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: September 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 33-59650
REVLON CONSUMER PRODUCTS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3662953
(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 September 30, 2001, all of which were held by an affiliate, Revlon,
Inc., an indirect majority owned subsidiary of Mafco Holdings Inc.
Total Pages - 21
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
ASSETS 2001 2000
---------- -----------
Current assets: (Unaudited)
Cash and cash equivalents .............................................. $ 37.2 $ 56.3
Trade receivables, less allowances of $14.9
and $16.1, respectively .......................................... 203.5 220.5
Inventories ............................................................ 186.3 184.8
Prepaid expenses and other ............................................. 45.4 68.5
---------- --------
Total current assets ............................................. 472.4 530.1
Property, plant and equipment, net ........................................... 151.2 221.7
Other assets ................................................................. 135.4 146.3
Intangible assets, net ....................................................... 200.4 206.1
---------- --------
Total assets ..................................................... $ 959.4 $ 1,104.2
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current liabilities:
Short-term borrowings - third parties .................................. $ 30.3 $ 30.7
Current portion of long-term debt - third parties ...................... 373.4 --
Accounts payable ....................................................... 99.6 86.3
Accrued expenses and other ............................................. 277.8 310.7
---------- --------
Total current liabilities ........................................ 781.1 427.7
Long-term debt - third parties ............................................... 1,149.5 1,539.0
Long-term debt - affiliates .................................................. 24.1 24.1
Other long-term liabilities .................................................. 216.7 217.7
Stockholder's deficiency:
Preferred stock, par value $1.00 per share; 1,000 shares authorized, 546
shares of Series A Preferred Stock
issued and outstanding ........................................... 54.6 54.6
Common Stock, par value $1.00 per share; 1,000
shares authorized, issued and outstanding ........................ -- --
Capital deficiency ..................................................... (214.8) (213.8)
Accumulated deficit since June 24, 1992 ................................ (1,039.2) (915.3)
Accumulated other comprehensive loss ................................... (12.6) (29.8)
---------- --------
Total stockholder's deficiency ................................... (1,212.0) (1,104.3)
---------- --------
Total liabilities and stockholder's deficiency ................... $ 959.4 $ 1,104.2
========== ==========
See Accompanying Notes to Unaudited Consolidated Condensed Financial
Statements.
2
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ------------
Net sales ................................................................. $ 327.2 $ 344.8 $ 989.0 $ 1,134.2
Cost of sales ............................................................. 129.8 128.0 404.4 433.2
---------- ---------- ---------- ------------
Gross profit ......................................................... 197.4 216.8 584.6 701.0
Selling, general and administrative expenses .............................. 169.0 192.7 553.9 633.2
Restructuring costs ....................................................... 3.0 13.7 25.5 28.3
---------- ---------- ---------- ------------
Operating income ..................................................... 25.4 10.4 5.2 39.5
---------- ---------- ---------- ------------
Other expenses (income):
Interest expense ..................................................... 34.1 35.6 104.8 108.9
Interest income ...................................................... (0.5) (0.6) (2.0) (1.4)
Amortization of debt issuance costs .................................. 1.6 1.0 4.6 4.5
Foreign currency losses (gains), net ................................. 2.7 (1.1) 2.5 1.0
Loss (gain) on sale of product line, brand and facilities, net ....... 7.9 -- 15.0 (3.0)
Miscellaneous, net ................................................... 0.1 (0.9) 0.9 --
---------- ---------- ---------- ------------
Other expenses, net ............................................. 45.9 34.0 125.8 110.0
---------- ---------- ---------- ------------
Loss before income taxes .................................................. (20.5) (23.6) (120.6) (70.5)
Provision for income taxes ................................................ 1.5 2.2 3.3 7.0
---------- ---------- ---------- ------------
Net loss .................................................................. $ (22.0) $ (25.8) $ (123.9) $ (77.5)
========== ========== ========== ============
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
3
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDER'S DEFICIENCY
AND COMPREHENSIVE LOSS
(DOLLARS IN MILLIONS)
ACCUMULATED
OTHER TOTAL
PREFERRED CAPITAL ACCUMULATED COMPREHENSIVE STOCKHOLDER'S
STOCK DEFICIENCY DEFICIT LOSS (a) DEFICIENCY
-------- ------------- ----------- ------------- -------------
Balance, January 1, 2000 ................................. $ 54.6 $ (212.4) $ (787.2) $ (68.1) $ (1,013.1)
Net distribution from affiliate ..................... (0.9)(c) (0.9)
Comprehensive loss:
Net loss .................................... (77.5) (77.5)
Currency translation adjustment ............. 33.3 (b) 33.3
----------
Total comprehensive loss ............................ (44.2)
-------- ---------- ------ ----- ----------
Balance, September 30, 2000 .............................. $ 54.6 $ (213.3) $ (864.7) $ (34.8) $ (1,058.2)
======== ========== ====== ===== ==========
Balance, January 1, 2001 ................................. $ 54.6 $ (213.8) $ (915.3) $ (29.8) $ (1,104.3)
Net distribution from affiliate ..................... (1.0)(c) (1.0)
Comprehensive loss:
Net loss .................................... (123.9) (123.9)
Currency translation adjustment ............. 16.8 (b) 16.8
Revaluation of forward currency contracts ... 0.4 0.4
----------
Total comprehensive loss ............................ (106.7)
-------- ---------- ------ ----- ----------
Balance, September 30, 2001 .............................. $ 54.6 $ (214.8) $ (1,039.2) $ (12.6) $ (1,212.0)
======== ========== ====== ===== ==========
- --------------------
(a) Accumulated other comprehensive loss includes unrealized gains on
revaluations of forward currency contracts of $0.4 as of September 30,
2001, unrealized losses on marketable securities of $3.8 as of September
30, 2000, cumulative net translation losses of $9.4 and $26.1 as of
September 30, 2001 and 2000, respectively, and adjustments for the minimum
pension liability of $3.6 and $4.9 as of September 30, 2001 and 2000,
respectively.
