24
services does not cause an unreasonable burden to MacAndrews
Holdings or Products Corporation, as the case may be. The Company reimburses
MacAndrews Holdings for the allocable costs of the services purchased for or
provided to the Company and its subsidiaries and for reasonable out-of-pocket
expenses incurred in connection with the provision of such services. MacAndrews
Holdings (or such affiliates) reimburses the Company for the allocable costs of
the services purchased for or provided to MacAndrews Holdings (or such
affiliates) and for the reasonable out-of-pocket expenses incurred in connection
with the purchase or provision of such services. In addition, in connection with certain
insurance coverage provided by MacAndrews Holdings, Products Corporation
obtained letters of credit under the Special LC Facility (which aggregated
approximately $27.7 as of December 31, 1997) to support certain self-funded
risks of MacAndrews Holdings and its affiliates, including the Company,
associated with such insurance coverage. The costs of such letters of credit
are allocated among, and paid by, the affiliates of MacAndrews Holdings,
including the Company, which participate in the insurance coverage to which the
letters of credit relate. The Company expects that these self-funded risks will
be paid in the ordinary course and, therefore, it is unlikely that such letters
of credit will be drawn upon. MacAndrews Holdings has agreed to indemnify
Products Corporation to the extent amounts are drawn under any of such letters
of credit with respect to claims for which neither Revlon, Inc. nor Products
Corporation is responsible. The net amounts reimbursed by
MacAndrews Holdings to the Company for the services provided under the
Reimbursement Agreements for 1998, 1997 and 1996 were $3.1 ($0.2 of which was
offset against certain notes payable to Holdings), $4.0 and 1995 were $4.0, $2.2, and $3.0, respectively.
Each of Revlon, Inc. and Products Corporation, on the one hand, and MacAndrews
Holdings, on the other, has agreed to indemnify the other party for losses
arising out of the provision of services by it under the Reimbursement
Agreements other than losses resulting from its willful misconduct or gross
negligence. The Reimbursement Agreements may be terminated by either party on 90
days' notice. The Company does not intend to request services under the
Reimbursement Agreements unless their costs would be at least as favorable to
the Company as could be obtained from unaffiliated third parties.
F-25
TAX SHARING AGREEMENT
Holdings, Revlon, Inc., Products Corporation and certain of its
subsidiaries and Mafco Holdings are parties to the Tax Sharing Agreement, which
is described in Note 12.13. Since payments to be made under the Tax Sharing
Agreement will be determined by the amount of taxes that Products Corporation
would otherwise have to pay if it were to file separate federal, state or local
income tax returns, the Tax Sharing Agreement will benefit Mafco Holdings to the
extent Mafco Holdings can offset the taxable income generated by Products
Corporation against losses and tax credits generated by Mafco Holdings and its
other subsidiaries.
F-25
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. The amount of interest to be reimbursed by Holdings for 1994 was
approximately $0.8 and was evidenced by noninterest-bearing promissory notes
originally due and payable on June 30, 1995. In February 1995, the $13.3 in
notes then payable by Holdings to Products Corporation under the Financing
Reimbursement Agreement was offset against a $25.0 note payable by Products
Corporation to Holdings and Holdings agreed not to demand payment under the
resulting $11.7 note payable by Products Corporation so long as any
indebtedness remained outstanding under the credit agreement then in effect. 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 %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. The amount of
interest to be reimbursed by Holdings for 1995 was approximately $4.2. As of December 31,
1995, the aggregate amount of notes payable by Holdings under the Financing
Reimbursement Agreement was $8.9. In June 1996, $10.9 in notes due to Products
Corporation, which included $2.0 of interest reimbursement from Holdings in
1996, under the Financing Reimbursement Agreement was offset against an $11.7
demand note payable by Products Corporation to Holdings.
OTHER
Pursuant to a lease dated April 2, 1993 (the "Edison Lease"), Holdings
leasesleased 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, arewere 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 iswas
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 1996 and 19951996 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.Corporation's now discontinued retail operation. Products Corporation providesprovided
certain administrative services, including accounting, for Holdings with respect
to the Edison facility pursuant to which Products Corporation payspaid on behalf of
Holdings costs associated with the Edison facility and iswas 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 for such costs with respect to the Edison facility for
F-26
1998, 1997 and 1996 was $0.5, $0.7 and 1995 was $0.7, $1.1, and $1.2, respectively.
