currently owns approximately 20.8 million shares of Revlon Class A Common Stock and 31.25 million shares of Revlon Class B Common Stock.
In connection with consummating the Revlon Exchange Transactions, Revlon, Inc. announced that its previously announced plan to launch a rights offering to reduce debt by a further $50 by year-end 2004 was reduced to $9.7, as a result of $190.3 of Revlon Exchange Notes having been exchanged in excess of the Revlon Exchange Notes committed to be exchanged by MacAndrews & Forbes and Fidelity under their respective support agreements. This $190.3 more than satisfied Revlon, Inc.'s plan to reduce debt through the Revlon Exchange Offers by $150 in addition to the Revlon Exchange Notes that were committed to be exchanged in the support agreements with MacAndrews & Forbes and Fidelity. The $40.3 difference satisfied all but $9.7 of the Company's plan to reduce debt by a further $50 by year-end 2004. Because the costs and expenses, as well as the use of organizational resources, associated with a $9.7 rights offering would be unduly disproportionate, Revlon, Inc. indicated that its support and investment agreements with MacAndrews & Forbes and Fidelity relating to the Company's debt reduction plan were amended to enable Revlon, Inc. to satisfy the remaining $9.7 of debt reduction as part of the final stage of the Company's debt reduction plan. Therefore, the Company now intends to reduce debt by approximately an additional $110 by the end of March 2006. Consistent with agreements between MacAndrews & Forbes and Revlon, Inc. entered into contemporaneously with the agreements relating to the Revlon Exchange Transactions, MacAndrews & Forbes agreed to back-stop the additional $110 of debt reduction.
Also, in conjunction with the Revlon Exchange Transactions, the Company obtained the Exchange Bank Amendments to provide an additional $64.4 term loan facility, the proceeds of which were used to repay outstanding revolving indebtedness under its Credit Agreement without a reduction in revolving credit commitments. These amendments also reduced the interest rates payable on such term loan facility by 0.5%, as compared to the interest rates payable on loans under the existing term loan facility of the Company's Credit Agreement, with such rates on these new term loans being, at its option, either (A) the Alternate Base Rate plus 4.0%; or (B) the Eurodollar Rate plus 5.0%. These new additional term loans mature on May 30, 2005 and require an amortization payment of $0.7 on November 30, 2004. The Exchange Bank Amendments also permit various aspects of the transactions relating to the Revlon Exchange Transactions, including permitting: (i) the prepayment of the Mafco $100 million term loan and the Mafco $125 million term loan occurring as a result of the indebtedness thereunder outstanding at the consummation of the Revlon Exchange Transactions being fully converted to equity; (ii) the reduction of the commitment of the Mafco $65 million line of credit to its undrawn amount at the consummation of the Revlon Exchange Transactions (which reduction was nil as there was no amount outstanding under the Mafco $65 million line of credit at the consummation of the Revlon Exchange Transactions); (iii) any proceeds remaining after such transactions to be contributed to Products Corporation and used to prepay or repurchase any of its outstanding indebtedness; (iv) Revlon, Inc. to enter into certain investment or subscription agreements in connection with the Revlon Exchange Transactions; and (v) the aggregate term loan commitments under the Credit Agreement to be increased by $64.4. (See Note 11 to the Unaudited Consolidated Condensed Financial Statements).
EBITDA (as defined in the Credit Agreement) was $144.4 for the four consecutive fiscal quarters ended December 31, 2003, which was less than the minimum of $230 required under the EBITDA covenant of the Credit Agreement for that period and the Company's leverage ratio was 1.66:1.00, which was in excess of the maximum ratio of 1.10:1.00 permitted under the leverage ratio covenant of the Credit Agreement for that period. Accordingly, the Company sought and on January 28, 2004 secured the January 2004 Bank Amendment that included waivers of compliance with these covenants for the four quarters ended December 31, 2003 and, in light of the Company's expectation that its plan would affect its ability to comply with these covenants during 2004, an amendment to eliminate the EBITDA and leverage ratio covenants for the first three quarters of 2004 and a waiver of compliance with such
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS —(Continued)
(dollars in millions, except per share data)
covenants for the four quarters ending December 31, 2004 expiring on January 31, 2005. The January 2004 Bank Amendment to the Credit Agreement included certain other amendments to allow for the continued implementation of the Company's plan, including, among other things: (i) providing exceptions from the limitations under the indebtedness covenant to permit the 2004 Mafco $125 million term loan, (ii) permitting the Company to borrow up to an additional $50 in working capital loans from MacAndrews Holdings or its affiliates, if necessary, (iii) extending the maturity of the Mafco $65 million line of credit until June 30, 2005 and providing that as a condition to the Company borrowing under such line from and after the effective date of the January 2004 Bank Amendment that at least $100 shall have been borrowed under the 2004 Mafco $125 million term loan, (iv) continuing the $20 minimum liquidity covenant, (v) increasing the applicable margin on loans under the Credit Agreement by 0.25%, the incremental cost of which to the Company, assuming the Credit Agreement is fully drawn, would be approximately $0.5 from February 1, 2004 through the end of 2004, and (vi) permitting Revlon, Inc. to guarantee certain classes of the Company's public indebtedness to enable it to consummate the Revlon Exchange Transactions and related transactions.