(b) The currency translation adjustment as of September 30, 2001 and September
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 net distributions in capital from the Charles of the Ritz
business (See Note 6).
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
4
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 2001 2000
-------- --------
Net loss ...................................................................... $ (123.9) $ (77.5)
Adjustments to reconcile net loss to net cash
(used for) provided by operating activities:
Depreciation and amortization ............................................ 86.9 89.7
Loss (gain) on sale of product line, brand and facilities, net ........... 15.0 (3.0)
Change in assets and liabilities, net of acquisitions and dispositions:
Decrease in trade receivables ....................................... 7.1 25.6
(Increase) decrease in inventories .................................. (15.0) 15.7
(Increase) decrease in prepaid expenses and
other current assets ................................... (7.7) 8.8
Increase (decrease) in accounts payable ............................. 14.9 (22.3)
Decrease in accrued expenses and other
current liabilities .................................... (32.9) (121.7)
Purchase of permanent displays ...................................... (35.6) (40.3)
Other, net .......................................................... 1.2 (6.7)
-------- --------
Net cash used for operating activities ........................................ (90.0) (131.7)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .......................................................... (10.4) (11.4)
Acquisition of technology rights .............................................. -- (3.0)
Net proceeds from the sale of product line, brand and facilities .............. 97.5 339.5
-------- --------
Net cash provided by investing activities ..................................... 87.1 325.1
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings - third parties .............. 0.5 (7.1)
Proceeds from the issuance of long-term debt - third parties .................. 196.1 289.6
Repayment of long-term debt - third parties ................................... (208.8) (475.7)
Payment of debt issuance costs ................................................ (2.4) --
-------- --------
Net cash used for financing activities ........................................ (14.6) (193.2)
-------- --------
Effect of exchange rate changes on cash and cash equivalents .................. (1.6) (1.6)
-------- --------
Net decrease in cash and cash equivalents ................................ (19.1) (1.4)
Cash and cash equivalents at beginning of period ......................... 56.3 25.4
-------- --------
Cash and cash equivalents at end of period ............................... $ 37.2 $ 24.0
======== ========
Supplemental schedule of cash flow information:
Cash paid (received) during the period for:
Interest ............................................................ $ 113.4 $ 121.3
Income taxes, net of refunds ........................................ 2.4 3.1
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
5
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(1) BASIS OF PRESENTATION
Revlon Consumer Products Corporation ("Products Corporation" and,
together with its subsidiaries, the "Company") is a direct wholly owned
subsidiary of Revlon, Inc., which is an indirect majority owned subsidiary of
MacAndrews & Forbes Holdings Inc. ("MacAndrews Holdings"), a corporation wholly
owned indirectly through Mafco Holdings Inc. ("Mafco Holdings" and, together
with MacAndrews Holdings, "MacAndrews & Forbes") by Ronald O. Perelman.
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 nine months ended September 30, 2000,
disbursements and commitments for advertising and promotion exceeded advertising
and promotion expenses by $23.1 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 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
6
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
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 $0.4 on the balance sheet and a credit of $0.4 in Other
Comprehensive Loss for the fair value effects of the foreign currency forward
exchange contracts outstanding at September 30, 2001. The amount of the hedges'
ineffectiveness as of September 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
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------------- --------------
Raw materials and supplies......... $ 61.2 $ 56.2
Work-in-process.................... 8.6 9.4
Finished goods..................... 116.5 119.2
-------------- --------------
$ 186.3 $ 184.8
============== ==============
(3) RESTRUCTURING AND OTHER COSTS, NET
In the fourth quarter of 1999, the Company continued to restructure its
organization and began a new program in line with its original restructuring
plan developed in late 1998, principally for additional employee severance and
other personnel benefits and to restructure certain operations outside the
United States, including certain operations in Japan. In the first quarter of
2000, the Company recorded a charge of $9.5 relating to the 1999 restructuring
program that began in the fourth quarter of 1999. The Company continued to
implement the 1999 restructuring program 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
initiated a new restructuring program in line with the original restructuring
plan developed in late 1998, designed to improve profitability by reducing
personnel and consolidating manufacturing facilities. The Company recorded a
charge of $13.7 in the third quarter of 2000 for programs begun in such quarter
as well as for programs previously commenced. The 2000 restructuring program
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 program 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
7
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
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 previous restructuring programs, as well as the 2000
restructuring program, principally for additional employee severance and other
personnel benefits, relocation and to consolidate worldwide operations.
