SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__________________ to _______________
Commission file number 333-23451
REV HOLDINGS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3933701
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 MADISON AVENUE, NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212-527-4000
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 __
The number of shares outstanding of the registrant's common stock was 1,000
shares as of June 30, 2001, all of which were held by an affiliate of Mafco
Holdings Inc.
Total Pages - 21
REV HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in millions, except per share data)
JUNE 30, DECEMBER 31,
ASSETS 2001 2000
--------------- ---------------
Current assets: (Unaudited)
Cash and cash equivalents............................................. $ 34.4 $ 56.3
Trade receivables, less allowances of $15.3
and $16.1, respectively......................................... 205.7 220.3
Inventories........................................................... 188.3 184.7
Prepaid expenses and other............................................ 40.7 66.1
--------------- ---------------
Total current assets............................................ 469.1 527.4
Property, plant and equipment, net.......................................... 190.5 221.7
Other assets................................................................ 157.1 147.2
Intangible assets, net...................................................... 202.4 206.1
--------------- ---------------
Total assets.................................................... $ 1,019.1 $ 1,102.4
=============== ===============
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current liabilities:
Short-term borrowings - third parties................................. $ 30.0 $ 30.7
Current portion of long-term debt - third parties..................... 403.1 753.6
Accounts payable...................................................... 105.2 86.3
Accrued expenses and other............................................ 296.6 309.9
--------------- ---------------
Total current liabilities....................................... 834.9 1,180.5
Long-term debt - third parties.............................................. 1,229.9 1,539.0
Long-term debt - affiliates................................................. 24.1 24.1
Other long-term liabilities................................................. 220.7 222.1
Stockholder's deficiency:
Common Stock, par value $1.00 per share; 1,000
shares authorized, issued and outstanding....................... - -
Additional paid-in-capital (capital deficiency)....................... 290.7 (408.8)
Accumulated deficit since June 24, 1992............................... (1,548.4) (1,424.7)
Accumulated other comprehensive loss.................................. (32.8) (29.8)
--------------- ---------------
Total stockholder's deficiency.................................. (1,290.5) (1,863.3)
--------------- ---------------
Total liabilities and stockholder's deficiency.................. $ 1,019.1 $ 1,102.4
=============== ===============
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
2
REV HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(dollars in millions)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
-------------------------- ------------------------
2001 2000 2001 2000
--------- ---------- --------- ---------
Net sales............................................... $ 336.7 $ 339.3 $ 660.0 $ 788.1
Cost of sales........................................... 142.7 129.5 274.1 304.7
--------- --------- --------- --------
Gross profit....................................... 194.0 209.8 385.9 483.4
Selling, general and administrative expenses............ 198.0 187.5 385.2 440.5
Restructuring costs..................................... 7.9 5.1 22.5 14.6
--------- --------- --------- --------
Operating (loss) income............................ (11.9) 17.2 (21.8) 28.3
--------- --------- --------- --------
Other expenses (income):
Interest expense................................... 39.1 52.6 90.0 109.8
Interest income.................................... (0.6) (0.4) (1.5) (0.8)
Amortization of debt issuance costs................ 1.2 1.9 3.9 5.3
Foreign currency losses (gains), net............... 0.2 2.6 (0.2) 2.1
Loss (gain) on sale of product line and brand, net. 7.1 3.2 7.1 (3.0)
Gain on sale of subsidiary stock................... - (1.1) - (1.1)
Miscellaneous, net................................. - 0.4 0.8 0.9
--------- --------- -------- ---------
Other expenses, net........................... 47.0 59.2 100.1 113.2
--------- --------- -------- ---------
Loss before income taxes................................ (58.9) (42.0) (121.9) (84.9)
Provision for income taxes.............................. 1.2 1.1 1.8 4.8
--------- --------- --------- --------
Net loss................................................ $ (60.1) $ (43.1) $ (123.7) $ (89.7)
========= ========= ========= ========
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
3
REV HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDER'S DEFICIENCY
AND COMPREHENSIVE LOSS
(DOLLARS IN MILLIONS)
ADDITIONAL ACCUMULATED
PAID-IN-CAPITAL OTHER TOTAL
(CAPITAL ACCUMULATED COMPREHENSIVE STOCKHOLDER'S
DEFICIENCY) DEFICIT LOSS (a) DEFICIENCY
------------ ------------- ------------------ --------------
Balance, January 1, 2000................................... $ (408.8) $ (1,214.1) $ (68.1) $ (1,691.0)
Comprehensive loss:
Net loss...................................... (89.7) (89.7)
Currency translation adjustment............... 38.4 (b) 38.4
----------
Total comprehensive loss.............................. (51.3)
-------- ---------- -------- ----------
Balance, June 30, 2000..................................... $ (408.8) $ (1,303.8) $ (29.7) $ (1,742.3)
======== ========== ======== ==========
Balance, January 1, 2001................................... $ (408.8) $ (1,424.7) $ (29.8) $ (1,863.3)
Capital contribution from indirect parent............. 699.5 (c) 699.5
Comprehensive loss:
Net loss...................................... (123.7) (123.7)
Currency translation adjustment............... (3.6)(b) (3.6)
Revaluation of forward currency contracts..... 0.6 0.6
----------
Total comprehensive loss.............................. (126.7)
-------- ---------- -------- ----------
Balance, June 30, 2001..................................... $ 290.7 $ (1,548.4) $ (32.8) $ (1,290.5)
======== ========== ======== ==========
- --------------------
(a) Accumulated other comprehensive loss includes revaluations of forward
currency contracts of $0.6 as of June 30, 2001, unrealized losses on
marketable securities of $3.8 as of June 30, 2000, cumulative net
translation losses of $29.8 and $21.0 as of June 30, 2001 and 2000,
respectively, and adjustments for the minimum pension liability of $3.6
and $4.9 as of June 30, 2001 and 2000, respectively.
(b) The currency translation adjustment as of June 30, 2001 and June 30,
2000 includes a reclassification adjustment of $7.1 and $48.3,
respectively, for realized losses on foreign currency adjustments
associated primarily with the sale of the Colorama brand in Brazil and
the Company's worldwide professional products line.
(c) Represents primarily capital contributions from indirect parent to
cancel REV Holdings Senior Secured Discount Notes due 2001 (the "Old REV
Holdings Notes").