During 1997, a subsidiary of Products Corporation sold an inactive
subsidiary to ana 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
F-26
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.
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 1996 and 1995;1996; in Tokyo during 1996
and 1995 and in Hong Kong during 1997.1997 and the first half of 1998. The rent paid by MacAndrews &
Forbes or its affiliates to
Products Corporation for 1998, 1997 and 1996 was $2.9, $3.8 and 1995 was
$3.8, $4.6,
and $5.3, respectively.
In July 1995, Products Corporation borrowed from Holdings
approximately $0.8, representing certain amounts received by Holdings relating
to an arbitration arising out of the sale by Holdings of certain of its
businesses. In 1995, Products Corporation borrowed from Holdings approximately
$5.6, representing certain amounts received by Holdings from the sale by
Holdings of certain of its businesses.
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.
TheDuring 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
F-27
stock and certain assets of certain subsidiaries of Holdings and (ii)
until the disposition of the Edison facility in August 1998, a mortgage on Holdings'the
Edison New Jersey facility.
Products Corporation borrows funds from its affiliates from time to
time to supplement its working capital borrowings. No such borrowings were
outstanding as of December 31, 1998, 1997 1996 or 1995.1996. 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 facilityfacilities 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 1995$0.5, respectively.
During 1998, Products Corporation made advances of $0.25 and $0.3 to
Mr. Fellows and Ms. Dwyer, respectively. During 1998, Products Corporation made
an advance of $0.4 to Mr. Levin, a director of Products Corporation during part
of 1998, which advance was $0.6, $0.5 and $1.2, respectively.repaid in January 1999.
In November 1993, Products Corporation assigned to Holdings a lease for
warehouse space in New Jersey (the "N.J. Warehouse") between Products
Corporation and a trust established for the benefit of certain family members of
the Chairman of the Executive Committee.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 and
1995, 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 and $0.2 for 1996 and 1995, respectively.1996.
During 1997 1996 and 1995,1996, Products Corporation used an airplane owned by a
corporation of which Messrs. Gittis, Drapkin and, during 1995 and
1996, Levin, were the
sole stockholders, for which Products Corporation paid approximately $0.2 $0.2 and
$0.4$0.2 for 1997 and 1996, and 1995, respectively.
F-27
During 1998 and 1997, Products Corporation purchased products from ana
company that was its affiliate during part of 1998, for which it paid
approximately $0.9.$0.4 and $0.9, respectively.
During 1997, Products Corporation provided licensing services to ana
company that was its affiliate during 1997 and part of 1998, for which Products
Corporation has beenwas paid approximately $0.7.
An$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 assemblesduring 1996,
1997 and 1998 assembled lipstick cases for Products Corporation. Products
Corporation paid approximately $1.1, $0.9 $1.0 and $1.0 for such services for 1998,
1997 and 1996, and 1995, respectively.
In January 1995, Products Corporation agreed to license certain of its
trademarks to a former affiliate of MacAndrews & Forbes. The amount paid to
Products Corporation pursuant to such license for 1995 was less than $0.1. The
affiliate purchased $1.1 of wigs from Products Corporation during 1995.
Products Corporation terminated the license with the affiliate during 1995.
16.17. 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 $57.3, $51.7$43.7, $46.1 and $49.3$46.7 for
the years ended December 31, 1998, 1997 1996 and 1995,1996, respectively. Minimum rental
commitments under all noncancelable leases, including those pertaining to idled
facilities, and the Edison research and development facility, with remaining lease terms in excess of one year from December 31,
19971998 aggregated $201.1;$164.0; such commitments for each of the five years subsequent
to December 31, 19971998 are $43.2, $39.8, $34.6, $29.3$37.4, $33.4, $27.4, $24.6 and $26.7,$12.8, respectively.
Such amounts exclude the minimum rentals to be received by the Company in the
future under noncancelable subleases of $4.2.$5.1.
The Company and its subsidiaries are defendants in litigation and
proceedings involving various matters. In the opinion of the Company's
management, based upon advice of its counsel handling such litigation and
proceedings, adverse outcomes, if any, will not result in a material effect on
the Company's consolidated financial condition or results of operations.