Additionally, in the second quarter of 2001, the Company continued to implement
the 2000 restructuring program and recorded a charge of $7.9, principally for
additional employee severance and other personnel benefits, relocation and other
costs related to the consolidation of worldwide operations. The Company
continued to implement the 2000 restructuring program in the third quarter of
2001 and recorded a charge of $3.0, principally for additional employee
severance and other personnel benefits and relocation.
In connection with the 1999 restructuring program and the 2000
restructuring program, termination benefits for 403 employees and 2,147
employees, respectively, were included in the Company's restructuring charges of
which 403 and 1,915 employees have been terminated as of September 30, 2001. The
remaining employees from the 2000 restructuring program are expected to be
terminated within one year from the date of their notification.
Details of the activity described above during the nine month period
ended September 30, 2001, are as follows:
BALANCE UTILIZED, NET BALANCE
AS OF ------------------------- AS OF
1/1/01 EXPENSES, NET CASH NONCASH 9/30/01
----------- ---------------- ----------- --------- ----------
Employee severance and other
personnel benefits .................. $ 28.6 $ 19.4 $ (32.4) $ - $ 15.6
Relocation .............................. - 2.6 (2.6) - -
Leases and equipment write-offs ......... 5.9 3.1 (3.0) - 6.0
Other obligations ........................ 1.5 0.4 (1.9) - -
----------- ----------- ----------- --------- ----------
$ 36.0 $ 25.5 $ (39.9) $ - $ 21.6
=========== =========== =========== ========= ==========
In connection with the 2000 restructuring program, in the beginning of
the fourth quarter of 2000, the Company decided to consolidate its manufacturing
facility in Phoenix, Arizona into its manufacturing facility in Oxford, North
Carolina. The plan was to relocate substantially all of the Phoenix equipment to
the Oxford facility and commence production there over a period of approximately
nine months which would allow the Company to fully staff the Oxford facility and
to produce enough inventory through a combination of production in the Phoenix
and Oxford facilities to meet supply chain demand as the Phoenix facility
production lines were dismantled, moved across the country, and placed into
service at the Oxford facility. Substantially all production at the Phoenix
facility ceased by June 30, 2001, and the facility was sold. The useful life of
the facility and production assets which would not be relocated to the Oxford
facility was shortened at the time the decision was made to the nine-month
period in which the Phoenix facility would continue production. The Company
began depreciating the net book value of the Phoenix facility and production
equipment in excess of its estimated salvage value over the estimated nine-month
useful life. This resulted in the recognition of increased depreciation through
June 30, 2001 of $6.1, which is included in cost of sales. Due to the sale of
the Phoenix facility in the second quarter of 2001, there was no additional
increased depreciation charged for the quarter ended September 30, 2001.
8
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(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 1.8% and 5.1% of
the Company's net sales for the third quarter of 2001 and 2000, respectively,
and for approximately 3.4% and 4.7% of the Company's net sales for the nine
months ended September 30, 2001 and 2000, respectively. While the Company's
operations in Brazil have historically been significant, as a result of the sale
of the Company's 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 5).
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.
THREE MONTHS ENDED NINE MONTHS ENDED
GEOGRAPHIC AREAS: SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
Net sales: 2001 2000 2001 2000
-------------- ------------- -------------- -------------
United States ...................... $ 220.1 $ 210.5 $ 644.9 $ 668.1
Canada ............................. 12.6 13.5 35.3 39.3
-------------- ------------- -------------- -------------
United States and Canada ........... 232.7 224.0 680.2 707.4
International ...................... 94.5 120.8 308.8 426.8
-------------- ------------- -------------- -------------
$ 327.2 $ 344.8 $ 989.0 $ 1,134.2
============== ============= ============== =============
SEPTEMBER 30, DECEMBER 31,
Long-lived assets: 2001 2000
-------------- -------------
United States ...................... $ 355.2 $ 398.8
Canada ............................. 6.6 8.1
-------------- -------------
United States and Canada ........... 361.8 406.9
International ...................... 125.2 167.2
-------------- -------------
$ 487.0 $ 574.1
============== =============
THREE MONTHS ENDED NINE MONTHS ENDED
CLASSES OF SIMILAR PRODUCTS: SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
Net sales: 2001 2000 2001 2000
-------------- ------------- -------------- -------------
Cosmetics, skin care and fragrances. $ 214.0 $ 224.6 $ 637.3 $ 705.5
Personal care and professional ..... 113.2 120.2 351.7 428.7
-------------- ------------- -------------- -------------
$ 327.2 $ 344.8 $ 989.0 $ 1,134.2
============== ============= ============== =============
9
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(5) DISPOSITIONS
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 increased depreciation in the first quarter of 2001, the Company
recorded a loss on the sale of $3.7 in the second quarter of 2001, which is
included in SG&A expenses.