The 2004 M&F Loan and $25 million M&F Loan were consolidated into the 2004 Mafco $125 million term loan. The 2004 Mafco $125 million term loan is a senior unsecured multiple-draw term loan at an interest rate of 12% per annum, and which is on substantially the same terms as the Mafco $100 million term loan provided by MacAndrews & Forbes earlier in 2003 (the latter of which was fully converted into equity in connection with the Revlon Exchange Transactions), including that interest on such loans is not payable in cash, but accrues and is added to the principal amount each quarter and will be paid in full at final maturity on December 1, 2005. (See Note 9 to the Unaudited Consolidated Condensed Financial Statements for important information concerning the 2004 Mafco $125 million term loan).
2003 Financing Transactions
In February 2003 Revlon, Inc. entered into an investment agreement with MacAndrews Holdings (the "2003 Investment Agreement") pursuant to which Revlon, Inc. undertook and, on June 20, 2003, completed, a $50 equity rights offering (the "2003 Rights Offering"), pursuant to which Revlon, Inc. issued an additional 17,605,650 shares of its Revlon Class A Common Stock, including 3,015,303 shares subscribed for by the public and 14,590,347 shares issued to MacAndrews Holdings in a private placement (representing the number of shares of Revlon Class A Common Stock that MacAndrews Holdings would otherwise have been entitled to purchase pursuant to its basic subscription privilege, which was approximately 83% of the shares of Revlon Class A Common Stock offered in the 2003 Rights Offering).
In addition, in connection with the 2003 Investment Agreement, MacAndrews Holdings also made available a $100 term loan to the Company (the "Mafco $100 million term loan"). Until it was exchanged for equity in connection with the Revlon Exchange Transactions, the Mafco $100 million term loan had a final maturity date of December 1, 2005 and interest on such loan of 12.0% was not payable in cash, but accrued and was added to the principal amount each quarter and was to have been paid in full at final maturity. (See Note 9 to the Unaudited Consolidated Condensed Financial Statements for important information concerning the Mafco $100 million term loan).
Additionally, MacAndrews Holdings also provided the Company with an additional $40 line of credit during 2003, which amount was originally to increase to $65 on January 1, 2004 (the "Mafco $65 million line of credit") (the Mafco $100 million term loan and the Mafco $65 million line of credit, each as amended, are referred to as the "2003 Mafco Loans") and which was originally to be available to the Company through December 31, 2004. The Mafco $65 million line of credit bears interest payable in cash at a rate of the lesser of (i) 12.0% and (ii) 0.25% less than the rate payable from time to time on Eurodollar loans under the Company's Credit Agreement (which rate was 8.50% as of March 31, 2004). However, in connection with the January 2004 Bank Amendment of the Company's Credit Agreement, the Company and MacAndrews Holdings agreed to extend the maturity of the Mafco $65 million line of credit to June
26
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS —(Continued)
(dollars in millions, except per share data)
30, 2005 and to subject the availability of funds under such line of credit to the condition that an aggregate principal amount of $100 have been drawn under the 2004 Mafco $125 million term loan.
Sources and Uses
The Company's principal sources of funds are expected to be operating revenues, cash on hand, funds available for borrowing under the Credit Agreement, the Mafco $65 million line of credit, the 2004 Mafco $125 million term loan and other permitted lines of credit. (See Notes 9 to the Unaudited Consolidated Condensed Financial Statements). The Credit Agreement, the Mafco $65 million line of credit, the 2004 Mafco $125 million term loan, Products Corporation's 12% Senior Secured Notes, Products Corporation's 8 5/8% Senior Subordinated Notes due 2008 (the "8 5/8% Senior Subordinated Notes"), Products Corporation's 8 1/8% Senior Notes due 2006 (the "8 1/8% Senior Notes") and Products Corporation's 9% Senior Notes due 2006 (the "9% Senior Notes") contain certain provisions that by their terms limit Products Corporation's and 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, including expenses in connection with the continued implementation of, and refinement to, the Company's plan, purchases of permanent wall displays, capital expenditure requirements, payments in connection with the Company's restructuring programs referred to herein and debt service payments and costs. Cash contributions to the Company's pension plans were $21 in 2003 and the Company expects them to be approximately $40 in 2004.
The Company has undertaken a number of programs to efficiently manage its cash and working capital including, among other things, programs to carefully manage and reduce inventory levels, centralized purchasing to secure discounts and efficiencies in procurement, and providing additional discounts to U.S. customers for more timely payment of receivables and careful management of accounts payable.
The Company previously estimated that charges related to the implementation of its plan for 2002, 2003 and 2004 would not exceed $160. The Company recorded charges of approximately $104 in 2002 and approximately $31 in 2003 related to the implementation of the stabilization and growth phase of its plan. The Company currently does not expect to record any additional charges during 2004 in connection with its plan. The Company expects that cash payments related to the foregoing charges that it has previously recorded with respect to its plan will be approximately $100 during 2003 and 2004, of which the Company paid approximately $80 in 2003 and approximately $5 in the first quarter of 2004.
The Company developed a new design for its wall displays (which the Company is continuing to refine as part of the implementation of its plan) and began installing them at certain customers' retail stores during 2002, which it continued during 2003 and 2004. While most of the new wall displays were installed during 2002 and 2003, the Company is continuing to install the remainder of the new wall displays during 2004. The Company is also reconfiguring existing wall displays at its retail customers. Accordingly, the Company has accelerated the amortization of its old wall displays. The Company estimates that purchases of wall displays for 2004 will be approximately $50 to $60.
