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: March 31, 2002
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.)
35 EAST 62ND STREET, NEW YORK, NEW YORK 10021
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212-572-8600
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 March 31, 2002, all of which were held by an affiliate of Mafco
Holdings Inc.
Total Pages - 22
REV HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
ASSETS 2002 2001
------------- -------------
Current assets: (Unaudited)
Cash and cash equivalents ............................................ $ 67.5 $ 103.3
Marketable securities ................................................. - 2.2
Trade receivables, less allowances of $14.6 and $16.1, respectively ... 189.8 203.9
Inventories ........................................................... 167.6 157.9
Prepaid expenses and other ............................................ 47.9 45.6
---------- ----------
Total current assets ............................................ 472.8 512.9
Property, plant and equipment, net .......................................... 139.8 142.8
Other assets ................................................................ 144.9 143.9
Intangible assets, net ...................................................... 198.1 198.5
---------- ----------
Total assets .................................................... $ 955.6 $ 998.1
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current liabilities:
Short-term borrowings - third parties ................................. $ 22.3 $ 17.5
Accounts payable ...................................................... 86.2 87.0
Accrued expenses and other ............................................ 280.2 285.4
---------- ----------
Total current liabilities ....................................... 388.7 389.9
Long-term debt - third parties .............................................. 1,706.4 1,700.0
Long-term debt - affiliates ................................................. 33.5 28.6
Other long-term liabilities ................................................. 258.4 261.1
Stockholder's deficiency:
Common stock, par value $1.00 per share; 1,000
shares authorized, issued and outstanding ....................... - -
Additional paid-in-capital ............................................ 306.7 306.7
Accumulated deficit since June 24, 1992 ............................... (1,671.4) (1,627.1)
Accumulated other comprehensive loss .................................. (66.7) (61.1)
--------- -----------
Total stockholder's deficiency .................................. (1,431.4) (1,381.5)
--------- -----------
Total liabilities and stockholder's deficiency ................. $ 955.6 $ 998.1
========= ===========
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
2
REV HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED
MARCH 31,
------------------------------
2002 2001
------------ ------------
Net sales ................................................................. $ 275.4 $ 313.6
Cost of sales ............................................................. 109.0 131.6
--------- ---------
Gross profit ......................................................... 166.4 182.0
Selling, general and administrative expenses .............................. 166.7 176.9
Restructuring costs ....................................................... 4.0 14.6
--------- ---------
Operating loss ....................................................... (4.3) (9.5)
--------- ---------
Other expenses (income):
Interest expense ..................................................... 41.7 50.9
Interest income ...................................................... (0.5) (0.9)
Amortization of debt issuance costs ................................. 1.9 2.7
Foreign currency gains, net .......................................... (0.6) (0.4)
Loss on sale of assets, net .......................................... 1.0 -
Miscellaneous, net ................................................... 0.7 0.8
--------- ---------
Other expenses, net ............................................. 44.2 53.1
--------- ---------
Loss before income taxes .................................................. (48.5) (62.6)
(Benefit) provision for income taxes ...................................... (4.2) 0.5
--------- ---------
Net loss $ (44.3) $ (63.1)
========= =========
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, 2001 ................................ $ (391.8) $ (1,442.3) $ (29.8) $ (1,863.9)
Net distribution from affiliate..................... (0.3)(b) (0.3)
Capital contribution from indirect parent........... 699.5 (c) 699.5
Comprehensive loss:
Net loss ................................... (63.1) (63.1)
Currency translation adjustment ............ (11.8) (11.8)
Revaluation of forward currency contracts .. 1.1 1.1
------------
Total comprehensive loss .......................... (73.8)
--------- ----------- ------------- ------------
Balance, March 31, 2001 ................................. $ 307.4 $ (1,505.4) $ (40.5) $ (1,238.5)
========= =========== ============= ============
Balance, January 1, 2002 ................................ $ 306.7 $ (1,627.1) $ (61.1) $ (1,381.5)
Comprehensive loss:
Net loss ................................... (44.3) (44.3)
Currency translation adjustment ............ (5.4) (5.4)
Revaluation of forward currency contracts .. (0.2) (0.2)
------------
Total comprehensive loss .......................... (49.9)
--------- ----------- ------------- ------------
Balance, March 31, 2002 ................................. $ 306.7 $ (1,671.4) $ (66.7) $ (1,431.4)
========= =========== ============= ============
- --------------------
(a) Accumulated other comprehensive loss includes unrealized losses (gains) on
revaluations of forward currency contracts of $0.2 and $(1.1) as of March
31, 2002 and 2001, respectively, cumulative net translation losses of $20.4
and $38.0 as of March 31, 2002 and 2001, respectively, and adjustments for
the minimum pension liability of $46.1 and $3.6 as of March 31, 2002 and
2001, respectively.
(b) Represents net distributions in capital from the Charles of the Ritz
business.