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 $57. 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 $6.5, $6.3 of
which was recorded 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. The purchase price was approximately
$20.0, $10.0 of which 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 recognized a pre-tax and after-tax loss of $7.7
during the third quarter of 2001.
(6) ACQUISITION OF CHARLES OF THE RITZ BRAND
In September 2001, Revlon, Inc. acquired from Revlon Holdings Inc., an
affiliate and indirect wholly owned subsidiary of Mafco Holdings, all the assets
and liabilities of the Charles of the Ritz business in consideration of the
issuance of 400,000 newly issued shares of Revlon, Inc.'s Class A Common Stock
and the issuance of 4,333 shares of newly issued voting (with 433,300 votes in
the aggregate) Series B Preferred Stock which are convertible into 433,300
shares in the aggregate of Revlon, Inc.'s Class A Common Stock, with any such
conversion subject to approval by the stockholders of Revlon, Inc. at the 2002
Annual Meeting of Stockholders. As Revlon Holdings Inc. and Products Corporation
are under common control, the transaction has been accounted for at historical
cost in a manner similar to that of a pooling of interests and, accordingly, all
prior period financial statements presented have been restated as if the
acquisition took place at the beginning of such periods. An investment banking
firm rendered its written opinion that the terms of the transaction were fair
from a financial standpoint to Revlon, Inc. Upon acquiring the Charles of the
Ritz business, Revlon, Inc. contributed such business to Products Corporation in
the form of a capital contribution. The effect of the acquisition was to
increase both operating income and net income by $1.8 and $0.4 for the nine
months ended September 30, 2001 and 2000, respectively. The net equity (deficit)
of the Charles of the Ritz business of $0.2 and $(0.6) is included in total
stockholder's deficiency at September 30, 2001 and December 31, 2000,
respectively.
10
REVLON CONSUMER PRODUCTS CORPORATION 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, May 8, 2000, and July 16, 2001 Products Corporation
completed the dispositions of its worldwide professional products line,
Plusbelle brand in Argentina and Colorama brand in Brazil, respectively.
Accordingly, the Unaudited Consolidated Condensed Financial Statements include
the results of operations of the professional products line, Plusbelle and
Colorama brands 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 $327.2 and $344.8 for the third quarters of 2001 and
2000, respectively, a decrease of $17.6, or 5.1% on a reported basis (a decrease
of 2.8% on a constant U.S. dollar basis), and were $989.0 and $1,134.2 for the
nine months ended September 30, 2001 and 2000, respectively, a decrease of
$145.2, or 12.8% on a reported basis (a decrease of 10.1% on a constant U.S.
dollar basis). The decline in consolidated net sales for the third quarter and
nine months ended September 30, 2001 as compared with the third quarter and nine
months ended September 30, 2000 is primarily due to the sale of the worldwide
professional products line and the Plusbelle brand in Argentina in the first and
third quarters of 2000, respectively, and the Colorama brand in Brazil in July
of 2001.
Net sales, excluding the worldwide professional products line, the
Plusbelle brand in Argentina, and the Colorama brand in Brazil, were $326.9 and
$333.7 for the third quarter of 2001 and 2000, respectively, a decrease of $6.8,
or 2.0% on a reported basis (an increase of 0.2% on a constant U.S. dollar
basis), and were $972.6 and $1,003.3 for the nine months ended September 30,
2001 and 2000, respectively, a decrease of $30.7, or 3.1% on a reported basis (a
decrease of 0.6% on a constant U.S. dollar basis).
United States and Canada. Net sales in the United States and Canada
were $232.7 for the third quarter of 2001 compared with $224.0 for the third
quarter of 2000, an increase of $8.7, or 3.9%, and were $680.2 and $707.4 for
the nine months ended September 30, 2001 and 2000, respectively, a decrease of
$27.2, or 3.8%. Net sales in the United States and Canada, excluding the United
States and Canada portion of the worldwide professional products business, were
$232.7 for the third quarter of 2001, compared with $224.0 for the third quarter
of 2000, an increase of $8.7, or 3.9%, and were $680.2 and $671.7 for the nine
months ended September 30, 2001 and 2000, respectively, an increase of $8.5, or
1.3%. The increase in the third quarter 2001 of 3.9%, as compared to the third
quarter 2000, is mainly due to lower sales returns of $19.7 resulting primarily
from the Company's new trade terms, partially offset by higher sales incentives
and allowances of $10.4. The increase in the nine months ended September 30,
2001 of 1.3%, as compared to the nine months ended September 30, 2000, is due to
lower sales returns of $47.0 resulting primarily from the Company's new trade
terms, substantially offset by higher sales incentives and allowances of $8.0
and lower sales volume of $29.6 as a result of competitive activities.