The Company estimates that capital expenditures for 2004 will be approximately $20 to $25. The Company estimates that cash payments related to the restructuring programs referred to in Note 5 to the Unaudited Consolidated Condensed Financial Statements and executive separation costs will be approximately $15 to $22 in 2004.
The Company expects that operating revenues, cash on hand and funds available for borrowing under the Credit Agreement, the Mafco $65 million line of credit, the 2004 Mafco $125 million term loan and other permitted lines of credit will be sufficient to enable the Company to cover its operating expenses, including cash requirements in connection with the Company's operations, the continued
27
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS —(Continued)
(dollars in millions, except per share data)
implementation of, and refinement to, the Company's plan, cash requirements in connection with the Company's restructuring programs referred to above and the Company's debt service requirements for 2004. (See Note 9 to the Unaudited Consolidated Condensed Financial Statements). The U.S. mass-market color cosmetics category during 2003 and the first quarter of 2004 was softer than expected. Despite this softness in the U.S. mass-market color cosmetics category, based upon the Company's belief that its continued implementation of its plan is proving effective, the Company intends to continue to support its plan. To help fund the costs and expenses of the continued implementation of the Company's plan, in July 2003, MacAndrews Holdings agreed to make available to the Company in 2003 the full $65 under the Mafco $65 million line of credit, $25 of which was scheduled to become available on January 1, 2004. Additionally, MacAndrews & Forbes has provided the Company with the 2004 Mafco $125 million term loan, which is on terms that are substantially the same as the Mafco $100 million term loan (the latter of which was fully converted into equity in connection with the Revlon Exchange Transactions). As of May 3, 2004, the Company had drawn $270.0 under the Credit Agreement, none of the Mafco $65 million line of credit and none of the 2004 Mafco $125 million term loan. (See Note 9 to the Unaudited Consolidated Condensed Financial Statements for important information concerning the Mafco $100 million term loan, Mafco $65 million line of credit and the 2004 Mafco $125 million term loan). The Credit Agreement, the Mafco $65 million line of credit and the 2004 Mafco $125 million term loan are intended to continue to help fund the continued implementation of, and refinement to, the Company's plan and to decrease the risk that would otherwise exist if the Company were to fail to meet its debt and ongoing obligations as they become due in 2004 and 2005. However, there can be no assurance that such funds will be sufficient to meet the Company's cash requirements on a consolidated basis. If the Company's anticipated level of revenue growth is not achieved because, for example, of decreased consumer spending in response to weak economic conditions or weakness in the cosmetics category, increased competition from the Company's competitors or the Company's marketing plans are not as successful as anticipated, or if the Company's expenses associated with the continued implementation of, and refinement to, the Company's plan exceed the anticipated level of expenses, the Company's current sources of funds may be insufficient to meet the Company's cash requirements. Additionally, in the event of a decrease in demand for the Company's products or reduced sales or lack of increases in demand and sales as a result of the continued implementation of, and refinement to, the Company's plan, such development, if significant, could reduce the Company's operating revenues and could adversely affect its ability to achieve certain financial covenants under the Credit Agreement and in such event the Company could be required to take measures, including reducing discretionary spending. If the Company is unable to satisfy such cash requirements from these sources, the Company could be required to adopt one or more alternatives, such as delaying the implementation of or revising aspects of its plan, reducing or delaying purchases of wall displays or advertising or promotional expenses, reducing or delaying capital spending, delaying, reducing or revising restructuring programs, restructuring indebtedness, selling assets or operations, seeking additional capital contributions or loans from MacAndrews & Forbes, Revlon, Inc. or other affiliates and/or third parties or reducing other discretionary spending. The Company will have substantial debt maturing in 2005, which will require refinancing, consisting of $309.9 (assuming the maximum amount is borrowed) under the Credit Agreement and $363.0 of 12% Senior Secured Notes, as well as any amounts borrowed under the Mafco $65 million line of credit and the 2004 Mafco $125 million term loan. (See Note 9 to the Unaudited Consolidated Condensed Financial Statements for important information concerning recent amendments to the Credit Agreement). (See Note 11 to the Unaudited Consolidated Condensed Financial Statements).