(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)
THREE MONTHS ENDED
MARCH 31,
-------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 2002 2001
------------- -------------
Net loss ................................................................................ $ (44.3) $ (63.1)
Adjustments to reconcile net loss to net cash
(used for) provided by operating activities:
Depreciation and amortization ...................................................... 25.9 32.3
Loss on sale of assets, net ........................................................ 1.0 -
Amortization of debt discount ...................................................... - 15.7
Change in assets and liabilities, net of acquisitions and dispositions:
Decrease in trade receivables ................................................. 12.2 2.9
Increase in inventories ....................................................... (11.1) (6.1)
Increase in prepaid expenses and otherer current assets ....................... (3.2) (3.6)
(Decrease) increase in accounts payable ....................................... (0.3) 4.1
Decrease in accrued expenses and other current liabilities .................... (1.0) (18.1)
Purchase of permanent displays ................................................ (14.9) (12.4)
Other, net .................................................................... (10.9) 2.7
-------- ---------
Net cash used for operating activities .................................................. (46.6) (45.6)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................................................... (1.9) (4.9)
Sale of marketable securities ........................................................... 1.8 -
-------- ---------
Net cash used for investing activities .................................................. (0.1) (4.9)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings - third parties ................................... 5.1 1.4
Proceeds from the issuance of long-term debt - third parties ............................ 7.1 88.2
Repayment of long-term debt - third parties ............................................. (1.2) (87.1)
Net distribution from affiliate ......................................................... - (0.3)
Capital contribution from indirect parent ............................................... - 22.0
Payment of debt issuance costs .......................................................... - (2.4)
Advance under the Keepwell Agreement .................................................... 4.9 -
-------- ---------
Net cash provided by financing activities ............................................... 15.9 21.8
-------- ---------
Effect of exchange rate changes on cash and cash equivalents ............................ (5.0) 2.6
-------- ---------
Net decrease in cash and cash equivalents .......................................... (35.8) (26.1)
Cash and cash equivalents at beginning of period ................................... 103.3 56.3
-------- ---------
Cash and cash equivalents at end of period ......................................... $ 67.5 $ 30.2
======== =========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest ...................................................................... $ 43.3 $ 47.7
Income taxes, net of refunds. ................................................. 0.5 0.5
Supplemental schedule of noncash financing activities:
Noncash capital contribution from indirect parent to cancel the Old REV .............
Holdings Notes and pursuant to the amended tax sharing agreements ............... $ - $ 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 accounting principles generally accepted
in the United States. 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, 2001.
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.
In November 2001, the FASB Emerging Issues Task Force (the "EITF")
reached consensus on EITF Issue 01-9 entitled, "Accounting for Consideration
Given by a Vendor to a Customer or a Reseller of the Vendor's Products" (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 adopted the earlier portion
of these new Guidelines (formerly EITF Issue 00-14) addressing certain sales
incentives effective January 1, 2001, and accordingly, all prior period
financial statements reflect the implementation of the earlier portion of the
Guidelines. The second portion of the Guidelines (formerly EITF Issue 00-25)
addresses vendor income statement characterization of consideration to a
purchaser of the vendor's products or services, including the classification of
slotting fees, cooperative advertising arrangements and buy-downs. Certain
promotional payments that were classified in SG&A expenses are now classified as
a reduction of net sales. The impact of the adoption of the second portion of
the Guidelines on the consolidated financial statements reduced both net sales
and SG&A expenses by equal and offsetting amounts. The adoption did not have any
impact on the Company's reported operating loss or net loss. The Company adopted
the second portion of the Guidelines effective January 1, 2002, and accordingly,
all prior period financial statements reflect the implementation of the second
portion of the Guidelines.
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
6
REV HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
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 requires 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 requires that intangible assets with
finite useful lives be amortized over their respective estimated useful lives to
their estimated residual values, and reviewed for impairment in accordance with
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
The Company adopted the provisions of Statement 141 in July 2001 and Statement
142 effective January 1, 2002. In connection with the adoption of Statement 142,
the Company performed a transitional goodwill impairment test as required and
has determined that no goodwill impairment existed at March 31, 2002. The
Company has also evaluated the lives of all of its intangible assets. As a
result of this evaluation the Company has determined that none of its intangible
assets, other than goodwill, have indefinite lives and that the existing useful
lives are appropriate.(See Note 4).
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 has adopted the provisions of
Statement 144 effective January 1, 2002 and such adoption had no effect on its
financial statements.
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year's presentation.
(2) INVENTORIES
MARCH 31, DECEMBER 31,
2002 2001
------------ -------------
Raw materials and supplies ........................... $ 52.5 $ 44.9
Work-in-process ...................................... 12.1 10.1
Finished goods ....................................... 103.0 102.9
---------- ----------
$ 167.6 $ 157.9
========== ==========
(3) OTHER ASSETS
The Company capitalizes the cost of permanent display fixtures and
amortizes such cost over the estimated useful life of the assets of three to
five years. Beginning in the first quarter of 2002, the Company decided to
roll-out new permanent display units, replacing existing permanent display
fixtures at an accelerated rate. As a result, the useful lives of those
permanent display fixtures to be replaced was shortened to their new estimated
useful lives, resulting in accelerated amortization of $2.8 during the
three-month period ended March 31, 2002.
(4) INTANGIBLE ASSETS, NET
Intangible assets, net of $198.1 and $198.5 at March 31, 2002 and
December 31, 2001, respectively, consists of trademarks, net, patents, net and
goodwill, net. The amounts outstanding for these intangible assets at March 31,
2002 and December 31, 2001 were as follows: for trademarks, net, $6.6 and $6.8,
respectively; for patents, net, $5.6 and $5.8, respectively; and for goodwill,
net, $185.9 at both March
7
REV HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
31, 2002 and December 31, 2001. Amortization expense for the three-months ended
March 31, 2002 and 2001 was $0.4 and $2.3, respectively. Amortization of
goodwill ceased on January 1, 2002 upon adoption of Statement 142. Excluding
amortization expense related to goodwill of $1.9 recognized during the
three-months ended March 31, 2001, net loss would have been $61.2. The Company's
intangible assets other than goodwill continue to be subject to amortization,
which is anticipated to be approximately $1.6 annually through December 31,
2007.