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
4
REV HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
SIX MONTHS ENDED
JUNE 30,
-------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 2001 2000
------------- --------------
Net loss........................................................................ $ (123.7) $ (89.7)
Adjustments to reconcile net loss to net cash
(used for) provided by operating activities:
Depreciation and amortization.............................................. 62.4 63.6
Loss (gain) on sale of product line and brand, net......................... 7.1 (3.0)
Amortization of debt discount.............................................. 15.7 36.5
Gain on sale of subsidiary stock........................................... - (1.1)
Change in assets and liabilities, net of acquisitions and dispositions:
Decrease in trade receivables......................................... 6.0 25.0
(Increase) decrease in inventories.................................... (7.5) 7.6
(Increase) decrease in prepaid expenses and
other current assets..................................... (4.7) 9.5
Increase (decrease) in accounts payable............................... 20.5 (18.3)
Decrease in accrued expenses and other
current liabilities...................................... (4.6) (103.4)
Purchase of permanent displays........................................ (29.3) (26.8)
Other, net............................................................ (3.2) (0.1)
--------- ------
Net cash used for operating activities.......................................... (61.3) (100.2)
--------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................ (9.4) (6.1)
Acquisition of technology right................................................. - (3.0)
Net proceeds from the sale of product line, brand and certain assets............ 35.2 339.6
--------- ------
Net cash provided by investing activities....................................... 25.8 330.5
--------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings - third parties........................... 0.3 2.7
Proceeds from the issuance of long-term debt - third parties.................... 157.5 231.2
Repayment of long-term debt - third parties..................................... (161.1) (449.8)
Capital contribution from indirect parent....................................... 22.0 -
Payment of debt issuance costs.................................................. (2.4) -
--------- ------
Net cash provided by (used for) financing activities............................ 16.3 (215.9)
--------- ------
Effect of exchange rate changes on cash and cash equivalents.................... (2.7) (1.7)
--------- ------
Net (decrease) increase in cash and cash equivalents....................... (21.9) 12.7
Cash and cash equivalents at beginning of period........................... 56.3 25.4
--------- ------
Cash and cash equivalents at end of period................................. $ 34.4 $ 38.1
========= ======
Supplemental schedule of cash flow information:
Cash paid (received) during the period for:
Interest.............................................................. $ 68.4 $ 73.0
Income taxes, net of refunds.......................................... 2.2 2.4
Supplemental schedule of noncash financing activities:
Noncash capital contributions from indirect parent to cancel the Old
REV Holdings Notes and pursuant to the amended tax sharing agreement.. $ 677.5 $ -
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
5
REV HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(1) BASIS OF PRESENTATION
REV Holdings Inc. (together with its subsidiaries, "REV Holdings" or
the "Company") is a holding company, formed in 1997, that conducts its business
exclusively through its indirect subsidiary, Revlon Consumer Products
Corporation and its subsidiaries (together, "Products Corporation"). Products
Corporation was formed in April 1992 and, on June 24, 1992, succeeded to the
assets and liabilities of the cosmetic and skin care, fragrances and personal
care products business of its then parent company, whose name was changed from
Revlon, Inc. to Revlon Holdings Inc. ("Holdings"). REV Holdings has had no
business operations of its own and its only material asset is its ownership of
approximately 83% of the outstanding shares of capital stock of Revlon, Inc.
(which represents approximately 97.3% of the voting power of those outstanding
shares), which, in turn, owns all of the capital stock of Products Corporation.
The Company is an indirect wholly owned subsidiary of Holdings and an indirect
wholly owned subsidiary of MacAndrews & Forbes Holdings Inc. ("MacAndrews
Holdings"), a corporation wholly owned indirectly through Mafco Holdings Inc.
("Mafco Holdings" and, together with MacAndrews Holdings, "MacAndrews & Forbes")
by Ronald O. Perelman.
The accompanying Consolidated Condensed Financial Statements are
unaudited. In management's opinion, all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation have been made.
The Unaudited Consolidated Condensed Financial Statements include the
accounts of the Company after elimination of all material intercompany balances
and transactions. The Company has made a number of estimates and assumptions
relating to the assets and liabilities, the disclosure of contingent assets and
liabilities and the reporting of revenues and expenses to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates. The Unaudited
Consolidated Condensed Financial Statements should be read in conjunction with
the consolidated financial statements and related notes contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
The results of operations and financial position, including working
capital, for interim periods are not necessarily indicative of those to be
expected for a full year.
Prior to January 1, 2001, advertising and promotion expenses estimated
for a full year were charged to earnings for interim reporting purposes in
proportion to the relationship that net sales for such period bore to estimated
full year net sales. As a result, for the first half of 2000, disbursements and
commitments for advertising and promotion exceeded advertising and promotion
expenses by $31.2 and such amount was deferred. Effective January 1, 2001, the
Company recognizes advertising and promotional expenses during the quarter in
which they are incurred.
In May 2000, the FASB Emerging Issues Task Force (the "EITF") reached a
consensus EITF 00-14 entitled, "Accounting for Certain Sales Incentives" (the
"Guidelines"), which addresses when sales incentives and discounts should be
recognized, as well as where the related revenues and expenses should be
classified in the financial statements. The Company has adopted these new
Guidelines effective January 1, 2001, and accordingly the accompanying Unaudited
Consolidated Condensed Financial Statements reflect the implementation of the
EITF Guidelines for all periods presented.
On January 1, 2001, the Company adopted SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended. The standard
requires the recognition of all derivative instruments on the balance sheet as
either assets or liabilities measured at fair value. Changes in fair value are
recognized immediately in earnings unless the derivatives qualify as hedges of
future cash flows. For derivatives qualifying as hedges of future cash flows,
the effective portion of changes in fair value is recorded as a
6
REV HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
component of Other Comprehensive Income and recognized in earnings when the
hedged transaction is recognized in earnings. Any ineffective portion
(representing the extent that the change in fair value of the hedges does not
completely offset the change in the anticipated net payments being hedged) is
recognized in earnings as it occurs. There was no cumulative effect recognized
for adopting this accounting change.
The Company formally designates and documents each financial instrument
as a hedge of a specific underlying exposure as well as the risk management
objectives and strategies for entering into the hedge transaction upon
inception. The Company also formally assesses upon inception and quarterly
thereafter whether the financial instruments used in hedging transactions are
effective in offsetting changes in the fair value or cash flows of the hedged
items.
The Company uses derivative financial instruments, primarily forward
foreign exchange contracts, to reduce the exposure of adverse effects of
fluctuating foreign currency exchange rates. These contracts, which have been
designated as cash flow hedges, were entered into primarily to hedge anticipated
inventory purchases and certain intercompany payments denominated in foreign
currencies, which have maturities of less than one year. The unrecognized income
(loss) on the revaluation of forward currency contracts will be recognized in
earnings by December 31, 2001. The Company has entered into these contracts with
a counterparty that is a major financial institution, and accordingly the
Company believes that the risk of counterparty nonperformance is remote.
In accordance with the provisions of the statement, the Company
recorded an asset of $0.6 on the balance sheet and a credit of $0.6 in Other
Comprehensive Loss for the fair value effects of the foreign currency forward
exchange contracts outstanding at June 30, 2001. The amount of the hedges'
ineffectiveness as of June 30, 2001 recorded in the Unaudited Consolidated
Condensed Statements of Operations was not significant.
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year's presentation.
(2) INVENTORIES
JUNE 30, DECEMBER 31,
2001 2000
-------------- -------------
Raw materials and supplies.... $ 61.5 $ 56.2
Work-in-process............... 12.8 9.4
Finished goods................ 114.0 119.1
-------------- -------------
$ 188.3 $ 184.7
============== =============
(3) RESTRUCTURING COSTS, NET
In the fourth quarter of 1999, the Company began a new restructuring
program principally for additional employee severance and other personnel
benefits and to restructure certain operations outside the United States,
including certain operations in Japan (the "1999 Restructuring Plan"). In the
first quarter of 2000, the Company recorded a charge of $9.5 relating to the
1999 Restructuring Plan. The Company continued to implement the 1999
Restructuring Plan during the second quarter of 2000 during which it recorded a
charge of $5.1.