The Company's EBITDA, as defined in the Credit Agreement, was approximately $144.4 for the four quarters ended December 31, 2003. As a result, the Company would not have been in compliance with the Credit Agreement's EBITDA and leverage ratio covenants, had they been in effect at that time. The Company expects that it will need to seek a further amendment to the Credit Agreement or a waiver of the EBITDA and leverage ratio covenants under the Credit Agreement prior to the expiration of the
28
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS —(Continued)
(dollars in millions, except per share data)
existing waiver on January 31, 2005 because the Company does not expect that its operating results, including after giving effect to various actions under the Company's plan, will allow it to satisfy those covenants for the four consecutive fiscal quarters ending December 31, 2004. The minimum EBITDA required to be maintained by the Company under the Credit Agreement was $230 for each of the four consecutive fiscal quarters ending on December 31, 2003 (which covenant was waived through January 31, 2004 and thereafter eliminated for the four quarters ending March 31, 2004, June 30, 2004 and September 30, 2004) and $250 for any four consecutive fiscal quarters ending December 31, 2004 and thereafter (which covenant was waived through January 31, 2005). The leverage ratio covenant under the Credit Agreement will permit a maximum ratio of 1.10:1.00 for any four consecutive fiscal quarters ending on or after December 31, 2003 (which limit was eliminated for the four quarters ending March 31, 2004, June 30, 2004 and September 30, 2004 and waived through January 31, 2005 for the four fiscal quarters ending December 31, 2004). In addition, after giving effect to the January 2004 Bank Amendment, the Credit Agreement also contains a $20 minimum liquidity covenant. While the Company expects that its bank lenders will consent to such amendment or waiver, there can be no assurance that they will or that they will do so on terms that are favorable to the Company. If the Company is unable to obtain such amendment or waiver, it could be required to refinance the Credit Agreement or repay it with proceeds from the sale of assets or operations, or additional capital contributions and/or loans from MacAndrews & Forbes and Revlon, Inc. or other affiliates and/or third parties. In the event that the Company is unable obtain such a waiver or amendment and it were not able to refinance or repay the Credit Agreement, its inability to meet the financial covenants for the four consecutive fiscal quarters ending December 31, 2004 would constitute an event of default under the Company's Credit Agreement, which would permit the bank lenders to accelerate the Credit Agreement, which in turn would constitute an event of default under the indentures governing the Company's 12% Senior Secured Notes, 9% Senior Notes, 8 1/8% Senior Notes and 8 5/8% Senior Subordinated Notes if the amount accelerated exceeds $25.0 and such default remains uncured within 10 days of notice from the trustee under the applicable indenture. Further, the lenders under the Company's Credit Agreement could proceed against the collateral securing indebtedness under the Credit Agreement. If these lenders were to foreclose upon this collateral, which includes the capital stock of the Company, the value of Revlon Common Stock would be substantially diminished or eliminated. (See "The 2004 Debt Reduction Transactions" above and Note 11 to the Unaudited Consolidated Condensed Financial Statements).
There can be no assurance that the Company would be able to take any of the actions referred to in the preceding two paragraphs because of a variety of commercial or market factors or constraints in the Company's debt instruments, including, for example, the Company's inability to reach agreement with its bank lenders on refinancing terms that are acceptable to the Company before the waiver of its financial covenants expires on January 31, 2005, market conditions being unfavorable for an equity or debt offering, or that the transactions may not be permitted under the terms of the Company's various debt instruments then in effect, because of restrictions on the incurrence of debt, incurrence of liens, asset dispositions and related party transactions. In addition, such actions, if taken, may not enable the Company to satisfy its cash requirements if the actions do not generate a sufficient amount of additional capital.
The terms of the Credit Agreement, the Mafco $65 million line of credit, the 2004 Mafco $125 million term loan, the 12% Senior Secured Notes, the 8 5/8% Senior Subordinated Notes, the 8 1/8% Senior Notes and the 9% Senior Notes generally restrict Products Corporation from paying dividends or making distributions, except that Products Corporation is permitted to pay dividends and make distributions to Revlon, Inc., among other things, to enable Revlon, Inc. to pay expenses incidental to being a public holding company, including, among other things, professional fees such as legal and accounting fees, regulatory fees such as Commission filing fees and other miscellaneous expenses related to being a public holding company and, subject to certain limitations, to pay dividends or make distributions in certain
29
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS —(Continued)
(dollars in millions, except per share data)
circumstances to finance the purchase by Revlon, Inc. of the Revlon Class A Common Stock in connection with the delivery of such Revlon Class A Common Stock to grantees under the Revlon, Inc. Stock Plan.
As a result of the closing of the Revlon Exchange Transactions, as of the end of the day on March 25, 2004, Revlon Inc., Products Corporation and its U.S. subsidiaries were no longer included in the Mafco Group for federal income tax purposes. The Code and the Treasury regulations issued thereunder govern both the calculation of the amount and allocation to the members of the Mafco Group of any CNOLs that will be available to offset the Company's taxable income and the taxable income of its U.S. subsidiaries for the taxable years beginning after March 25, 2004. It is impossible to estimate accurately the amount of CNOLs that will be allocated to the Company as of December 31, 2004 because various factors could increase or decrease or eliminate these amounts. These factors include, but are not limited to, the amount and nature of the income, gains or losses that the other members of the Mafco Group recognize in the 2004 taxable year because any CNOLs are, pursuant to Treasury regulations, used to offset the taxable income of the Mafco Group for the entire consolidated return year ending December 31, 2004. Only the amount of any CNOLs that the Mafco Group does not absorb by December 31, 2004 will be available to be allocated to the Company and its U.S. subsidiaries for the Company's taxable years beginning on March 26, 2004. Subject to the foregoing, it is currently estimated that the Company would have approximately $330 in U.S. federal net operating losses and nil for alternative minimum tax losses available to the Company as of March 25, 2004. Any losses that the Company and its U.S. subsidiaries may generate after March 25, 2004 will be available to the Company for its use and its U.S. subsidiaries' use and will not be available for the use of the Mafco Group. Following the closing of the Revlon Exchange Transactions, Revlon, Inc. became the parent of a new consolidated group for federal income tax purposes and Products Corporation's federal taxable income and loss will be included in such group's consolidated tax returns. Accordingly, Revlon, Inc. and Products Corporation entered into a new tax sharing agreement pursuant to which Products Corporation will be required to pay to Revlon, Inc. amounts equal to the taxes that Products Corporation would otherwise have had to pay if Products Corporation were to file separate federal, state or local income tax returns, limited to the amount, and payable only at such times, as Revlon, Inc. will be required to make payments to the applicable taxing authorities.
As a result of dealing with suppliers and vendors in a number of foreign countries, Products Corporation enters into foreign currency forward exchange contracts and option contracts from time to time to hedge certain cash flows denominated in foreign currencies. There were foreign currency forward exchange contracts with a notional amount of $60.8 outstanding at March 31, 2004. The fair value of foreign currency forward exchange contracts outstanding at March 31, 2004 was $(0.4).