(5) RESTRUCTURING AND OTHER COSTS, NET
During the third quarter of 2000, 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 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 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.
In the first quarter of 2002, the Company continued to implement the
2000 restructuring program and recorded a charge of $4.0, principally for
additional employee severance and other personnel benefits, relocation and other
costs related to the consolidation of worldwide operations.
In connection with the 2000 restructuring program, termination benefits
for 2,349 employees were included in the Company's restructuring charges of
which 2,100 employees have been terminated as of March 31, 2002. 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 three-month period
ended March 31, 2002 are as follows:
BALANCE UTILIZED, NET BALANCE
AS OF -------------------------- AS OF
1/1/02 EXPENSES, NET CASH NONCASH 3/31/02
----------- ------------- ------------ ----------- ----------
Employee severance and other
personnel benefits ....................... $ 15.1 $ 3.0 $ (5.7) $ - $ 12.4
Relocation .................................... - 0.1 (0.1) - -
Leases and equipment write-offs ............... 7.4 0.7 (0.6) - 7.5
Other obligations ............................. 0.3 0.2 (0.1) - 0.4
----------- -------- ---------- --------- --------
$ 22.8 $ 4.0 (6.5) $ - $ 20.3
=========== ======== ========== ========= ========
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
8
REV HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
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 March 31, 2001 of
$6.2, which is included in cost of sales.
(6) 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.
During the first quarter of 2002, to reflect the integration of
management reporting responsibilities, the Company reclassified Puerto Rico's
results from its international operations to its United States operations. The
geographic information reflects this change for both the 2002 and 2001 periods.
THREE MONTHS ENDED
GEOGRAPHIC AREAS: MARCH 31,
------------------------------
Net sales: 2002 2001
------------ ------------
United States .............................. $ 187.0 $ 202.5
Canada ..................................... 9.4 10.0
------------ ------------
United States and Canada ................... 196.4 212.5
International .............................. 79.0 101.1
------------ ------------
$ 275.4 $ 313.6
============ ============
MARCH 31, DECEMBER 31,
Long-lived assets: 2002 2001
------------ ------------
United States .............................. $ 364.7 $ 365.0
Canada ..................................... 2.6 2.5
------------ ------------
United States and Canada ................... 367.3 367.5
International .............................. 115.5 117.7
------------ ------------
$ 482.8 $ 485.2
============ ============
THREE MONTHS ENDED
CLASSES OF SIMILAR PRODUCTS: MARCH 31,
------------------------------
Net sales: 2002 2001
------------ ------------
Cosmetics, skin care and fragrances ........ $ 175.4 $ 206.6
Personal care .............................. 100.0 107.0
------------ ------------
$ 275.4 $ 313.6
============ ============
9
REV HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(7) DISPOSITION
In February 2002, Products Corporation completed the disposition of its
subsidiaries that operated its marketing, sales and distribution business in
Belgium, the Netherlands and Luxembourg ("Benelux"). As part of this sale,
Products Corporation entered into a long-term distribution agreement with the
purchaser pursuant to which the purchaser distributes the Company's products in
Benelux. The purchase price consisted principally of the assumption of certain
liabilities and a deferred purchase price contingent upon future results of up
to approximately $3.3, which could be received over approximately a seven-year
period. In connection with the disposition, the Company recognized a pre-tax and
after-tax loss of $1.0.
(8) DERIVATIVE FINANCIAL INSTRUMENTS
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 is recognized in cost of
sales upon the recognition of the underlying inventory cost or transactions
being hedged. During 2002, the Company 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. The notional
amount of forward foreign exchange contracts outstanding at March 31, 2002 was
$32.5. The Company recorded an accrued liability of $0.2 on the balance sheet
and a debit of $0.2 in Other Comprehensive Loss for the fair value effects of
the foreign currency forward exchange contracts outstanding at March 31, 2002.
(9) 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 Senior Secured Discount
Notes due 2001 (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.
On February 1, 2002, GSB Investments Corp. made a non-interest bearing
advance of $4.9 to REV Holdings under the Keepwell Agreement (as hereinafter
defined), which was used to make the February 1, 2002 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 July 16, 2001 Products Corporation completed the disposition of the
Colorama brand in Brazil. Accordingly, the Unaudited Consolidated Condensed
Financial Statements include the results of operations of the Colorama brand
through the date of its disposition.
During the first quarter of 2002, to reflect the integration of
management reporting responsibilities, the Company reclassified Puerto Rico's
results from its international operations to its United States operations.
Management's discussion and analysis data reflects this change for both the 2002
and 2001 periods.
Discussion of Critical Accounting Policies:
In the ordinary course of business, the Company has made a number of
estimates and assumptions relating to the reporting of results of operations and
financial condition in the preparation of its financial statements in conformity
with accounting principles generally accepted in the United States of America.
Actual results could differ significantly from those estimates and assumptions.
The Company believes that the following discussion addresses the Company's most
critical accounting policies, which are those that are most important to the
portrayal of the Company's financial condition and results and require
management's most difficult, subjective and complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain.