F-28
17.18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations:
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------
1ST 2ND 3RD 4TH
QUARTER (b) QUARTER (b) QUARTER QUARTER
----------- ----------- --------- ---------
Net sales............................... $492.9 $572.4 $623.5 $702.1
Gross profit............................ 326.6 370.5 406.4 455.3
(Loss) income before extraordinary
item................................... (25.4) 9.4 33.1 42.6
Net (loss) income....................... (25.4) (5.5)(a) 33.1 42.6
YEAR ENDED DECEMBER 31, 1996 (b)
-------------------------------------------1998
---------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
----------- --------- --------- --------- -------
Net sales............................... $464.8 $518.3 $571.7 $614.7sales.................................... $ 497.8 $ 575.3 $ 548.6 $ 630.5
Gross profit............................ 311.7 347.5 378.4 405.4profit................................. 334.5 381.3 362.5 408.2
(Loss) income before extraordinary
item................................... (29.0) 1.5 21.0 32.1from continuing operations..... (15.0) 12.3 13.0(a) (36.1)(a)
Loss from discontinued operations............ (4.6) (26.9) - (32.7)
Extraordinary items-early extinguishments
of debt.................................. (38.2) (13.5) - -
Net (loss) income....................... (35.6)(c) 1.5 21.0 32.1income............................ (57.8) (28.1) 13.0 (68.8)
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- -------
Net sales..................................... $ 480.0 $ 537.7 $ 581.0 $ 639.9
Gross profit.................................. 319.6 356.5 389.3 430.1
(Loss) income from continuing operations...... (22.3) 8.7 34.9 37.7
(Loss) income from discontinued operations.... (2.8) 1.0 (1.5) 4.0
Extraordinary items-early extinguishments
of debt.................................... - (14.9) - -
Net (loss) income............................. (25.1) (5.2) 33.4 41.7
(a) Includes the extraordinary chargesa non-recurring gain of $14.9 resulting from the
write-off$7.1 in the secondthird quarter and
non-recurring charges, net, of 1997 of deferred financing costs associated
with$42.9 in the early extinguishment of borrowings and the redemption of Products
Corporation's Sinking Fund Debentures.
(b) 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.
(c) Includes an extraordinary charge of $6.6 resulting from the
write-off of deferred financing costs associated with the early extinguishment
of borrowings.fourth quarter (See Note 4).
F-29
18.19. GEOGRAPHIC SEGMENTSINFORMATION
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, 1997,1998, 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 5.5%5.4%, 6.1%5.8% and 6.1%6.3% of the Company's net sales for
1998, 1997 1996 and 1995,1996, 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. This data is
presented in accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which the Company has retroactively
adopted for all periods presented.sales, respectively.
GEOGRAPHIC AREASAREAS: YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
Net sales: 1998 1997 1996
1995
-------- -------- -------------------- ----------- -----------
Net sales:
United States..................... $1,452.5 $1,259.7 $1,115.4
International.....................States $ 1,338.5 $ 1,300.2 $ 1,182.3
International 913.7 938.4 909.8
824.6
-------- -------- --------
$2,390.9 $2,169.5 $1,940.0
======== ======== ========
AS OF------------ ----------- -----------
$ 2,252.2 $ 2,238.6 $ 2,092.1
============ =========== ===========
DECEMBER 31,
--------------------
1997 1996
-------- ----------------------------------
Long-lived assets: 1998 1997
----------- -----------
United States.....................States $ 570.6637.9 $ 555.0
International.....................545.4
International 287.4 280.5
245.9
-------- ------------------- -----------
$ 851.1925.3 $ 800.9
======== ========825.9
=========== ===========
CLASSES OF SIMILAR PRODUCTS: YEAR ENDED DECEMBER 31,
-------------------------------
CLASSES OF SIMILAR PRODUCTS:------------------------------------------
Net sales: 1998 1997 1996
1995
-------- -------- --------
Net sales:----------- ----------- -----------
Cosmetics, skin care and fragrances....................... $1,408.3 $1,262.0 $1,080.5fragrances $ 1,309.7 $ 1,319.6 $ 1,216.3
Personal care and professional ... 982.6 907.5 859.5
-------- -------- --------
$2,390.9 $2,169.5 $1,940.0
======== ======== ========942.5 919.0 875.8
----------- ----------- -----------
$ 2,252.2 $ 2,238.6 $ 2,092.1
=========== =========== ===========
19. SUBSEQUENT EVENT (UNAUDITED)
On February 2, 1998, an affiliate of the Company, Revlon Escrow Corp.,
issued notes in the aggregate amount of $900.0 (the "Notes"). The net proceeds
of $880 (net of discounts, fees and expenses) were deposited with an escrow
agent and substantially all of such proceeds will be used to fund the
redemptions by Products Corporation of its Senior Subordinated Notes and the
Senior Notes, including prepayment premiums for early redemptions. Products
Corporation will assume the obligations of Revlon Escrow Corp. under the Notes
upon consummation of such redemptions. In connection with the early redemptions
of the Senior Notes and Senior Subordinated Notes, the Company expects to
record an extraordinary loss of up to $52 in 1998.