11
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
International. Net sales in the Company's international operations were
$94.5 for the third quarter of 2001, compared with $120.8 for the third quarter
of 2000, a decrease of $26.3, or 21.8% on a reported basis (a decrease of 16.3%
on a constant U.S. dollar basis), and were $308.8 for the nine months ended
September 30, 2001, compared with $426.8 for the nine months ended September 30,
2000, a decrease of $118.0, or 27.6% on a reported basis (a decrease of 21.4% on
a constant U.S. dollar basis).
Net sales of the Company's international operations, excluding the
worldwide professional products line, the Plusbelle brand in Argentina and the
Colorama brand in Brazil ("Ongoing International Operations"), were $94.2 and
$109.7 for the third quarter of 2001 and 2000, respectively, a decrease of
$15.5, or 14.1%, on a reported basis (a decrease of 8.2% on a constant U.S.
dollar basis), and were $292.4 and $331.6 for the nine months ended September
30, 2001 and 2000, respectively, a decrease of $39.2, or 11.8%, on a reported
basis (a decrease of 5.2% on a constant U.S. dollar basis).
Ongoing International Operations sales 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 9.8% on a reported basis to $37.7
for the third quarter of 2001, as compared with the third quarter of 2000 (a
decrease of 4.7% on a constant U.S. dollar basis), and decreased by 11.4% on a
reported basis to $117.6 for the nine months ended September 30, 2001, as
compared with the nine months ended September 30, 2000 (a decrease of 4.0% on a
constant U.S. dollar basis). In Latin America, which comprises Mexico, Central
America, South America and Puerto Rico, net sales decreased by 21.9% on a
reported basis to $28.6 for the third quarter of 2001, as compared with the
third quarter of 2000 (a decrease of 15.1% on a constant U.S. dollar basis), and
decreased by 8.6% on a reported basis to $95.0 for the nine months ended
September 30, 2001, as compared with the nine months ended September 30, 2000 (a
decrease of 3.7% on a constant U.S. dollar basis). In the Far East, net sales
decreased by 10.9% on a reported basis to $27.9 for the third quarter of 2001,
as compared with the third quarter of 2000 (a decrease of 4.7% on a constant
U.S. dollar basis), and decreased by 16.0% on a reported basis to $79.8 for the
nine months ended September 30, 2001, as compared with the nine months ended
September 30, 2000 (a decrease of 8.7% 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.
The decrease in net sales for the third quarter of 2001, as compared to
the third quarter of 2000 for Ongoing International Operations on a comparable
currency basis, was primarily due to increased competitive activity in Mexico
and Australia (which factor the Company estimates contributed to an
approximately 2.4% reduction in net sales), a reduction in sales volume in
certain tourist related markets in Latin America (which factor the Company
estimates contributed to an approximately 2.6% reduction in net sales), the
conversion of an operation to a distributor in 2001 (which factor the Company
estimates contributed to an approximately 1.7% reduction in net sales) and
difficult conditions in Argentina (which factor the Company estimates
contributed to an approximately 1.5% reduction in net sales).
The decrease in net sales in the nine months ended September 30, 2001,
as compared to the nine months ended September 30, 2000 for Ongoing
International Operations on a comparable currency basis, was primarily due to
the increased competitive activity in Japan, Hong Kong and Australia (which
factor the Company estimates contributed to an approximately 2.3% reduction in
net sales), a reduction in sales volume in certain tourist related markets in
Latin America (which factor the Company estimates contributed to an
approximately 1.6% reduction in net sales) and the conversion of an operation to
a distributor in 2001 (which factor the Company estimates contributed to an
approximately 1.3% reduction in net sales).
Cost of sales
As a percentage of net sales, cost of sales was 39.7% for the third
quarter of 2001, compared with 37.1% for the third quarter of 2000, and 40.9%
for the nine months ended September 30, 2001, compared
12
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
with 38.2% for the nine months ended September 30, 2000. Excluding the worldwide
professional products line, the Plusbelle brand in Argentina and the Colorama
brand in Brazil and excluding $5.8 and $30.6 ($6.1 of which represents increased
depreciation recorded for the Phoenix facility - See Note 3) of additional
consolidation costs associated with the shutdown of the Phoenix and Canada
facilities in the third quarter and nine months ended September 30, 2001,
respectively, which are reflected in reported cost of sales, cost of sales as a
percentage of net sales was 37.7% for the third quarter of 2001, compared with
36.5% for the third quarter of 2000 and 37.4% for the nine months ended
September 30, 2001, compared with 37.3% for the nine months ended September 30,
2000. The increase in cost of sales as a percentage of net sales for the third
quarter 2001, as compared to the comparable 2000 period is due to a higher level
of sales incentives which increased to approximately 2.7% of net sales in the
third quarter of 2001 from approximately 0.3% in the third quarter of 2000,
partially offset by lower sales returns and allowances. Cost of sales as a
percentage of net sales for the nine months ended September 30, 2001, as
compared to the nine months ended September 30, 2000, showed improvements
resulting from lower sales returns and allowances, which were offset by a higher
level of sales incentives.