Sales Returns:
The Company allows customers to return their unsold products when they
meet certain Company-established criteria as outlined in the Company's trade
terms. The Company regularly reviews and revises, when deemed necessary, its
estimates of sales returns based primarily upon actual returns, planned product
discontinuances, and promotional sales, which would permit customers to return
items based upon the Company's trade terms. The Company records estimated sales
returns as a reduction to sales, cost of sales and accounts receivable and an
increase to inventory. Cost of sales includes the cost of refurbishment of
returned products. Returned products which are recorded as inventories are
valued based upon expected realizability. The physical condition and
marketability of the returned products are the major factors considered by the
Company in estimating realizable value. Actual returns, as well as realized
values on returned products, may differ significantly, either favorably or
unfavorably, from our estimates if factors such as product discontinuances,
customer inventory levels or competitive conditions differ from our estimates
and expectations and, in the case of actual returns, if economic conditions
differ significantly from our estimates and expectations.
Trade Support Costs:
In order to support the retail trade, the Company has various
performance-based arrangements with retailers to reimburse them for all or a
portion of their promotional activities related to the Company's products. The
Company regularly reviews and revises, when deemed necessary, estimates of costs
to the Company for these promotions based on estimates of what has been incurred
by the retailers. Actual costs incurred by the Company may differ significantly
if factors such as the level and success of the retailers' programs or other
conditions differ from our estimates and expectations.
11
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
Inventories:
Inventories are stated at the lower of cost or market value. Cost is
principally determined by the first-in, first-out method. The Company records
adjustments to the value of inventory based upon its forecasted plans to sell
its inventories. The physical condition (e.g., age and quality) of the
inventories is also considered in establishing its valuation. These adjustments
are estimates, which could vary significantly, either favorably or unfavorably,
from actual requirements if future economic conditions, customer inventory
levels, product discontinuances or competitive conditions differ from our
estimates and expectations.
Property, Plant and Equipment and Other Assets:
Property, plant and equipment is recorded at cost and is depreciated on
a straight-line basis over the estimated useful lives of such assets. Changes in
circumstances such as technological advances, changes to the Company's business
model, changes in the planned use of fixtures or software or closing of
facilities or changes in the Company's capital strategy can result in the actual
useful lives differing from the Company's estimates.
Long-lived assets, including fixed assets, permanent display units and
intangibles other than goodwill, are reviewed by the Company for impairment
whenever events or changes in circumstances indicate that the carrying amount of
any such asset may not be recoverable. The estimate of cash flow is based upon,
among other things, certain assumptions about expected future operating
performance. The Company's estimates of undiscounted cash flow may differ from
actual cash flow due to, among other things, technological changes, economic
conditions, changes to its business model or changes in its operating
performance. If the sum of the undiscounted cash flows (excluding interest) is
less than the carrying value, the Company recognizes an impairment loss,
measured as the amount by which the carrying value exceeds the fair value of the
asset. In those cases where the Company determines that the useful life of other
long-lived assets should be shortened, the Company would depreciate the net book
value in excess of the salvage value (after testing for impairment as described
above), over the revised remaining useful life of such asset thereby increasing
amortization expense.
Pension Benefits:
The Company sponsors pension and other retirement plans in various
forms covering substantially all employees who meet eligibility requirements.
Several statistical and other factors which attempt to anticipate future events
are used in calculating the expense and liability related to the plans. These
factors include assumptions about the discount rate, expected return on plan
assets and rate of future compensation increases as determined by the Company,
within certain guidelines. In addition, the Company's actuarial consultants also
use subjective factors such as withdrawal and mortality rates to estimate these
factors. The actuarial assumptions used by the Company may differ materially
from actual results due to changing market and economic conditions, higher or
lower withdrawal rates or longer or shorter life spans of participants. These
differences may result in a significant impact to the amount of pension expense
recorded by the Company. Due to decreases in interest rates and declines in the
income of assets in the plans, it is expected that the pension expense for 2002
will be significantly higher than in recent years.
12
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
RESULTS OF OPERATIONS
In order to provide a more meaningful comparison of results from
operations, the Company's discussion is presented on an "ongoing operations"
basis. The following table sets forth certain summary unaudited data for the
Company for the quarters ended March 31, 2002 and March 31, 2001 reconciling the
Company's actual "as reported results" to the ongoing operations, after giving
effect to the following: (i) the disposition of the Colorama brand, assuming
such transaction occurred on January 1, 2001; (ii) the elimination of
restructuring costs in the period incurred; and (iii) the elimination of
additional costs associated with the closing of the Phoenix and Canada
facilities that were included in cost of sales and selling, general and
administrative expenses ("SG&A") and executive severance costs that were
included in SG&A expenses in the period incurred (after giving effect thereto,
the "Ongoing Operations"). The adjustments are based upon available information
and certain assumptions that our management believes are reasonable and do not
represent pro forma adjustments prepared in accordance with Regulation S-X. The
summary unaudited data for the Ongoing Operations does not purport to represent
the results of operations or our financial position that actually would have
occurred had the foregoing transactions referred to in (i) above been
consummated on January 1, 2001.