During the third quarter of 2000, the Company continued to re-evaluate
its organizational structure. As part of this re-evaluation, the Company
developed a new restructuring plan designed to
7
REV HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
improve profitability by reducing personnel and consolidating manufacturing
facilities (the "2000 Restructuring Plan"). The 2000 Restructuring Plan focused
on the Company's plans to close its manufacturing operations in Phoenix, Arizona
and Mississauga, Canada and to consolidate its cosmetics production into its
plant in Oxford, North Carolina. The 2000 Restructuring Plan also includes the
remaining obligation for excess leased real estate in the Company's
headquarters, consolidation costs associated with the Company closing its
facility in New Zealand, and the elimination of several domestic and
international executive and operational positions, both of which were effected
to reduce and streamline corporate overhead costs. In the first quarter of 2001,
the Company recorded a charge of $14.6 related to the 2000 Restructuring Plan,
principally for additional employee severance and other personnel benefits and
to consolidate worldwide operations. In the second quarter of 2001, the Company
continued to implement the 2000 Restructuring Plan and recorded a charge of
$7.9, principally for additional employee severance and other personnel benefits
and other costs related to the consolidation of worldwide operations.
In connection with the 1999 Restructuring Plan and the 2000
Restructuring Plan, 403 employees and 1,930 employees, respectively, were
included in the Company's restructuring charges. Of the 1,930 employees for whom
severance and other personnel benefits were included in the 2000 Restructuring
Plan, the Company had terminated 1,186 employees by June 30, 2001. Substantially
all the employees from the 1999 Restructuring Plan have been terminated as of
June 30, 2001.
Details of the activity described above during the six month period
ended June 30, 2001, are as follows:
BALANCE
AS OF UTILIZED, NET BALANCE
------------------------- AS OF
1/1/01 EXPENSES, NET CASH NONCASH 6/30/01
----------- ----------------- ------------ --------- ----------
Employee severance and other
personnel benefits........................ $ 28.6 $ 19.0 $ (24.2) $ - $ 23.4
Factory, warehouse, office
and other costs............................ 7.4 3.5 (2.4) (1.4) 7.1
------ ------- -------- ------ -----
$ 36.0 $ 22.5 $ (26.6) $ (1.4) $ 30.5
===== ====== ======= ====== =====
(4) GEOGRAPHIC INFORMATION
The Company manages its business on the basis of one reportable
operating segment. 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 and
liabilities are affected by fluctuations in foreign currency exchange rates. The
Company's operations in Brazil have accounted for approximately 3.4% and 4.7% of
the Company's net sales for the second quarter of 2001 and 2000, respectively
and for approximately 4.3% and 4.5% of the Company's net sales for the first
half of 2001 and 2000, respectively. While the Company's operations in Brazil
have historically been significant, as a result of the sale of the Colorama
brand in Brazil in July 2001, the Company's ongoing operations in Brazil are no
longer significant to the Company's consolidated ongoing operations. (See Note
7).
During the first quarter of 2001, to reflect the integration of
management reporting responsibilities, the Company reclassified Canada's results
from its international operations to its United States operations. The
geographic information reflects this change for both the 2001 and 2000 periods.
8
REV HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
GEOGRAPHIC AREAS: THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------------- ---------------------------------
Net sales: 2001 2000 2001 2000
-------------- ------------- -------------- -------------
United States........................ $ 215.5 $ 199.0 $ 423.0 $ 456.3
Canada............................... 11.8 14.2 22.7 25.8
----------- ----------- -------- --------
United States and Canada............. 227.3 213.2 445.7 482.1
International........................ 109.4 126.1 214.3 306.0
----------- ----------- -------- --------
$ 336.7 $ 339.3 $ 660.0 $ 788.1
=========== =========== ======== ========
JUNE 30, DECEMBER 31,
Long-lived assets: 2001 2000
----------- -----------
United States........................ $ 384.4 $ 399.7
Canada............................... 6.7 8.1
----------- -----------
United States and Canada............. 391.1 407.8
International........................ 158.9 167.2
----------- -----------
$ 550.0 $ 575.0
=========== ===========
CLASSES OF SIMILAR PRODUCTS: THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------------- ---------------------------------
Net sales: 2001 2000 2001 2000
-------------- ------------- -------------- -------------
Cosmetics, skin care and fragrances.. $ 208.0 $ 225.2 $ 421.6 $ 479.5
Personal care and professional....... 128.7 114.1 238.4 308.6
-------------- ------------- -------------- -------------
$ 336.7 $ 339.3 $ 660.0 $ 788.1
============== ============= ============== =============
(5) LONG-TERM DEBT
On February 12, 2001, REV Holdings issued $80.5 principal amount of its
12% Senior Secured Notes due 2004 (the "New REV Holding Notes"), which were
issued in exchange for a like principal amount of the Old REV Holdings Notes.
The New REV Holdings Notes bear interest at 12% per year, payable semi-annually,
and mature on February 1, 2004. On March 15, 2001, an affiliate contributed
$667.5 principal amount of Old REV Holdings Notes to REV Holdings, which were
delivered to the trustee for cancellation and contributed $22.0 in cash to REV
Holdings to retire the remaining Old REV Holdings Notes at maturity. Upon
cancellation, the indenture governing the Old REV Holdings Notes was discharged.
(6) ASSET SALES
In April 2001, Products Corporation sold land in Minami Aoyama near
Tokyo, Japan and related rights for the construction of a building on such land
(the "Aoyama Property") for approximately $28. In connection with such
disposition the Company recognized a pre-tax and after-tax loss of $0.8 during
the second quarter of 2001.
In May 2001, Products Corporation sold its Phoenix facility for
approximately $7 and leased it back for a certain period of time. After
recognition of accelerated depreciation in the first quarter of 2001, the
Company recorded a loss on the sale of $3.7 in the second quarter of 2001.
9
REV HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(7) SUBSEQUENT EVENTS
In July 2001, Products Corporation completed the disposition of the
Colorama brand of cosmetics and hair care products as well as Products
Corporation's manufacturing facility located in Sao Paulo, Brazil for
approximately $56. Products Corporation used $22 of the net proceeds after
transaction costs and retained liabilities to permanently reduce commitments
under the Credit Agreement (as hereinafter defined). In connection with such
disposition the Company recognized a pre-tax and after-tax loss of $6.3 during
the second quarter of 2001.
In July 2001, Products Corporation completed the disposition of its
subsidiary that owned and operated its manufacturing facility in Maesteg, Wales,
UK, including all production equipment. Products Corporation will receive
approximately $20.0, $10.0 was received on the closing date and $10.0 is to be
received over a six year period a portion of which is contingent upon certain
future events. The Company does not expect to recognize a material loss on this
transaction.
On August 1, 2001, GSB Investments Corp. made a non-interest bearing
advance of $4.5 to REV Holdings under the Keepwell Agreement (as hereinafter
defined), which was used to make the August 1, 2001 interest payment on the New
REV Holdings Notes.
10
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
OVERVIEW
The Company operates in a single segment and manufactures, markets and
sells an extensive array of cosmetics and skin care, fragrances and personal
care products. In addition, the Company has a licensing group.