SG&A expenses
SG&A expenses were $169.0 for the third quarter of 2001, compared with
$192.7 for the third quarter of 2000 and $553.9 for the nine months ended
September 30, 2001, compared with $633.2 for the nine months ended September 30,
2000. Excluding the worldwide professional products line, the Plusbelle brand in
Argentina and the Colorama brand in Brazil and $1.2 and $6.9 of additional
consolidation costs associated with the shutdown of the Phoenix and Canada
facilities in the third quarter and nine months ended September 30, 2001,
respectively, which are reflected in reported SG&A expenses, SG&A expenses were
$165.5 for the third quarter of 2001, compared with $188.3 for the third quarter
of 2000 and $538.1 for the nine months ended September 30, 2001, compared with
$565.8 for the nine months ended September 30, 2000. The decrease in ongoing
SG&A expenses for the third quarter and nine months ended September 30, 2001, as
compared to the comparable 2000 periods, is due primarily to the reduction of
departmental general and administrative expenses from $83.9 in the third quarter
of 2000 to $67.8 for the third quarter of 2001 and from $260.7 for the nine
months ended September 30, 2000 to $216.5 for the nine months ended September
30, 2001 as a result of the Company's restructuring efforts, partially offset by
recognition of higher brand support from $255.7 for the nine months ended
September 30, 2000 to $266.3 for the nine months ended September 30, 2001.
Restructuring costs
In the fourth quarter of 1999, the Company continued to restructure its
organization and began a new program in line with its original restructuring
plan developed in late 1998, principally for additional employee severance and
other personnel benefits and to restructure certain operations outside the
United States, including certain operations in Japan. In the first quarter of
2000, the Company recorded a charge of $9.5 relating to the 1999 restructuring
program that began in the fourth quarter of 1999. The Company continued to
implement the 1999 restructuring program 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 initiated a
new restructuring program in line with the original restructuring plan developed
in late 1998, designed to improve profitability by reducing personnel and
consolidating manufacturing facilities. The Company recorded a charge of $13.7
in the third quarter of 2000 for programs begun in such quarter as well as for
programs previously commenced. The 2000 restructuring program 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 program also includes the
remaining obligation for excess leased real estate in the
13
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
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 previous restructuring
programs, as well as the 2000 restructuring program, principally for additional
employee severance and other personnel benefits, relocation and to consolidate
worldwide operations. Additionally, in the second quarter of 2001, the Company
continued to implement the 2000 restructuring program and recorded a charge of
$7.9, principally for additional employee severance and other personnel
benefits, relocation and other costs related to the consolidation of worldwide
operations. The Company continued to implement the 2000 restructuring program in
the third quarter of 2001 and recorded a charge of $3.0, principally for
additional employee severance and other personnel benefits and relocation. The
Company anticipates that it will recognize approximately $25 to $30 (including
amounts recorded to date) of costs to implement this program during 2001.
The Company anticipates annualized savings of approximately $23 to $25
relating to the restructuring charges recorded during the nine months ended
September 30, 2001.
Other expenses (income)
Interest expense was $34.1 for the third quarter of 2001 compared with
$35.6 for the third quarter of 2000 and $104.8 for the nine months ended
September 30, 2001 compared with $108.9 for the nine months ended September 30,
2000. The decrease in interest expense for the third quarter and nine months
ended September 30, 2001 as compared to the third quarter and nine months ended
September 30, 2000 is primarily due to the repayment of borrowings under the
Credit Agreement with the net proceeds from the disposition of the worldwide
professional products line, the Plusbelle brand in Argentina and the Colorama
brand in Brazil and by lower interest rates under the Credit Agreement.
Sale of product line, brands and facilities
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. In connection with the disposition the
Company recognized a pre-tax and after-tax loss of $7.7 during the third quarter
of 2001.
In July 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 $6.5, $6.3 of which was recorded in
the second quarter of 2001. Additionally, the Company recognized a pre-tax and
after-tax loss on the disposition of the Aoyama Property in Japan 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.
14
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
Provision for income taxes
The provision for income taxes was $1.5 for the third quarter of 2001
compared with $2.2 for the third quarter of 2000 and $3.3 for the nine months
ended September 30, 2001 compared with $7.0 for the nine months ended September
30, 2000. The decrease in the provision for income taxes for the nine months
ended September 30, 2001, as compared to the nine months ended September 30,
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 nine months ended September 30,
2001 in certain markets outside the United States.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities was $90.0 and $131.7 for the
nine months ended September 30, 2001 and 2000, respectively. The decrease in net
cash used for operating activities for the nine months ended September 30, 2001,
compared with the nine months ended September 30, 2000 resulted primarily from
reduced utilization of working capital, partially offset by a higher net loss in
the nine months ended September 30, 2001.