QUARTER ENDED MARCH 31, 2002:
- -------------------------------------------
BRANDS AND RESTRUCTURING
AS FACILITIES COSTS AND ONGOING
REPORTED SOLD OTHER, NET OPERATIONS
---------------- ----------------- ---------------- -----------------
Net sales ....................................... $ 275.4 $ - $ - $ 275.4
Gross profit .................................... 166.4 - 0.7 167.1
SG&A expenses ................................... 166.7 - (6.6) 160.1
Restructuring costs and other, net. ............. 4.0 - (4.0) -
QUARTER ENDED MARCH 31, 2001:
- -------------------------------------------
BRANDS AND RESTRUCTURING
AS FACILITIES COSTS AND ONGOING
REPORTED SOLD OTHER, NET OPERATIONS
------------- ------------- ------------- -----------
Net sales ....................................... $ 313.6 $ (9.8) $ - $ 303.8
Gross profit .................................... 182.0 (4.2) 6.4 184.2
SG&A expenses ................................... 176.9 (3.5) (1.7) 171.7
Restructuring costs and other, net. ............. 14.6 - (14.6) -
Net sales
Net sales were $275.4 and $313.6 for the first quarters of 2002 and
2001, respectively, a decrease of $38.2, or 12.2% on a reported basis (a
decrease of 9.0% on a constant U.S. dollar basis).
Net sales from Ongoing Operations were $275.4 and $303.8 for the first
quarters of 2002 and 2001, respectively, a decrease of $28.4, or 9.3% on a
reported basis (a decrease of 6.3% on a constant U.S. dollar basis).
United States and Canada. Net sales in the United States and Canada on
both an as reported and Ongoing Operations basis were $196.4 for the first
quarter of 2002 compared with $212.5 for the first quarter of 2001, a decrease
of $16.1, or 7.6%. The decrease for the first quarter of 2002 of 7.6% was driven
primarily by lower shipments to our retail customers as a result of the decision
by two major U.S. retailers to shift the timing of plan-o-gram resets for
certain 2002 new products (this resulted in shipments
13
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
of approximately $14.0 of 2002 new products in the fourth quarter of 2001) and
to a lesser extent higher promotional activity and increased competitive
activity.
International. Net sales in the Company's international operations were
$79.0 for the first quarter of 2002, compared with $101.1 for the first quarter
of 2001, a decrease of $22.1, or 21.9% on a reported basis (a decrease of $11.6,
or 12.7% on a constant U.S. dollar basis).
Net sales in the Company's international Ongoing Operations ("Ongoing
International Operations") were $79.0 and $91.3 for the first quarters of 2002
and 2001, respectively, a decrease of $12.3, or 13.5%, on a reported basis (a
decrease of $3.0, or 3.6% 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 is comprised of Europe,
the Middle East and Africa, net sales decreased by $6.0, or 15.8% on a reported
basis to $32.0 for the first quarter of 2002, as compared with the first quarter
of 2001 (a decrease of $2.0, or 5.9% on a constant U.S. dollar basis). In Latin
America, which is comprised of Mexico, Central America and South America, net
sales decreased by $6.1, or 21.1% on a reported basis to $22.8 for the first
quarter of 2002, as compared with the first quarter of 2001 (a decrease of $1.4,
or 5.7% on a constant U.S. dollar basis). In the Far East, net sales decreased
by $0.2, or 0.8% on a reported basis to $24.2 for the first quarter of 2002, as
compared with the first quarter of 2001 (an increase of $0.4, or 1.7% on a
constant U.S. dollar basis). Net sales in the Company's international operations
may be adversely affected by weak economic conditions, political uncertainties,
adverse currency fluctuations, and competitive activities.
The decrease in net sales for the first quarter of 2002, as compared to
the first quarter of 2001, for Ongoing International Operations on a comparable
currency basis, was primarily due to political and economic difficulties in
Argentina and Venezuela (which factor the Company estimates contributed to an
approximately 2.9% reduction in net sales on a constant dollar basis),
conversion of the Company's Benelux business to a distributor and lower sales to
certain other European distributors (which factor the Company estimates
contributed to an approximately 5.3% reduction in net sales on a constant dollar
basis), partially offset by increased new product sales and distribution in the
U.K., China, Hong Kong and France (which factor the Company estimates
contributed to an approximately 4.6% increase in net sales on a constant dollar
basis).
Gross profit
Gross profit was $166.4 for the first quarter of 2002, compared with
$182.0 for the first quarter of 2001. As a percentage of net sales, gross profit
margins were 60.4% for the first quarter of 2002 compared with 58.0% for the
first quarter of 2001. Gross profit and gross profit margin for Ongoing
Operations were $167.1 and 60.7%, respectively, in the first quarter of 2002
compared with gross profit and gross profit margin of $184.2 and 60.6% in the
first quarter of 2001. The improvement in gross profit margin on an ongoing
basis in the first quarter of 2002 compared to the first quarter of 2001 is due
to favorable product mix and reduced overhead costs as a result of the shutdown
of the Phoenix and Canada facilities in 2001, partially offset by higher
promotional activity. Gross profit from Ongoing Operations for the first quarter
of 2001 excludes $6.4 ($6.2 of which represents increased depreciation recorded
for the Phoenix facility - See Note 5) of additional consolidation costs
associated with the shutdown of the Phoenix and Canada facilities in 2001 and
$4.2 of gross profit from the Colorama brand in Brazil.