On March 30, 2000 and May 8, 2000, Products Corporation completed the
dispositions of its worldwide professional products line and Plusbelle brand in
Argentina, respectively. Accordingly, the Unaudited Consolidated Condensed
Financial Statements include the results of operations of the professional
products line and Plusbelle brand through the dates of their respective
dispositions.
During the first quarter of 2001, to reflect the integration of
management reporting responsibilities, the Company reclassified Canada's results
from its international operations to its United States operations. Management's
discussion and analysis data reflects this change for both the 2001 and 2000
periods.
RESULTS OF OPERATIONS
Net sales
Net sales were $336.7 and $339.3 for the second quarters of 2001 and
2000, respectively, a decrease of $2.6, or 0.8% on a reported basis (an increase
of 2.0% on a constant U.S. dollar basis), and were $660.0 and $788.1 for the
first half of 2001 and 2000, respectively, a decrease of $128.1, or 16.3% on a
reported basis (a decrease of 13.4% on a constant U.S. dollar basis). The
decline in consolidated net sales for the first half of 2001 as compared with
the first half of 2000 is primarily due to the sale of the worldwide
professional products line and the Plusbelle brand in Argentina in the first and
second quarters of 2000, respectively.
Net sales, excluding the worldwide professional products line, the
Plusbelle brand in Argentina, and the Colorama brand in Brazil, which was
disposed of in July of 2001, were $330.4 and $325.1 for the second quarter of
2001 and 2000, respectively, an increase of $5.3, or 1.6% on a reported basis
(an increase of 4.1% on a constant U.S. dollar basis), and were $643.9 and
$668.2 for the first half of 2001 and 2000, respectively, a decrease of $24.3,
or 3.6% on a reported basis (a decrease of 1.1% on a constant U.S. dollar
basis).
United States and Canada. Net sales in the United States and Canada
were $227.3 for the second quarter of 2001 compared with $213.2 for the second
quarter of 2000, an increase of $14.1, or 6.6%, and were $445.7 and $482.1 for
the first half of 2001 and 2000, respectively, a decrease of $36.4, or 7.6%. Net
sales in the United States and Canada, excluding the United States and Canada
portion of the worldwide professional products business, were $227.3 for the
second quarter of 2001 compared with $213.2 for the second quarter of 2000, an
increase of $14.1, or 6.6%, and were $445.7 and $446.3 for the first half of
2001 and 2000, respectively. The increase in the second quarter of 2001 as
compared to the second quarter of 2000 was primarily due to higher sales volume
as a result of new product launches.
International. Net sales in the Company's international operations were
$109.4 for the second quarter of 2001 compared with $126.1 for the second
quarter of 2000, a decrease of $16.7, or 13.2% on a reported basis (a decrease
of 6.6% on a constant U.S. dollar basis), and were $214.3 for the first half of
2001 compared with $306.0 for the first half of 2000, a decrease of $91.7, or
30.0% on a reported basis (a decrease of 23.6% on a constant U.S. dollar basis).
The decrease for the second quarter of 2001 as compared to the second quarter of
2000 is primarily due to the sale of the Plusbelle brand in Argentina in the
second quarter of 2000, and competitive activities in certain markets outside
the United States and Canada and the decrease in the first half of 2001 as
compared to the first half of 2000 was primarily due to the sale of the
worldwide professional products line and the Plusbelle brand in Argentina in the
first and second quarters of 2000, respectively, and competitive activities in
certain markets.
11
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
The following information excludes the net sales of the worldwide
professional products line, Plusbelle brand in Argentina and the Colorama brand
in Brazil. Net sales outside the United States and Canada were $103.1 for the
second quarter of 2001 compared with $111.9 for the second quarter of 2000, a
decrease of $8.8, or 7.9%, on a reported basis (a decrease of 1.6% on a constant
U.S. dollar basis), and were $198.2 for the first half of 2001 compared with
$221.9 for the first half of 2000, a decrease of $23.7, or 10.7%, on a reported
basis (a decrease of 3.7% on a constant U.S. dollar basis). The decrease in net
sales for the second quarter and first half of 2001 on a reported basis reflects
the unfavorable effect on sales of a stronger U.S. dollar against certain
foreign currencies. The decrease in net sales for the second quarter and first
half of 2001 on a constant U.S. dollar basis is primarily due to increased
competitive activity in certain markets outside the United States and Canada.
Sales outside the United States and Canada are divided by the Company into three
geographic regions. In Europe and Africa, which comprises Europe, the Middle
East and Africa, net sales decreased by 11.1% on a reported basis to $40.8 for
the second quarter of 2001 as compared with the second quarter of 2000 (a
decrease of 3.7% on a constant U.S. dollar basis) and decreased by 12.1% on a
reported basis to $79.9 for the first half of 2001 as compared with the first
half of 2000 (a decrease of 3.6% on a constant U.S. dollar basis). In Latin
America, which comprises Mexico, Central America, South America and Puerto Rico,
net sales decreased by 1.4% on a reported basis to $35.2 for the second quarter
of 2001 as compared with the second quarter of 2000 (an increase of 1.7% on a
constant U.S. dollar basis) and decreased by 1.3% on a reported basis to $66.4
for the first half of 2001 as compared with the first half of 2000 (an increase
of 2.4% on a constant U.S. dollar basis). In the Far East, net sales decreased
by 10.6% on a reported basis to $27.1 for the second quarter of 2001 as compared
with the second quarter of 2000 (a decrease of 2.5% on a constant U.S. dollar
basis) and decreased by 18.5% on a reported basis to $51.9 for the first half of
2001 as compared with the first half of 2000 (a decrease of 10.7% on a constant
U.S. dollar basis). Net sales in the Company's international operations may be
adversely affected by weak economic conditions, political and economic
uncertainties, adverse currency fluctuations, and competitive activities.
Cost of sales
As a percentage of net sales, cost of sales was 42.4% for the second
quarter of 2001 compared with 38.2% for the second quarter of 2000 and 41.5% for
the first half of 2001 compared with 38.7% for the first half of 2000. Excluding
the worldwide professional products line, the Plusbelle brand in Argentina and
the Colorama brand in Brazil and excluding $18.4 and $24.8 of additional
consolidation costs associated with the shutdown of the Phoenix and Canada
facilities in the second quarter and first half of 2001, respectively, which are
reflected in reported cost of sales, cost of sales as a percentage of net sales
was 36.5% for the second quarter of 2001 compared with 37.5% for the second
quarter of 2000 and 37.3% for the first half of 2001 compared with 37.7% for the
first half of 2000. The reduction in cost of sales as a percentage of net sales
for the second quarter and first half of 2001 as compared to the comparable 2000
periods is primarily due to lower sales return rates which benefited net sales
in the 2001 period, offset in part by higher promotional activity.