Net cash provided by investing activities was $87.1 and $325.1 for the
nine months ended September 30, 2001 and 2000, respectively. Net cash provided
by investing activities for the nine months ended September 30, 2001 consisted
of net proceeds from the sale of the Company's Colorama brand in Brazil, the
Company's subsidiary in Maesteg, Wales, UK, the Aoyama Property in Japan and the
Phoenix facility, partially offset by capital expenditures. Net cash provided by
investing activities in the nine months ended September 30, 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 used for financing activities was $14.6 and $193.2 for the
nine months ended September 30, 2001 and 2000, respectively. Net cash used for
financing activities for the nine months ended September 30, 2001 included the
repayment of borrowings under the Credit Agreement with the net proceeds from
the disposition of the Colorama brand in Brazil and payment of debt issuance
costs, partially offset by cash drawn under the Credit Agreement. Net cash used
for financing activities for the nine months ended September 30, 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 September 30, 2001, the
Credit Agreement provided up to $471.1 and was comprised of five senior secured
facilities: $89.0 in two term loan facilities (the "Term Loan Facilities"), a
$300.0 multi-currency facility (the "Multi-Currency Facility"), a $32.1
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"). At September 30, 2001, the Company
had $89.0 outstanding under the Term Loan Facilities, $252.3 outstanding under
the MultiCurrency Facility, $32.1 outstanding under the Acquisition Facility and
$28.7 of issued but undrawn letters of credit under the Special LC Facility. 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),
15
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
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.
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 and borrowings under the Credit Agreement and
refinancings. 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
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, payments to be made in connection with the Company's
restructuring programs referred to above and debt service payments.
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 purchases of permanent displays for all of 2002
will be $45 to $60 and capital expenditures for all of 2002 will be $15 to $25.
The Company estimates that cash payments related to the Company's 2000 and 1999
restructuring programs and executive separation costs incurred in 1999 will be
$60 to $80 for all of 2001. Pursuant to a tax sharing agreement, Products
Corporation may be required to make tax sharing payments to Revlon, Inc. (which
in turn may be required to make tax sharing payments to Mafco Holdings) as if
Products Corporation were filing separate income tax returns, except that no
payments are required by Products Corporation (or Revlon, Inc.) if and to the
extent that Products Corporation is prohibited under the Credit Agreement from
making tax sharing payments to Revlon, Inc. The Credit Agreement prohibits
Products Corporation from making any tax sharing payments other than in respect
of state and local income taxes. Products Corporation currently anticipates
that, as a result of net operating tax losses and prohibitions under the Credit
Agreement, no cash federal tax payments or cash payments in lieu of federal
taxes pursuant to the tax sharing agreement 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 $14.4 and nil (U.S. dollar
equivalent) outstanding at September 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) and borrowings under the
Credit Agreement will be sufficient to enable the Company to meet its
anticipated cash requirements during 2001 on a consolidated basis, including for
debt service and expenses in connection with the Company's restructuring
programs. In addition, the Company anticipates that it will refinance the Credit
Agreement before the first quarter of 2002 on terms that are satisfactory to the
Company. Products Corporation issued a press release on November 6, 2001
reporting that it intends to refinance its existing Credit Agreement with the
proceeds from an offering of approximately $250 in principal amount of senior
secured notes due 2005 and an amended and restated secured credit agreement
providing for borrowings of approximately $325. There can be no assurance that
the refinancing will be consummated or if consummated
16
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
as to terms. The senior secured notes, which the Company expects to offer, would
not be registered under the Securities Act of 1933, as amended. In addition,
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) and borrowings under the Credit Agreement will be sufficient to meet
the Company's cash requirements on a consolidated basis. If the Company is
unable to satisfy such cash requirements 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 programs, restructuring
indebtedness, selling additional assets or operations, or seeking capital
contributions or additional loans from Revlon, Inc. or other affiliates of the
Company. 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 to continue to satisfy its capital requirements or that they
would be permitted under the terms of the Company's various debt instruments
then in effect. The terms of the Credit Agreement, the 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.
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 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
17
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
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
September 30, 2001.