SG&A expenses
SG&A expenses were $166.7 for the first quarter of 2002, compared with
$176.9 for the first quarter of 2001. SG&A expenses for Ongoing Operations were
$160.1 for the first quarter of 2002, which
14
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
excludes $6.5 of executive separation costs, compared with $171.7 for the first
quarter of 2001, which excludes $1.7 of additional consolidation costs
associated with the shutdown of the Phoenix and Canada facilities in 2001 and
$3.5 of SG&A expenses of the Colorama brand in Brazil. The decrease in SG&A
expenses for Ongoing Operations for the first quarter of 2002, as compared to
the comparable 2001 period, is due primarily to the reduction of departmental
and other general and administrative expenses from $83.9 in the first quarter of
2001 to $72.4 for the first quarter of 2002, primarily as a result of the
Company's restructuring efforts and the elimination of goodwill amortization of
$1.9, as well as decreases in distribution costs of $2.5. The decrease in SG&A
expenses for Ongoing Operations was partially offset by an increase in brand
support expenses from $72.0 for the first quarter of 2001 to $74.4 for the first
quarter of 2002, including accelerated amortization expense of $2.8 associated
with the roll-out of the Company's new permanent display units.
Restructuring costs
During the third quarter of 2000, 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 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 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.
In the first quarter of 2002, the Company continued to implement the
2000 restructuring program and recorded a charge of $4.0, principally for
additional employee severance and other personnel benefits, relocation and other
costs related to the consolidation of worldwide operations.
The Company anticipates annualized savings of approximately $4 to $6
relating to the restructuring charges recorded during the first quarter of 2002.
Other expenses (income)
Interest expense was $41.7 for the first quarter of 2002 compared with
$50.9 for the first quarter of 2001. The decrease in interest expense for the
first quarter of 2002, as compared to the first quarter of 2001, is primarily
due to the cancellation of the Old REV Holdings Notes, lower average outstanding
borrowings and lower interest rates under the Credit Agreement (as hereinafter
defined), partially offset by the interest on the 12% Senior Secured Notes due
2005 (the "12% Notes") (which were issued in late November 2001) and interest on
the New REV Holdings Notes that were issued in February 2001.
Sale of assets, net
In February 2002, Products Corporation completed the disposition of its
Benelux business. As part of this sale, Products Corporation entered into a
long-term distribution agreement with the purchaser pursuant to which the
purchaser distributes the Company's products in Benelux. The purchase price
consisted principally of the assumption of certain liabilities and a deferred
purchase price contingent upon future results of up to approximately $3.3, which
could be received over approximately a seven-year period. In connection with the
disposition, the Company recognized a pre-tax and after-tax loss of $1.0.
15
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
(Benefit) provision for income taxes
The (benefit) provision for income taxes was $(4.2) for the first
quarter of 2002, compared with $0.5 for the first quarter of 2001. The benefit
for income taxes in the first quarter of 2002 resulted from the Company's full
utilization of its alternative minimum tax net operating losses to offset the
alternative minimum taxable income recorded in 2001 in connection with the
retirement of the Old REV Holdings Notes, in accordance with the new tax
legislation enacted in the first quarter of 2002.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities was $46.6 and $45.6 for the
first quarters of 2002 and 2001, respectively. The increase in net cash used for
operating activities is due to lower depreciation and amortization expenses in
the 2002 period due to the disposal of manufacturing facilities during 2001 and
the elimination of goodwill amortization, which was partially offset by
accelerated amortization of permanent display units and higher purchases of
permanent displays, partially offset by changes in working capital.
Net cash used for investing activities was $0.1 and $4.9 for the first
quarter of 2002 and 2001, respectively. Net cash used for investing activities
for the first quarter of 2002 consisted of capital expenditures, partially
offset by the sale of marketable securities. Net cash used for investing
activities for the first quarter of 2001 consisted of capital expenditures. The
reduction in capital expenditures for the first quarter of 2002, as compared to
the first quarter of 2001, is due to the timing of such expenditures.
Net cash provided by financing activities was $15.9 and $21.8 for the
first quarters of 2002 and 2001, respectively. Net cash provided by financing
activities for the first quarter of 2002 included cash drawn under the 2001
Credit Agreement and an advance under the Keepwell Agreement, partially offset
by the repayment of borrowings under the 2001 Credit Agreement. Net cash
provided by financing activities for the first quarter of 2001 included
borrowings under the 1997 Credit Agreement and a capital contribution from an
indirect parent to retire the Old REV Holdings Notes, partially offset by
repayments of borrowings under the 1997 Credit Agreement, payment of debt
issuance costs and repayment of the remaining portion of the Old REV Holdings
Notes with such capital contribution.
On November 26, 2001, Products Corporation issued and sold $363 in
aggregate principal amount of 12% Notes in a private placement, receiving gross
proceeds of $350.5. Products Corporation used the proceeds from the 12% Notes
and borrowings under the 2001 Credit Agreement to repay outstanding indebtedness
under Products Corporation's 1997 Credit Agreement and to pay fees and expenses
incurred in connection with entering into the 2001 Credit Agreement and the
issuance of the 12% Notes, and the balance was available for general corporate
purposes. On February 25, 2002, Products Corporation filed a registration
statement with the Securities and Exchange Commission (the "Commission") with
respect to an offer to exchange the 12% Notes for registered notes with
substantially the same terms (the "Exchange Offer"), which registration
statement became effective on May 13, 2002. The Exchange Offer will expire on
June 13, 2002, unless extended.