30
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS —(Continued)
(dollars in millions, except per share data)
Disclosures about Contractual Obligations and Commercial Commitments
There have been no material changes (with the exception of the elimination of approximately $804 in debt in conjunction with the Revlon Exchange Transactions) outside the ordinary course of the Company's business to the Company's total contractual cash obligations which are set forth in the table included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. (See Note 9 to the Unaudited Consolidated Condensed Financial Statements). The following table reflects the materially reduced long-term debt obligations after the Revlon Exchange Transactions:
| | | | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period
(dollars in millions) |
Contractual Obligations
As of March 31, 2004 | | Total | | Less than 1 year | | 1-3 years | | 4-5 years | | After 5 years |
| Long-term Debt | | $ | 1,103.6 | | | | Nil | | | $ | 776.6 | | | $ | 327.0 | | | | Nil | |
|
Off-Balance Sheet Transactions
The Company does not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Effect of Proposed Accounting Standard
In April 2003, the FASB announced it will require all companies to expense the fair value of employee equity-based awards. The FASB issued an exposure draft in the first quarter of 2004 that could become effective in 2005. Until a new statement is issued, the provisions of APB Opinion No. 25 and SFAS No. 123 will remain in effect. The Company will evaluate the impact of any new statement regarding employee equity-based awards when a new statement is issued.
31
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS —(Continued)
(dollars in millions, except per share data)
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has exposure to market risk both as a result of changing interest rates and movements in foreign currency exchange rates. The Company's policy is to manage market risk through a combination of fixed and floating rate debt, the use of derivative financial instruments and foreign exchange forward and option contracts. The Company does not hold or issue financial instruments for trading purposes. The qualitative and quantitative information presented in Item 7A of the Company's Annual Report on Form 10-K for the year ended December 31, 2003 ("Item 7A") describes significant aspects of the Company's financial instrument programs that have material market risk as of December 31, 2003. The following table presents the information required by Item 7A as of March 31, 2004:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
Expected maturity date for the year ended December 31, | | | | Fair Value
March 31,
2004 |
| | | 2004 | | 2005 | | 2006 | | 2007 | | 2008 | | Thereafter | | Total | |
| | | (dollars in millions) | |
| Debt | | | | | |
| Short-term variable rate (various currencies) | | $ | 29.8 | | | | | | | | | | | | | | | | | | | | | | | $ | 29.8 | | | $ | 29.8 | |
| Average interest rate (a) | | | 3.4 | % | | | | | | | | | | | | | |
| Long-term fixed rate — third party ($US) | | | | | | $ | 357.1 | | | $ | 191.7 | | | | | | | $ | 327.0 | | | | | | | | 875.8 | | | | 870.7 | |
| Average interest rate | | | | | | | 12.0 | % | | | 8.5 | % | | | | | | | 8.6 | % | | | | | | | | | |
| Long-term variable rate — third party ($US) | | | | | | | 224.4 | * | | | | | | | | | | | | | | | | | | | 224.4 | | | | 224.4 | |
| Average interest rate (a) | | | | | | | 6.7 | % | | | | | | | | | | | | | | | | | | | | | |
| Long-term variable rate — third party (various currencies) | | | | | | | 3.4 | * | | | | | | | | | | | | | | | | | | | 3.4 | | | | 3.4 | |
| Average interest rate (a) | | | | | | | 9.5 | % | | | | | | | | | | | | | | | | | | | | | | | | |
| Total debt | | $ | 29.8 | | | $ | 584.9 | | | $ | 191.7 | | | $ | — | | | $ | 327.0 | | | $ | — | | | $ | 1,133.4 | | | $ | 1,128.3 | |
| | | Average
Contractual
Rate
$/FC | | | | | | | | | | Original
US Dollar
Notional
Amount | | Contract
Value
March 31,
2004 | | Fair Value
March 31,
2004 |
| Forward Contracts | |
| Sell Hong Kong Dollars/Buy USD | | | 0.1287 | | | | | | | | | | | | | | | | | | | $ | 0.2 | | | $ | 0.2 | | | $ | — | |
| Buy Euros/Sell USD | | | 1.2152 | | | | | | | | | | | | | | | | | | | | 4.1 | | | | 4.1 | | | | — | |
| Sell British Pounds/Buy USD | | | 1.7999 | | | | | | | | | | | | | | | | | | | | 6.4 | | | | 6.4 | | | | — | |
| Sell Australian Dollars/Buy USD | | | 0.7531 | | | | | | | | | | | | | | | | | | | | 12.6 | | | | 12.7 | | | | 0.1 | |
| Sell Canadian Dollars/Buy USD | | | 0.7515 | | | | | | | | | | | | | | | | | | | | 20.0 | | | | 19.8 | | | | (0.2 | ) |
| Sell South African Rand/Buy USD | | | 0.1431 | | | | | | | | | | | | | | | | | | | | 6.9 | | | | 6.5 | | | | (0.4 | ) |
| Buy Australian Dollars/Sell New Zealand Dollars | | | 1.1219 | | | | | | | | | | | | | | | | | | | | 4.9 | | | | 5.0 | | | | 0.1 | |
| Buy British Pounds/Sell Euros | | | 0.6737 | | | | | | | | | | | | | | | | | | | | 5.7 | | | | 5.7 | | | | — | |
| Total forward contracts | | | | | | | | | | | | | | | | | | | | | | $ | 60.8 | | | $ | 60.4 | | | $ | (0.4 | ) |
|
| (a) | Weighted average variable rates are based upon implied forward rates from the yield curves at March 31, 2004. |
| * | Represents Products Corporation's Credit Agreement which matures in May 2005. |
32
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS —(Continued)
(dollars in millions, except per share data)
Item 4. Controls and Procedures
(a) Disclosure Controls and Procedures. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the fiscal period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting information required to be disclosed by the Company in the reports it files or submits under the Exchange Act within the time periods specified in the Commission's rules and forms.