SG&A expenses
SG&A expenses were $198.0 for the second quarter of 2001 compared with
$187.5 for the second quarter of 2000 and $385.2 for the first half of 2001
compared with $440.5 for the first half of 2000. Excluding the worldwide
professional products line, the Plusbelle brand in Argentina and the Colorama
brand in Brazil and $4.0 and $5.7 of additional consolidation costs associated
with the shutdown of the Phoenix and Canada facilities in the second quarter and
first half of 2001, respectively, which are reflected in reported SG&A expenses,
SG&A expenses were $190.8 for the second quarter of 2001 compared with $180.9
for the second quarter of 2000 and $372.8 for the first half of 2001 compared
with $377.5 for the first half of 2000. The increase in SG&A expenses for the
second quarter of 2001 as compared to the second quarter of 2000 is due
primarily to increased spending on brand support, partially offset by the
reduction of departmental general and administrative expenses as a result of the
Company's restructuring efforts.
12
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
Restructuring costs
In the fourth quarter of 1999, the Company began a new restructuring
program principally for additional employee severance and other personnel
benefits and to restructure certain operations outside the United States,
including certain operations in Japan (the "1999 Restructuring Plan"). In the
first quarter of 2000, the Company recorded a charge of $9.5 relating to the
1999 Restructuring Plan. The Company continued to implement the 1999
Restructuring Plan during the second quarter of 2000 during which it recorded a
charge of $5.1.
During the third quarter of 2000, the Company continued to re-evaluate
its organizational structure. As part of this re-evaluation, the Company
developed a new restructuring plan designed to improve profitability by reducing
personnel and consolidating manufacturing facilities (the "2000 Restructuring
Plan"). The 2000 Restructuring Plan focused on the Company's plans to close its
manufacturing operations in Phoenix, Arizona and Mississauga, Canada and to
consolidate its cosmetics production into its plant in Oxford, North Carolina.
The 2000 Restructuring Plan also includes the remaining obligation for excess
leased real estate in the Company's headquarters, consolidation costs associated
with the Company closing its facility in New Zealand, and the elimination of
several domestic and international executive and operational positions, both of
which were effected to reduce and streamline corporate overhead costs. In the
first quarter of 2001, the Company recorded a charge of $14.6 related to the
2000 Restructuring Plan, principally for additional employee severance and other
personnel benefits and to consolidate worldwide operations. In the second
quarter of 2001, the Company continued to implement the 2000 Restructuring Plan
and recorded a charge of $7.9, principally for additional employee severance and
other personnel benefits and other costs related to the consolidation of
worldwide operations. The Company anticipates that it will recognize
approximately $35 to $40 (including amounts recorded to date) of costs to
implement this plan during 2001.
The Company anticipates annual savings of approximately $18 to $22
relating to the restructuring charges recorded during the first half of 2001 in
connection with the 2000 Restructuring Plan.
Other expenses (income)
Interest expense was $39.1 for the second quarter of 2001 compared with
$52.6 for the second quarter of 2000 and $90.0 for the first half of 2001
compared with $109.8 for the first half of 2000. The decrease in interest
expense for the second quarter of 2001 as compared with the second quarter of
2000 is primarily due to the cancellation of the Old REV Holdings Notes in the
first quarter of 2001, partially offset by interest expense attributable to the
New REV Holdings Notes and higher average outstanding borrowings under the
Credit Agreement. The decrease in interest expense for the first half of 2001 as
compared to the first half of 2000 is primarily due to the cancellation of the
Old REV Holdings Notes in the first quarter of 2001, the repayment of borrowings
under the Credit Agreement with the net proceeds from the disposition of the
worldwide professional products line and the Plusbelle brand in Argentina,
partially offset by interest expense attributable to the New REV Holdings Notes
and higher interest rates under the Credit Agreement.
Amortization of debt issuance costs was $1.2 for the second quarter of
2001 compared with $1.9 for the second quarter of 2000 and $3.9 for the first
half of 2001 compared with $5.3 for the first half of 2000. The decrease in the
amortization of debt issuance costs for the first half of 2001 as compared with
the first half of 2000 is primarily due to the write-off of a portion of such
costs resulting from the sale of the worldwide professional products line and
the Plusbelle brand in Argentina.
13
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
Sale of product line and brands
On July 16, 2001, Products Corporation completed the disposition of the
Colorama brand in Brazil. In connection with the disposition the Company
recognized a pre-tax and after-tax loss of $6.3. Additionally, the Company
recognized a pre-tax and after-tax loss on the disposition of the Aoyama
Property of $0.8 during the second quarter of 2001.
On May 8, 2000, Products Corporation completed the disposition of the
Plusbelle brand in Argentina. In connection with the disposition, the Company
recognized a pre-tax and after-tax loss of $3.2.
On March 30, 2000, Products Corporation completed the disposition of
its worldwide professional products line, including professional hair care for
use in and resale by professional salons, ethnic hair and personal care
products, Natural Honey skin care and certain regional toiletries brands. In
connection with the disposition, the Company recognized a pre-tax and after-tax
gain of $6.2.
Provision for income taxes
The provision for income taxes was $1.2 for the second quarter of 2001
compared with $1.1 for the second quarter of 2000 and $1.8 for the first half of
2001 compared with $4.8 for the first half of 2000. The decrease in the
provision for income taxes for the first half of 2001 as compared to the first
half of 2000 was attributable to adjustments to certain deferred tax assets and
higher taxes associated with the worldwide professional products line in the
first quarter of 2000 and lower taxable income in the second quarter and first
half of 2001 in certain markets outside the United States.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities was $61.3 and $100.2 for the
first half of 2001 and 2000, respectively. The decrease in net cash used for
operating activities for the first half of 2001 compared with the first half of
2000 resulted primarily from a higher net loss in the first half of 2001,
partially offset by changes in working capital.
Net cash provided by investing activities was $25.8 and $330.5 for the
first half of 2001 and 2000, respectively. Net cash provided by investing
activities for the first half of 2001 consisted of proceeds from the sale of the
Company's Aoyama Property and Phoenix facility, partially offset by capital
expenditures. Net cash provided by investing activities in the first half of
2000 consisted of proceeds from the sale of the Company's worldwide professional
products line and the Plusbelle brand in Argentina, partially offset by cash
used for capital expenditures and acquisition of technology rights.
Net cash provided by (used for) financing activities was $16.3 and
$(215.9) for the first half of 2001 and 2000, respectively. Net cash provided by
financing activities for the first half of 2001 included cash drawn under the
Credit Agreement and a capital contribution from an indirect parent to retire
the Old REV Holdings Notes, partially offset by the repayment of borrowings
under the Credit Agreement, payment of debt issuance costs and repayment of the
remaining portion of the Old REV Holdings Notes with the capital contribution.
Net cash used for financing activities for the first half of 2000 included
repayments of borrowings under the Credit Agreement with the net proceeds from
the disposition of the worldwide professional products line and the Plusbelle
brand in Argentina and the repayment of Products Corporation's Japanese
yen-denominated credit agreement, partially offset by cash drawn under the
Credit Agreement.