On November 30, 2001, Products Corporation entered into the 2001 Credit
Agreement with a syndicate of lenders, whose individual members change from time
to time, which agreement amended and restated the credit agreement entered into
by Products Corporation in May 1997 (as amended, the "1997 Credit Agreement";
the 2001 Credit Agreement and the 1997 Credit Agreement are sometimes referred
to as the "Credit Agreement"), and which matures on May 30, 2005. As of March
31, 2002, the 2001 Credit Agreement provided up to $250.0, which is comprised of
a $117.9 term loan facility (the "Term Loan Facility") and a $132.1
multi-currency revolving credit facility (the "Multi-Currency Facility"). At
March
16
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
31, 2002, the Term Loan Facility was fully drawn and $97.6 was available under
the MultiCurrency Facility, including the letters of credit.
The Company's principal sources of funds are expected to be cash flow
generated from operations, cash on hand and available borrowings under the
Multi-Currency Facility of the Credit Agreement and advances under the Keepwell
Agreement. The Credit Agreement, Products Corporation's 12% Notes, 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
restructuring programs referred to above, debt service payments and interest
under the New REV Holdings Notes.
The Company estimates that cash payments related to the restructuring
programs referred to in Note 5 to the Unaudited Consolidated Condensed Financial
Statements and executive separation costs will be $25 to $30 in 2002. 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 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 2002.
Products Corporation enters into forward foreign exchange contracts and
option contracts from time to time to hedge certain cash flows denominated in
foreign currencies. There were forward foreign exchange contracts with a
notional amount of $32.5 and a fair value of $0.2 outstanding at March 31, 2002.
There were no option contracts outstanding at March 31, 2002.
The Company expects that cash flows from operations, cash on hand,
available borrowings under the Multi-Currency Facility of the Credit Agreement
and advances under the Keepwell Agreement will be sufficient to enable the
Company to meet its anticipated cash requirements during 2002 including the
payment of operating expenses, working capital, purchases of permanent displays
and capital expenditure requirements, expenses in connection with the Company's
restructuring programs referred to above and debt service payments of its
subsidiaries. However, there can be no assurance that the combination of cash
flow from operations, cash on hand, available borrowings under the
Multi-Currency Facility of the Credit Agreement and advances under the Keepwell
Agreement will be sufficient to meet the Company's cash requirements.
Additionally, in the event of a decrease in demand for Products Corporation's
products or reduced sales, such development, if significant, could reduce
Products Corporation's cash flow from operations and could adversely affect
Products Corporation's ability to achieve certain financial covenants under the
Credit Agreement, including the minimum EBITDA covenant, and in such event the
Company could be required to take measures, including reducing discretionary
spending. If the Company is unable to satisfy such cash requirements from these
sources, the Company could be required to adopt one or more alternatives, such
as reducing or delaying purchases of permanent displays, reducing or delaying
capital expenditures, delaying or revising restructuring programs, restructuring
subsidiary indebtedness, selling assets or operations, selling its equity
securities, seeking capital contributions or loans from affiliates of the
Company or selling additional
17
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
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, 2003. There can be no assurance that any of such
actions could be effected, that they would enable the Company's subsidiaries to
continue to satisfy their capital requirements or that they would be permitted
under the terms of the Company's 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 12% Notes, 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 Commission filing fees and
other miscellaneous expenses related to being a public holding company and,
subject to certain limitations, to pay dividends or make distributions in
certain 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.
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 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 indenture governing the New REV Holdings Notes (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 March 31, 2002, GSB Investments Corp. owned an aggregate of
42,949,525 shares, or approximately 31.6% of the common stock of Golden State
Bancorp Inc. ("GSB"). At March 31, 2002, the last reported sale price of GSB
common stock on the New York Stock Exchange ("NYSE") was $29.69 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
seven quarterly dividends of $0.10 per share, or an aggregate of $30.3, 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
18
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
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
February 1, 2002, GSB Investments Corp. made a non-interest bearing advance of
$4.9 to REV Holdings under the Keepwell Agreement, which was used to make the
February 1, 2002 interest payment on the New REV Holdings Notes. The Keepwell
Agreement will terminate at such time as there are no New REV Holdings Notes
outstanding, at which time GSB Investments Corp. may require repayment of
advances under the Keepwell Agreement.
The Company has developed a new design for its permanent display units
and has begun installing them at certain customers' retail stores during 2002.
Accordingly, the Company has accelerated the amortization of its existing
display units. The Company estimates the installation of these new displays will
result in accelerated amortization in the range of $10 to $15 during 2002. The
Company estimates that purchases of permanent displays for 2002 will be
approximately $60 to $65.
Additionally, the Company is evaluating its management information
systems to determine the scope and timing of upgrading to an Enterprise Resource
Planning ("ERP") System intended to provide benefits to the Company in excess of
the related purchase and implementation costs. If we determine to implement the
ERP System, certain existing information systems would be amortized on an
accelerated basis. Based upon the estimated time required to implement an ERP
System, the Company currently estimates that it would record additional
amortization of its current information system in the range of $15 to $25 during
2002 if it proceeds with the implementation of an ERP System.
The Company estimates that capital expenditures for 2002 will be $15
to $25.
Disclosures about Contractual Obligations and Commercial Commitments
The SEC has encouraged all public companies to aggregate all
contractual commitments and commercial obligations that affect financial
condition and liquidity. To respond to this, the Company has included a table in
the Company's Annual Report of Form 10-K for the year ended December 31, 2001.
There have been no material changes to the table setting forth the Company's
contractual commitments and commercial obligations that affect financial
condition and liquidity which was set forth in the Company's Annual Report on
Form 10-K for the year ended December 31, 2001.
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, 2001 describes significant aspects of the Company's financial instrument
programs that have material market risk as of December 31, 2001. The following
table presents the information required by Item 7A as of March 31, 2002.