(b) Internal Control Over Financial Reporting. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Forward-Looking Statements
This Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, as well as other public documents and statements of the Company, contain forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from those discussed in such forward-looking statements. Such statements include, without limitation, the Company's expectations and estimates (whether qualitative or quantitative) as to:
| | | | | | |
| (i) | | the Company's plans to update its retail presence and improve the marketing effectiveness of its retail wall displays by installing newly-reconfigured wall displays and reconfiguring existing wall displays at its retail customers (and its estimates of the costs of such wall displays, the effects of such plans on the accelerated amortization of existing wall displays and the estimated amount of such amortization); |
| (ii) | | the Company's plans to increase its advertising and media spending and improve the effectiveness of its advertising; |
| (iii) | | the Company's plans to introduce new products and further strengthen its new product development process; |
| (iv) | | the Company's plans to streamline its product assortment and reconfigure product placement on its wall displays and selectively adjust prices on certain of its products; |
| (v) | | the Company's plans to implement comprehensive programs to develop and train its employees; |
| (vi) | | the Company's future financial performance, including the Company's belief that its plan is proving effective and that it has strengthened its organizational capability (and its expectation to do so in 2004) and that it has strengthened its relationships with its key retailers in the U.S.; |
| (vii) | | the effect on sales of political and/or economic conditions, political uncertainties, military actions, terrorist activities, adverse currency fluctuations, competitive activities and category weakness; |
|
33
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS —(Continued)
(dollars in millions, except per share data)
| | | | | | |
| (viii) | | the charges and the cash costs resulting from implementing and refining the Company's plan and the timing of such costs, as well as the Company's expectations as to improved revenues and achieving profitability over the long term as a result of such phase of its plan and the Company's plans to continue to fund brand support; |
| (ix) | | the Company's plans regarding the continued growth momentum and accelerated growth phase of its plan, with the objective of improving its operating profit margins; |
| (x) | | the Company's plans to further improve the new product development and implementation process; |
| (xi) | | the Company's plans to continue to increase the effectiveness and reduce the cost of its display walls; |
| (xii) | | the Company's plans to drive efficiencies across its overall supply chain, including reducing manufactory costs by streamlining components and sourcing strategically; |
| (xiii) | | the Company's plans to optimize the effectiveness of its marketing and promotions and merchandiser coverage; |
| (xiv) | | restructuring activities, restructuring costs, the timing of restructuring payments and annual savings and other benefits from such activities; |
| (xv) | | operating revenues, cash on hand and availability of borrowings under the Mafco $65 million line of credit, the 2004 Mafco $125 million term loan, the Company's Credit Agreement and other permitted lines of credit being sufficient to satisfy the Company's cash requirements in 2004, and the availability of funds from the Company's Credit Agreement, the Mafco $65 million line of credit, the 2004 Mafco $125 million term loan and other permitted lines of credit, restructuring indebtedness, selling assets or operations, capital contributions and/or loans from MacAndrews & Forbes, Revlon, Inc. or other affiliates and/or third parties; |
| (xvi) | | the Company's uses of funds, including amounts required for the payment of operating expenses, including expenses in connection with the continued implementation of, and refinement to, the Company's plan, such as the purchase and reconfiguration of wall displays and increases in advertising and media, capital expenditure requirements, including charges and costs in connection with the ERP System, payments in connection with the Company's restructuring programs and debt service payments, and its estimates of operating expenses, working capital expenses, wall display costs, capital expenditures, restructuring costs and debt service payments (including payments required under Products Corporation's debt instruments); |
| (xvii) | | matters concerning the Company's market-risk sensitive instruments; |
| (xviii) | | the effects of the Company's adoption of certain accounting principles; |
| (xix) | | the Company obtaining a further waiver or amendment of various provisions of its Credit Agreement, including the EBITDA and leverage ratio covenants, or refinancing or repaying such debt before January 31, 2005 in the event such waiver or amendment is not obtained; |
| (xx) | | the Company's plan to refinance certain of its debt and the amounts and timing of such transactions and the estimated impact of such transactions on the Company's financial performance; and |
|
34
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS —(Continued)
(dollars in millions, except per share data)
| | | | | | |
| (xxi) | | the Company's plan to efficiently manage its cash and working capital, including, among other things, by carefully managing and reducing inventory levels, centralizing purchasing to secure discounts and efficiencies in procurement, and providing additional discounts to U.S. customers for more timely payment of receivables and carefully managing accounts payable. |
|
Statements that are not historical facts, including statements about the Company's beliefs and expectations, are forward-looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as "believes," "expects," "estimates," "projects," "forecast," "may," "will," "should," "seeks," "plans," "scheduled to," "anticipates" or "intends" or the negative of those terms, or other variations of those terms or comparable language, or by discussions of strategy or intentions. Forward-looking statements speak only as of the date they are made, and except for the Company's ongoing obligations under the U.S. federal securities laws, the Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Investors are advised, however, to consult any additional disclosures the Company makes in its Quarterly Reports on Form 10-Q filed in 2004 and Current Reports on Form 8-K filed with the Commission in 2004 (which, among other places, can be found on the Commission's website at http://www.sec.gov). The information available from time to time on such website shall not be deemed incorporated by reference into this Quarterly Report on Form 10-Q. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. In addition to factors that may be described in the Company's filings with the Commission, including this filing, the following factors, among others, could cause the Company's actual results to differ materially from those expressed in any forward-looking statements made by the Company:
| | | | | | |
| (i) | | difficulties or delays or unanticipated costs associated with improving the marketing effectiveness of the Company's wall displays; |
| (ii) | | difficulties or delays in, or unanticipated costs associated with, developing and/or presenting the Company's increased advertising programs and/or improving the effectiveness of its advertising; |
| (iii) | | difficulties or delays in, or unanticipated costs associated with, developing and introducing new products or failure of the Company's customers to accept new product offerings and/or in further strengthening the Company's new product development process; |
| (iv) | | difficulties or delays in, or unanticipated costs associated with, implementing the Company's plans to streamline its product assortment and reconfigure product placement on its wall displays and selectively adjust prices on certain of its products; |
| (v) | | difficulties or delays in, or unanticipated costs associated with, implementing comprehensive programs to train the Company's employees; |
| (vi) | | unanticipated circumstances or results affecting the Company's financial performance, including decreased consumer spending in response to weak economic conditions or weakness in the category, changes in consumer preferences, such as reduced consumer demand for the Company's color cosmetics and other current products, and actions by the Company's competitors, including business combinations, technological breakthroughs, new products offerings, promotional spending and marketing and promotional successes, including increases in market share; |
|
35
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS —(Continued)
(dollars in millions, except per share data)
| | | | | | |
| (vii) | | the effects of and changes in political and/or economic conditions, including inflation, monetary conditions, military actions and terrorist activities, and in trade, monetary, fiscal and tax policies in international markets; |
| (viii) | | unanticipated costs or difficulties or delays in completing projects associated with the continued implementation of, and refinement to, the Company's plan or lower than expected revenues or inability to achieve profitability over the long term as a result of such plan; |
| (ix) | | difficulties, delays or unanticipated costs in implementing the Company's plans regarding the accelerated growth phase of its plan, with the objective of improving its operating profit margins; |
| (x) | | difficulties, delays or unanticipated costs in implementing the Company's plans to further improve the new product development and implementation process; |
| (xi) | | difficulties, delays or unanticipated costs in implementing the Company's plans to continue to increase the effectiveness and reduce the cost of its display walls; |
| (xii) | | difficulties, delays or unanticipated costs in implementing the Company's plans to drive efficiencies across its overall supply chain, including reducing manufactory costs by streamlining components and sourcing strategically; |
| (xiii) | | difficulties, delays or unanticipated costs in implementing the Company's plans to optimize the effectiveness of its marketing and promotions or merchandiser coverage; |
| (xiv) | | difficulties, delays or unanticipated costs or less than expected savings and other benefits resulting from the Company's restructuring activities; |
| (xv) | | lower than expected operating revenues, the inability to secure capital contributions or loans from MacAndrews & Forbes, Revlon, Inc. or other affiliates and/or third parties, or the unavailability of funds under the Company's Credit Agreement, the Mafco $65 million line of credit, the 2004 Mafco $125 million term loan or other permitted lines of credit; |
| (xvi) | | higher than expected operating expenses, sales returns, working capital expenses, wall display costs, capital expenditures, restructuring costs or debt service payments; |
| (xvii) | | interest rate or foreign exchange rate changes affecting the Company and its market sensitive financial instruments; |
| (xviii) | | unanticipated effects of the Company's adoption of certain new accounting standards; |
| (xix) | | difficulties, delays or inability to obtain a further waiver or amendment of the EBITDA and leverage ratio covenants under the Credit Agreement or refinancing or repaying such debt on or before January 31, 2005 in the event such waiver or amendment is not obtained; |
| (xx) | | difficulties, delays or the inability of the Company to refinance certain of its debt, including the inability of Revlon, Inc. to issue equity or debt securities, including Revlon Class A Common Stock, for cash or in exchange for indebtedness of the Company and difficulties, delays or the inability of the Company to consummate the remaining Debt Reduction Transactions and to secure any required Board, stockholder, lender or regulatory approvals; and |
| (xxi) | | difficulties, delays or the inability of the Company to efficiently manage its cash and working capital. |
|
36
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS —(Continued)
(dollars in millions, except per share data)
Factors other than those listed above could also cause the Company's results to differ materially from expected results. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.
Website Availability of Reports and Other Corporate Governance Information
In January 2004, Revlon, Inc., which owns 100% of the Company's common stock, adopted a comprehensive corporate governance program, including Corporate Governance Guidelines for Revlon, Inc.'s Board of Directors, Board Guidelines for Assessing Director Independence and new charters for Revlon, Inc.'s Audit and Compensation Committees. Revlon, Inc. maintains a corporate investor relations website, www.revloninc.com, where its stockholders and other interested persons may review, among other things, Revlon, Inc.'s corporate governance materials and certain SEC filings (such as Revlon, Inc.'s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, annual reports, Section 16 reports reflecting certain changes in the stock ownership of Revlon, Inc.'s directors and Section 16 executive officers, and certain other documents filed with the Commission), each of which are generally available on such site on the same business day as the filing date with the Commission. In addition, under the section of the website entitled, "Corporate Governance," Revlon, Inc. posts the latest versions of its Corporate Governance Guidelines, Board Guidelines for Assessing Director Independence, charters for Revlon, Inc.'s Audit Committee, Nominating Committee and Compensation Committee, as well as Revlon, Inc.'s Code of Business Conduct, which includes its Code of Ethics for Senior Financial Officers, each of which Revlon, Inc. will provide in print, without charge, upon written request to Robert K. Kretzman, Executive Vice President and Chief Legal Officer, Revlon, Inc., 237 Park Avenue, New York NY, 10017.