F-30
SCHEDULE II
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND 1995
(dollars in millions)(DOLLARS IN MILLIONS)
BALANCE AT CHARGED TO OTHER BALANCE
AT
BEGINNING OF YEAR COST AND EXPENSES DEDUCTIONSOTHER AT END
OF YEAR ----------------- -----------------EXPENSES DEDUCTIONS OF YEAR
---------- --------------------- ---------- -------
YEAR ENDED DECEMBER 31, 1997:1998:
Applied against assetsasset accounts:
Allowance for doubtful accounts $12.9accounts......................................... $ 3.612.0 $ (4.5)4.5 $ (2.5)(1) $12.0$ 14.0
Allowance for volume and early payment discounts ............. $12.0 $46.8 $(44.9)discounts........................ $ 13.9 $ 44.8 $ (44.2)(2) $13.9$ 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 $13.6accounts......................................... $ 13.6 $ 7.1 $ (7.8)(1) $12.9$ 12.9
Allowance for volume and early payment discounts ............. $10.1 $43.8 $(41.9)discounts........................ $ 10.1 $ 43.8 $ (41.9)(2) $12.0
YEAR ENDED DECEMBER 31, 1995:
Applied against asset accounts:
Allowance for doubtful accounts $11.1 $ 5.5 $ (3.0)(1) $13.6
Allowance for volume and early
payment discounts ............. $10.6 $33.3 $(33.8)(2) $10.112.0
- --------------------------
Notes:
(1) Doubtful accounts written off, less recoveries, reclassifications and
foreign currency translation adjustments.
(2) Discounts taken, reclassifications and foreign currency translation
adjustments.
F-31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Revlon Consumer Products Corporation
(Registrant)
By: /s/ George Fellows By: /s/ Frank J. Gehrmann By: /s/ Lawrence E. Kreider
---------------------------- ---------------------------- ----------------------------By: /s/ George Fellows By: /s/ Frank J. Gehrmann By: /s/ Lawrence E. Kreider
------------------- --------------------- ------------------------
George Fellows Frank J. Gehrmann Lawrence E. Kreider
President, Executive Vice Senior Vice President,
Chief Executive President and Controller and Chief
Officer President and Controller and
and Director Chief Financial Officer Chief Accounting Officer
Director Officer
Dated: March 4, 199817, 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
4, 199817, 1999 and in the capacities indicated.
Signature Title
* Chairman of the Executive Committee of the Board and
__________________________________ Director
(Ronald O. Perelman)
* Chairman of the Board and Director
- -----------------------------------
(Jerry W. Levin)
/s/ George Fellows President, Chief Executive Officer and Director
- -----------------------------------
(George Fellows)
* Senior Executive Vice President and Director
- -----------------------------------
(William J. Fox)
* Director
- -----------------------------------
(Donald G. Drapkin)
* Director
- -----------------------------------
(Irwin Engelman)
(Table continued on next page)
* Director
- -----------------------------------
(Howard Gittis)
* Director
- -----------------------------------Signature Title
* Chairman of the Board and Director
- ------------------------
(Ronald O. Perelman)
/s/ George Fellows President, Chief Executive Officer and Director
- ------------------------
(George Fellows)
* Vice Chairman, Chief Administrative Officer
- ------------------------ and Director
(Irwin Engelman)
* Director
- ------------------------
(Donald G. Drapkin)
* Director
- ------------------------
(Howard Gittis)
* Director
- ------------------------
(Edward J. Landau)
* 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