In May 1997, Products Corporation entered into a credit agreement (as
subsequently amended, the "Credit Agreement") with a syndicate of lenders, whose
individual members change from time to time. As of June 30, 2001, the Credit
Agreement provided up to $493.1 and was comprised of five senior secured
14
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
facilities: $105.2 in two term loan facilities (the "Term Loan Facilities"), a
$300.0 multi-currency facility (the "Multi-Currency Facility"), a $37.9
revolving acquisition facility, which may also be used for general corporate
purposes (the "Acquisition Facility"), and a $50.0 special standby letter of
credit facility (the "Special LC Facility"). The Company under certain
circumstances and with the consent of a majority of the lenders may increase the
Acquisition Facility to $237.9. At June 30, 2001, the Company had $105.2
outstanding under the Term Loan Facilities, $260.0 outstanding under the
Multi-Currency Facility, $37.9 outstanding under the Acquisition Facility and
$23.5 of issued but undrawn letters of credit under the Special LC Facility. As
a result of the sale of the Colorama brand in Brazil, the commitments and
outstanding borrowings under the Term Loan Facilities and the Acquisition
Facility were reduced to $89.0 and $32.1, respectively. The Acquisition Facility
was scheduled to be reduced by $24.4 on December 31, 2001, but such scheduled
reduction was changed to $20.6 as a result of the commitment reduction due to
the sale of the Colorama brand. The balance of the Acquisition Facility, along
with the Term Loan Facilities, the Multi-Currency Facility and the Special LC
Facility mature in May 2002. In January 2001 (effective December 31, 2000),
Products Corporation and its bank lenders entered into an amendment to the
Credit Agreement, to (i) eliminate the interest coverage ratio and leverage
ratio covenants for 2001; (ii) add a minimum cumulative EBITDA covenant for each
quarter end during the year 2001; (iii) modify the definition of EBITDA
beginning with the quarterly period ended December 31, 2000; (iv) limit the
amount that Products Corporation may spend for capital expenditures; (v) permit
the sale of certain of Products Corporation's non-core assets; (vi) permit
Products Corporation to retain 100% of the Net Proceeds from such asset sales;
(vii) increase the "applicable margin" by 1/2 of 1%; and (viii) require Products
Corporation to provide a mortgage on its facility in Oxford, North Carolina as
security for its obligations under the Credit Agreement.
On February 12, 2001, REV Holdings issued $80.5 in principal amount of
its New REV Holding Notes, which were issued in exchange for a like principal
amount of REV Holdings' outstanding Old REV Holdings Notes. The New REV Holdings
Notes bear interest at 12% per year, payable semi-annually, and mature on
February 1, 2004. On March 15, 2001, an affiliate contributed $667.5 principal
amount of Old REV Holdings Notes to REV Holdings, which were delivered to the
trustee for cancellation and contributed $22.0 in cash to REV Holdings to retire
the remaining Old REV Holdings Notes at maturity. Upon cancellation, the
indenture governing the Old REV Holdings Notes was discharged.
The Company's principal sources of funds are expected to be cash flow
generated from operations (before interest), net proceeds from the sale of
certain non-core assets, borrowings under the Credit Agreement and advances
under the Keepwell Agreement. The Credit Agreement, Products Corporation's 8
5/8% Notes due 2008 (the "8 5/8% Notes"), Products Corporation's 8 1/8% Notes
due 2006 (the "8 1/8% Notes") and Products Corporation's 9% Notes due 2006 (the
"9% Notes") contain certain provisions that by their terms limit Products
Corporation's and/or its subsidiaries' ability to, among other things, incur
additional debt. The New REV Holdings Notes contain certain provisions that by
their terms limit REV Holdings' 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, purchases of permanent displays and capital
expenditure requirements, expenses in connection with the Company's 2000 and
1999 Restructuring Plans referred to above, debt service payments and interest
under the New REV Holdings Notes.
The Company estimates that purchases of permanent displays for all of
2001 will be $40 to $50 and capital expenditures for all of 2001 will be $13 to
$17. The Company estimates that cash payments related to the Company's 2000 and
1999 Restructuring Plans and executive separation costs incurred in 1999 will be
$60 to $80 for all of 2001. Pursuant to tax sharing agreements, REV Holdings and
Revlon, Inc. may be required to make tax sharing payments to Mafco Holdings as
if REV Holdings or Revlon, Inc., as the case may be, were filing separate income
tax returns, except that no payments are required by Revlon, Inc. if and to the
extent that Products Corporation is prohibited under the Credit Agreement from
making tax sharing payments to Revlon, Inc. The Credit Agreement prohibits
Products Corporation from making any tax sharing payments other than in respect
of state and local income taxes. REV Holdings currently
15
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
anticipates that, with respect to Revlon, Inc. as a result of net operating tax
losses and prohibitions under the Credit Agreement, and with respect to REV
Holdings as a result of the absence of business operations or a source of income
of its own, no cash federal tax payments or cash payments in lieu of federal
taxes pursuant to the tax sharing agreements will be required for 2001.
Products Corporation enters into forward foreign exchange contracts and
option contracts from time to time to hedge certain cash flows denominated in
foreign currencies. Products Corporation had forward foreign exchange contracts
denominated in various currencies of approximately $28.7 and nil (U.S. dollar
equivalent) outstanding at June 30, 2001 and 2000, respectively. Such contracts
are entered into to hedge transactions predominantly occurring within twelve
months.
The Company expects that cash flows from operations, net proceeds from
the sale of certain non-core assets (or financial support from an affiliate, if
such asset sales are not completed on a timely basis), borrowings under the
Credit Agreement and advances under the Keepwell Agreement will be sufficient to
enable the Company to meet its anticipated cash requirements during 2001
including debt service and expenses in connection with the Company's
restructuring plans. In addition, the Company anticipates that it will refinance
the Credit Agreement in or before the first quarter of 2002 on terms that are
satisfactory to the Company. However, there can be no assurance that the
combination of cash flow from operations, net proceeds from the sale of certain
non-core assets (or from such financial support), borrowings under the Credit
Agreement and advances under the Keepwell Agreement will be sufficient to meet
the Company's cash requirements on a consolidated basis. Furthermore, there can
be no assurance that the Company will be able to refinance the Credit Agreement
on satisfactory terms. If the Company is unable to satisfy such cash
requirements from these sources or refinance the Credit Agreement, the Company
could be required to adopt one or more alternatives, such as reducing or
delaying purchases of permanent displays, reducing or delaying capital
expenditures, delaying or revising restructuring plans, restructuring
indebtedness, selling additional assets or operations, selling its equity
securities, seeking capital contributions or additional loans from affiliates of
the Company or selling additional shares of capital stock of Revlon, Inc.
Products Corporation has received a commitment from an affiliate that is
prepared to provide, if necessary, additional financial support to Products
Corporation of up to $40 on appropriate terms through December 31, 2001. There
can be no assurance that any of such actions could be effected, that they would
enable the Company and its subsidiaries to continue to satisfy their capital
requirements or that they would be permitted under the terms of the Company's
and its subsidiaries' various debt instruments then in effect. The Company, as a
holding company, will be dependent on distributions with respect to its
approximately 83% ownership interest in Revlon, Inc. from the earnings generated
by Products Corporation and advances under the Keepwell Agreement to pay its
expenses and to pay interest and the principal amount at maturity of the New REV
Holdings Notes. The terms of the Credit Agreement, the 8 5/8% Notes, the 8 1/8%
Notes and the 9% Notes generally restrict Products Corporation from paying
dividends or making distributions, except that Products Corporation is permitted
to pay dividends and make distributions to Revlon, Inc., among other things, to
enable Revlon, Inc. to pay expenses incidental to being a public holding
company, including, among other things, professional fees such as legal and
accounting, regulatory fees such as Securities and Exchange Commission (the
"Commission") filing fees and other miscellaneous expenses related to being a
public holding company and to pay dividends or make distributions in certain
circumstances to finance the purchase by Revlon, Inc. of its Class A Common
Stock in connection with the delivery of such Class A Common Stock to grantees
under the Revlon, Inc. Amended and Restated 1996 Stock Plan, provided that the
aggregate amount of such dividends and distributions taken together with any
purchases of Revlon, Inc. Class A Common Stock on the open market to satisfy
matching obligations under the excess savings plan may not exceed $6.0 per
annum.