37
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS —(Continued)
(dollars in millions, except per share data)
PART II — OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.
Recent Sales of Unregistered Securities
As described above, on March 25, 2004, Revlon, Inc. consummated the Revlon Exchange Transactions. Following the consummation of these transactions, Revlon, Inc. held approximately $133.8 principal amount of the 8 1/8% Senior Notes, approximately $174.5 principal amount of the 9% Senior Notes and approximately $322.9 principal amount of the 8 5/8% Senior Subordinated Notes. Additionally, Revlon, Inc. also held approximately $109.7 of existing indebtedness (including principal and accrued interest) under the Mafco $100 million term loan, approximately $38.9 of existing indebtedness (including principal and accrued interest) under the 2004 Mafco $125 million term loan and approximately $24.1 of indebtedness under certain subordinated promissory notes. On April 1, 2004, Revlon, Inc. exchanged all of such notes and indebtedness for an aggregate of 4,260 shares of the Company's common stock. The issuance was conducted pursuant to Section 4(2) of the Securities Act of 1933, as amended.
Item 4. Submission of Matters to a Vote of Security Holders –
On March 25, 2004, Revlon, Inc., Products Corporation's sole stockholder, executed a written consent in lieu of a special meeting approving an amendment to Products Corporation's Certificate of Incorporation increasing the number of authorized shares of its common stock from 1,000 to 10,000.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
| | | | | | |
| 3.1 | | Restated Certificate of Incorporation of Products Corporation dated May 13, 2004. Filed herewith. |
| 10.25 | | Tax Sharing Agreement, dated as of March 26, 2004, by and among Revlon, Inc., Products Corporation and certain subsidiaries of Products Corporation. Filed herewith. |
| 31.1 | | Section 302 CEO certification. Filed herewith. |
| 31.2 | | Section 302 CFO certification. Filed herewith. |
| 32.1 | | Section 906 CEO certification. Furnished herewith. |
| 32.2 | | Section 906 CFO certification. Furnished herewith. |
|
(b) Reports on Form 8-K
On January 29, 2004, the Company filed with the Commission a current report on Form 8-K disclosing under Item 5, "Other Events and Regulation FD Disclosure" a press release announcing the January 2004 amendment of the Company's Credit Agreement which included copies of its Third Amendment and Second Waiver Agreement dated as of January 28, 2004 to its Credit Agreement and its $125 Million Senior Unsecured Multiple-Draw Term Loan Agreement dated as of January 28, 2004 with MacAndrews Holdings.
On April 19, 2004, the Company filed with the Commission a current report on Form 8-K disclosing under Item 9, "Regulation FD Disclosure" the Company's press release announcing the commencement by the Company of cash tender offers to purchase any and all of its outstanding 12% Senior Secured Notes, 8 1/8% Senior Notes and 9% Senior Notes.
38
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS —(Continued)
(dollars in millions, except per share data)
On April 29, 2004, the Company filed with the Commission a current report on Form 8-K disclosing under Item 5, "Other Events and Regulation FD Disclosure" a press release announcing the Company's intent to conduct a private placement of $400 in aggregate principal amount of senior unsecured notes due 2011. The press release also announced that the Company expected to enter into a new amended and restated credit agreement, to replace its existing Credit Agreement.
On April 29, 2004, the Company filed with the Commission a current report on Form 8-K disclosing under Item 12, "Results of Operation and Financial Condition" Revlon, Inc.'s press release announcing its earnings for the fiscal quarter ended March 31, 2004.
On April 30, 2004, the Company filed with the Commission a current report on Form 8-K disclosing under Item 5, "Other Events and Regulation FD Disclosure" a press release announcing that approximately 97% of the total issued and outstanding principal amount of Products Corporation's 12% Senior Secured Notes had been tendered in connection with Products Corporation's tender offer and consent solicitation commenced on April 16, 2004 and announcing the termination of withdrawal rights and the extension of the period to receive the consent payment through May 14, 2004 at 5:00 p.m. EDT.
On April 30, 2004, the Company filed with the Commission a current report on Form 8-K disclosing under Item 9, "Regulation FD Disclosure" certain financial and other information that the Company provided to certain institutions.
On May 3, 2004, the Company filed with the Commission a current report on Form 8-K disclosing under Item 9, "Regulation FD Disclosure" certain financial and other information that the Company provided to certain institutions.
39
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: May 17, 2004
REVLON CONSUMER PRODUCTS CORPORATION
Registrant
| | | | | | | | | | |
| By:/s/ Thomas E. McGuire | | | | | | By:/s/ John F. Matsen, Jr. |
| Thomas E. McGuire | | | | | | John F. Matsen, Jr. |
| Executive Vice President | | | | | | Senior Vice President and |
| and Chief Financial Officer | | | | | | Corporate Controller |
|
40
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