EXPECTED MATURITY DATE FOR YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------- FAIR VALUE
SEPT. 30,
2001 2002 2003 2004 THEREAFTER TOTAL 2001
----------------------------------------------------------------------- ----------
(US dollar equivalent in millions)
DEBT
- ---------------
Short-term variable rate (various currencies) .... $ 30.3 $ 29.7 * $ 60.0 $ 60.0
Average interest rate (a) .................. 6.6% 8.6%
Short-term variable rate ($US) ................... 343.7 * 343.7 343.7
Average interest rate (a) .................. 6.6%
Long-term fixed rate ($US) ....................... $1,149.5 1,149.5 692.7
Average interest rate ...................... 8.6%
---------- ----------- ------------ ----------- -----------
Total debt........................................ $ 30.3 $ 373.4 $1,149.5 $ 1,553.2 $1,096.4
---------- ----------- ------------ ----------- -----------
AVERAGE ORIGINAL
CONTRACTUAL US DOLLAR CONTRACT
RATE NOTIONAL VALUE FAIR VALUE
FORWARD CONTRACTS $/FC AMOUNT SEPT. 30, SEPT. 30,
- ----------------- 2001 2001
---------- ------------ ------------ ------------
Buy Euros/Sell USD .................................... 0.9284 $ 0.5 $ 0.5 $ -
Sell British Pounds/Buy USD ........................... 1.4437 3.7 3.6 (0.1)
Sell Australian dollars/Buy USD ....................... 0.5272 4.9 5.3 0.4
Sell South African Rand/Buy USD ....................... 0.1237 0.9 1.0 0.1
Buy British Pounds/Sell USD ........................... 1.4360 1.8 1.8 -
Buy Australian dollars/Sell New Zealand dollars ....... 1.2490 1.1 1.1 -
Buy British Pounds/Sell Euros 0.6315 1.5 1.5 -
------------ ------------ ------------
Total forward contracts ............................... $ 14.4 $ 14.8 $ 0.4
============ ============ ============
- --------------------
(a) Weighted average variable rates are based upon implied forward rates from
the yield curves at September 30, 2001.
* Represents the Company's Credit Agreement which matures in May 2002.
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 slotting fees, cooperative advertising arrangements
and buy-downs. The consensus will require that certain promotional payments that
are currently classified in SG&A expenses be classified as a reduction of net
sales. Although the impact of EITF 00-25 on the consolidated financial
statements is still being evaluated, its adoption is expected to reduce both net
sales and SG&A expenses by equal and offsetting amounts. The adoption will not
have any impact on the Company's reported operating income, net loss, or net
loss per common share. The Company will adopt EITF 00-25 no later that January
1, 2002.
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
18
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
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 $13. Amortization expense
related to goodwill was $8.6 and $5.4 for the year ended December 31, 2000 and
the nine months ended September 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.
In August 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations. Statement 143 requires recording the fair market value
of an asset retirement obligation as a liability in the period in which a legal
obligation associated with the retirement of tangible long-lived assets is
incurred. The Statement also requires recording the contra asset to the initial
obligation as an increase to the carrying amount of the related long-lived asset
and to depreciate that cost over the life of the asset. The liability is then
increased at the end of each period to reflect the passage of time and changes
in the initial fair value measurement. The Company is required to adopt the
provisions of Statement 143 effective fiscal 2003 and has not yet determined the
extent of its impact, if any.
In October 2001, the FASB issued Statement No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets. Statement 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The Statement also extends the reporting requirements to report separately as
discontinued operations, components of an entity that have either been disposed
of or classified as held for sale. The Company is required to adopt the
provisions of Statement 144 effective January 1, 2002 and has not yet determined
the extent of its impact, if any.
SUBSEQUENT EVENT
Products Corporation issued a press release on November 6, 2001
reporting that it intends to refinance its existing Credit Agreement with the
proceeds from an offering of approximately $250 in principal amount of senior
secured notes due 2005 and an amended and restated secured credit agreement
providing for borrowings of approximately $325. There can be no assurance that
the refinancing will be consummated or if consummated as to terms. The senior
secured notes, which the Company expects to offer, would not be registered under
the Securities Act of 1933, as amended.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q for the quarter ended September 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 the
charges, the cash cost and the annual savings resulting from plant shutdowns and
dispositions; the Company's expectation that its new trade terms for its U.S.
customers will increase consumption of its products, drive market
19
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
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 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 Revlon, Inc. or other affiliates of the
Company and the sale of additional assets or operations; the Company's
expectation that it will refinance its Credit Agreement before the first quarter
of 2002; the Company's intent to refinance its existing Credit Agreement with
the proceeds from an offering of senior secured notes and an amended and
restated credit agreement; 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 strategic plan; (iv) lower than expected cash flow
from operations, the inability to secure capital contributions or loans from
Revlon, Inc. or other affiliates of the Company or sell additional assets or
operations or the unavailability of funds under the Credit Agreement;
difficulties or delays in or the 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, disposition and consolidation of manufacturing
operations; (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
REVLON CONSUMER PRODUCTS CORPORATION 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 - None
(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.
REVLON CONSUMER PRODUCTS CORPORATION
Registrant
By:/s/ Douglas H. Greeff By:/s/ Laurence Winoker
- ---------------------------------- ---------------------------------------
Douglas H. Greeff Laurence Winoker
Executive Vice President Senior Vice President, Corporate
and Chief Financial Officer Controller and Treasurer
Dated: November 13, 2001
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