The Company currently anticipates that cash flow generated from
operations will be insufficient to pay interest when due and the principal
amount at maturity of the New REV Holdings Notes. The Company currently
anticipates that it will be required to adopt one or more alternatives to pay
the principal amount at maturity of the New REV Holdings Notes, such as
refinancing its indebtedness, selling its equity securities
16
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
or the equity securities or assets of Revlon, Inc. or seeking capital
contributions or loans from its affiliates. There can be no assurance that any
of the foregoing actions could be effected on satisfactory terms, that any of
the foregoing actions would enable the Company to pay the principal amount at
maturity of the New REV Holdings Notes or that any of such actions would be
permitted by the terms of the New Indenture or any other debt instruments of the
Company and the Company's subsidiaries then in effect. REV Holdings has entered
into a Keepwell Agreement with GSB Investments Corp., one of its affiliates,
(the "Keepwell Agreement") pursuant to which GSB Investments Corp. has agreed to
provide REV Holdings with funds in an amount equal to any interest payments due
on the New REV Holdings Notes, to the extent that REV Holdings does not have
sufficient funds on hand to make such payments on the applicable due dates.
However, the Keepwell Agreement is not a guarantee of the payment of interest on
the New REV Holdings Notes. The obligations of GSB Investments Corp. under the
Keepwell Agreement are only enforceable by REV Holdings, and may not be enforced
by the holders of the New REV Holdings Notes or the trustee under the New
Indenture for the New REV Holdings Notes. The failure of GSB Investments Corp.
to make a payment to REV Holdings under the Keepwell Agreement will not be an
event of default under the New Indenture. Further, the New Indenture has no
requirement that REV Holdings maintain the Keepwell Agreement. In addition,
although REV Holdings has the right to enforce the Keepwell Agreement, there can
be no assurance that GSB Investments Corp. will have sufficient funds to make
any payments to REV Holdings under the Keepwell Agreement or that it will comply
with its obligations under the Keepwell Agreement.
As of June 30, 2001, GSB Investments Corp. owned an aggregate of
42,949,525 shares, or approximately 32% of the common stock of Golden State
Bancorp. Inc. ("GSB"). At June 30, 2001, the last reported sale price of GSB
common stock on the New York Stock Exchange ("NYSE") was $30.80 per share. All
of these shares are currently pledged to secure obligations of GSB Investments
Corp. or affiliates of GSB Investments Corp. GSB Investments Corp. has received
four quarterly dividends of $0.10 per share, or an aggregate of $17.4, since GSB
commenced paying quarterly dividends in July 2000. If GSB were to continue to
pay quarterly dividends at this rate and GSB Investments Corp. were to continue
to own the same number of shares, GSB Investments Corp. would have sufficient
income from dividends paid on its GSB stock to make any payments to REV Holdings
that it might be required to make under the Keepwell Agreement. However, GSB has
only paid dividends at this rate since July 2000 and there can be no assurance
that GSB will continue to pay dividends at this rate, if at all, or that GSB
Investments Corp. will continue to own its shares of the common stock of GSB. If
either GSB Investments Corp. or affiliates of GSB Investments Corp. were to fail
to comply with their respective obligations that are secured by the pledge of
the GSB common stock, the beneficiary of such pledge could enforce its rights
with respect to such collateral and could deprive GSB Investments Corp. of its
rights to receive dividends on such pledged shares. If GSB Investments Corp.
does not receive sufficient dividend income from its GSB stock, it will be
required to seek alternative sources of funds in order to satisfy its potential
obligations under the Keepwell Agreement. On August 1, 2001, GSB Investments
Corp. made a non-interest bearing advance of $4.5 to REV Holdings under the
Keepwell Agreement, which was used to make the August 1, 2001 interest payment
on the New REV Holdings Notes.
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 to be 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 can be prevented from using the Euro after January 1, 2002 and no
one is obliged to use the Euro before July 2002. In keeping with this rule, the
Company expects to begin using the Euro for invoicing and payments by the end of
the second quarter of 2002. Based upon the information currently
17
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
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.
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, 2000 describes significant aspects of the Company's financial instrument
programs that have material market risk as of December 31, 2000. The following
table presents the information required by Item 7A as of June 30, 2001.
EXPECTED MATURITY DATE FOR YEAR ENDED JUNE 30, FAIR VALUE
------------------------------------------------------------------ JUNE 30,
2001 2002 2003 2004 THEREAFTER TOTAL 2001
-------------------------------------------- -------------------- ------------
(US dollar equivalent in millions)
DEBT
- ---------------
Short-term variable rate (various currencies).... $ 30.0 $30.0 * $ 60.0 $ 60.0
Average interest rate (a).................. 7.3% 7.9%
Short-term variable rate ($US)................... 373.1 * 373.1 373.1
Average interest rate (a).................. 5.4%
Long-term fixed rate ($US)....................... $1,149.4 1,149.4 652.1
Average interest rate...................... 8.6%
--------- ---------- ---------- ----------- ==========
Total debt**..................................... $30.0 $ 403.1 $1,149.4 $ 1,582.5 $1,085.2
========= ========== ========== =========== ==========
AVERAGE ORIGINAL CONTRACT
CONTRACTUAL US DOLLAR VALUE FAIR VALUE
Forward Contracts RATE NOTIONAL JUNE 30, JUNE 30,
- ----------------- $/FC AMOUNT 2001 2001
--------- ---------- --------- ----------
Buy Euros/Sell USD............................... 0.9275 $ 1.1 1.0 $ (0.1)
Sell British Pounds/Buy USD...................... 1.4442 7.7 7.9 0.2
Sell Australian dollars/Buy USD.................. 0.5273 9.3 9.7 0.4
Sell South African Rand/Buy USD.................. 0.1246 2.2 2.3 0.1
Buy British Pounds/Sell USD...................... 1.4370 3.7 3.6 (0.1)
Buy Australian dollars/Sell New Zealand dollars.. 1.2478 2.0 2.0 -
Buy British Pounds/Sell Euros.................... 0.6306 2.7 2.8 0.1
---------- --------- ----------
Total forward contracts.......................... $ 28.7 $ 29.3 $ 0.6
========== ========= ==========
- --------------------
(a) Weighted average variable rates are based upon implied forward rates from
the yield curves at June 30, 2001.
* Represents the Company's Credit Agreement which matures in May 2002.
** The New REV Holdings Notes are excluded from the table above since there is
no active trading market for the New REV Holdings Notes and therefore the
Company is unable to assess the fair market value at this time. The New
REV Holdings Notes mature on February 1, 2004 and have a face value of
$80.5.
EFFECT OF NEW ACCOUNTING STANDARDS
In April 2001, the EITF reached a consensus on EITF 00-25, "Vendor
Income Statement Characterization of Consideration to a Purchaser of the
Vendor's Products or Services." The consensus addresses the Statement of
Operations classification of consideration from a vendor to a reseller. This
consensus is expected to reduce both net sales and SG&A expenses by equal and
offsetting amounts, however, it will not have any impact on the Company's
reported operating (loss) income, net loss, or net loss per common share. The
Company is currently evaluating the requirements of this consensus and has not
yet determined the extent of its impact.
18
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria that must be met in order for intangible assets acquired in a purchase
method business combination to be recognized and reported apart from goodwill.
Statement 142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 142 will
also require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
Company is required to adopt the provisions of Statement 141 immediately and
Statement 142 effective January 1, 2002.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of approximately $186, and unamortized identifiable
intangible assets in the amount of approximately $12. Amortization expense
related to goodwill was $8.6 and $3.6 for the year ended December 31, 2000 and
the six months ended June 30, 2001, respectively. Because of the extensive
effort needed to comply with adopting Statements 141 and 142, it is not
practicable to reasonably estimate the impact of adopting these Statements on
the Company's financial statements at the date of this report, including whether
any transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
SUBSEQUENT EVENTS
In July 2001, Products Corporation completed the disposition of the
Colorama brand of cosmetics and hair care products as well as Products
Corporation's manufacturing facility located in Sao Paulo, Brazil for
approximately $56. Products Corporation used $22 of the net proceeds after
transaction costs and retained liabilities to permanently reduce commitments
under the Credit Agreement. In connection with such disposition the Company
recognized a pre-tax and after-tax loss of $6.3 during the second quarter of
2001.
In July 2001, Products Corporation completed the disposition of its
subsidiary that owned and operated its manufacturing facility in Maesteg, Wales,
UK, including all production equipment. Products Corporation will receive
approximately $20.0, $10.0 was received on the closing date and $10.0 is to be
received over a six year period a portion of which is contingent upon certain
future events. The Company does not expect to recognize a material loss on this
transaction.
On August 1, 2001, GSB Investments Corp. made a non-interest bearing
advance of $4.5 to REV Holdings under the Keepwell Agreement, which was used
to make the August 1, 2001 interest payment on the New REV Holdings Notes.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q for the quarter ended June 30, 2001
as well as other public documents and statements of the Company contains
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 as to: the introduction of new products;
future financial performance; the effect on sales of the reduction of overall
U.S. customer inventories including the timing thereof; the effect on sales of
political and/or economic conditions, adverse currency fluctuations and
competitive activities; the Company's estimate of restructuring activities,
restructuring costs and benefits; the Company's plans with respect to and
estimate of the timing of the shutdown of its Phoenix manufacturing operation,
the charges, the cash cost and the annual savings resulting from plant
shutdowns; the Company's expectation that its new trade terms for its U.S.
customers will increase consumption of its products, drive market growth, result
in more efficient ordering and shipping and reduce returns; the Company's
expectations regarding uses of funds including purchases of permanent displays
and capital expenditures; the availability of raw materials and components; the
Company's qualitative and quantitative estimates as to market risk sensitive
instruments; the Company's
19
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
expectations about the effects of the transition to the Euro; the Company's
intent to pursue the sale of certain non-core assets; the Company's expectation
regarding sources of funds including cash flow from operations, the availability
of funds from currently available credit facilities, net proceeds from the sale
of certain non-core assets, capital contributions or loans from affiliates or
advances under the Keepwell Agreement and the sale of additional assets or
operations of the Company or additional shares of Revlon, Inc. or the sale of
equity securities of REV Holdings; the Company's expectation that it will
refinance its Credit Agreement in or before the second quarter of 2002; and the
effect of the adoption of certain accounting standards, including EITF 00-25.
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 the Company undertakes no obligation to update them. A number of
important factors could cause actual results to differ materially from those
contained in any forward-looking statement. In addition to factors that may be
described in the Company's filings with the Commission, including this filing,
the following factors, among others, could cause the Company's actual results to
differ materially from those expressed in any forward-looking statements made by
the Company: (i) difficulties or delays in developing and introducing new
products or failure of customers to accept new product offerings; (ii) changes
in consumer preferences, including reduced consumer demand for the Company's
color cosmetics and other current products; (iii) unanticipated costs or
difficulties or delays in completing projects associated with the Company's
strategy to improve operating efficiencies; (iv) lower than expected cash flow
from operations, the inability to secure capital contributions or loans from
affiliates or advances under the Keepwell Agreement or sell additional assets or
operations of the Company or additional shares of Revlon, Inc. or equity
securities of REV Holdings or the unavailability of funds under the Credit
Agreement; difficulties or delays in or inability to refinance the Company's
Credit Agreement; (v) effects of and changes in political and/or economic
conditions, including inflation and monetary conditions, and in trade, monetary,
fiscal and tax policies in international markets; (vi) actions by competitors,
including business combinations, technological breakthroughs, new products
offerings and marketing and promotional successes; (vii) combinations among
significant customers or the loss, insolvency or failure to pay debts by a
significant customer or customers; (viii) lower than expected sales as a result
of the reduction of overall U.S. customer inventories; (ix) difficulties, delays
or unanticipated costs or less than expected savings and other benefits
resulting from the Company's restructuring activities; (x) difficulties or
delays in implementing, higher than expected charges and cash costs or lower
than expected savings from the shutdown of manufacturing operations in Phoenix;
(xi) difficulties or delays in implementing or achieving the intended results of
the new trade terms including increased consumption, market growth and lower
returns or unexpected consequences from the implementation of the new trade
terms including the possible effect on sales; (xii) interest rate or foreign
exchange rate changes affecting the Company and its market sensitive financial
instruments; (xiii) difficulties, delays or unanticipated costs associated with
the transition to the Euro; (xiv) difficulties or delays in sourcing raw
materials or components; (xv) difficulties or delays in pursuing the sale of one
or more non-core assets, the inability to consummate such sales or to secure the
expected level of proceeds from such sales; and (xvi) the unanticipated effects
of the adoption of certain new accounting standards, including EITF 00-25.
20
REV HOLDINGS INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS -
10.16 Revlon, Inc. Third Amended and Restated 1996 Stock Plan (Amended
and restated as of May 10, 2000). (Incorporated by reference
to Exhibit 10.16 to the Revlon, Inc. June 30, 2001 Form 10-Q).
10.22 Amendment dated June 15, 2001 to the Employment Agreement dated
November 2, 1999 between Products Corporation and Jeffrey M.
Nugent. (Incorporated by reference to Exhibit 10.18 to the
Revlon, Inc. June 30, 2001 Form 10-Q).
(B) REPORTS ON FORM 8-K - None
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.
REV HOLDINGS INC.
-----------------
Registrant
By:/s/ Todd J. Slotkin
--------------------------------------------
Todd J. Slotkin
Executive Vice President,
Chief Financial Officer
and Chief Accounting Officer
Dated: August 14, 2001
21