19
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
EXPECTED MATURITY DATE FOR THE YEAR ENDED MARCH 31, FAIR VALUE
-------------------------------------------------------------------------------- MARCH 31,
2002 2003 2004 2005 2006 THEREAFTER TOTAL 2002
--------- -------- -------- ----------- ---------- ----------- ------------ ------------
DEBT
- ------
Short-term variable rate (various
currencies) ...................... $22.3 $22.3 $22.3
Average interest rate (a) ... 7.9%
Long-term fixed rate ($US) ........ $351.4 $499.5 $649.9 1,500.8 1,025.1
Average interest rate ....... 11.2% 8.6% 8.6%
Long-term variable rate ($US) ..... 117.9 * 117.9 117.9
Average interest rate (a) ... 9.9%
Long-term variable rate
(various currencies) ........ 7.2 * 7.2 7.2
Average interest rate (a) ... 10.3%
------ ----- ----- ------- ------ ------- --------- --------
Total debt** ...................... $ 22.3 $ - $ - $476.5 $499.5 $ 649.9 $ 1,648.2 $1,172.5
====== ===== ===== ======= ====== ======= ========= ========
AVERAGE ORIGINAL CONTRACT
CONTRACTUAL US DOLLAR VALUE FAIR VALUE
RATE NOTIONAL MARCH 31, MARCH 31,
FORWARD CONTRACTS $/FC AMOUNT 2002 2002
- ----------------- ----------- ---------- --------- -----------
Buy Euros/Sell USD ................ 0.8728 $ 4.9 $ 4.9 $ -
Sell British Pounds/Buy USD ....... 1.4145 2.2 2.2 -
Sell Australian Dollars/Buy USD ... 0.5208 5.6 5.5 (0.1)
Sell Canadian Dollars/Buy USD ..... 0.6261 12.6 12.6 -
Sell South African Rand/Buy USD ... 0.0842 2.4 2.4 -
Buy Australian Dollars/
Sell New Zealand Dollars ..... 1.2196 1.8 1.8 -
Buy British Pounds/Sell Euros ..... 0.6141 3.0 2.9 (0.1)
------- --------- -------
Total forward contracts $ 32.5 $ 32.3 $ (0.2)
======= ============ =======
- --------------------
(a) Weighted average variable rates are based upon implied forward rates from
the yield curves at March 31, 2002.
* Represents Products Corporation's Credit Agreement which matures in May 2005.
** 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 STANDARD
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 depreciation of 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 January 1, 2003 and has not yet determined
the extent of its impact, if any.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q for the quarter ended March 31,
2002, as well as other public documents and statements of the Company, contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ materially from those discussed in such
forward-looking statements. Such statements include, without limitation, the
Company's expectations and estimates (whether qualitative or quantitative) as
to: the introduction of new products; the Company's plans to update its retail
presence and install new display walls (and the Company's estimates of the costs
of such new displays, the effects of such plans on the accelerated amortization
of existing displays and the estimated amount of such amortization); its future
financial performance; the effect on sales of political and/or economic
conditions, adverse currency fluctuations and competitive activities; the
possible implementation of a new ERP System, the costs and benefits of such
system and the effects of the adoption of such system
20
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
on the accelerated amortization of existing information systems if the Company
proceeds with such system; restructuring activities, restructuring costs, the
timing of such payments and annual savings and other benefits from such
activities; the effects of the Company's trade terms for its U.S. customers,
including reduced returns; cash flow from operations, cash on hand and
availability of borrowings under the 2001 Credit Agreement, the sufficiency of
such funds to satisfy the Company's cash requirements in 2002, and the
availability of funds from capital contributions or loans from affiliates,
advances under the Keepwell Agreement and the sale of additional shares of
Revlon, Inc. or the sale of equity securities of REV Holdings; uses of funds,
including for the purchases of permanent displays, capital expenditures (and the
Company's estimates of the amounts of such expenses) and restructuring costs
(and the Company's estimates of the amounts of such costs); the availability of
raw materials and components and, with respect to Europe, products; matters
concerning market-risk sensitive instruments; the effects of the assumptions and
estimates underlying the Company's critical accounting policies; the effects of
the adoption of certain accounting principles; and the receipt, amount and
timing of the payment of contingent deferred purchase price in connection with
the sale of certain assets. Statements that are not historical facts, including
statements about the Company's beliefs and expectations, are forward-looking
statements. Forward-looking statements can be identified by, among other things,
the use of forward-looking language, such as "believes," "expects," "estimates,"
"projects," "forecast," "may," "will," "should," "seeks," "plans," "scheduled
to," "anticipates" or "intends" or the negative of those terms, or other
variations of those terms or comparable language, or by discussions of strategy
or intentions. Forward-looking statements speak only as of the date they are
made, and except for the Company's ongoing obligations to disclose material
information under the U.S. federal securities laws, the Company undertakes no
obligation to publicly update any forward-looking statements, whether as a
result of new information, future events or otherwise. Investors are advised,
however, to consult any additional disclosures the Company makes in its
Quarterly Reports on Form 10-Q, Annual Report on Form 10-K and Current Reports
on Form 8-K to the Commission (which, among other places, can be found on the
Commission's website at http://www.sec.gov), as well as on the Company's website
at www.revloninc.com. The information available from time to time on such
website shall not be deemed incorporated by reference into this Quarterly Report
on Form 10-Q. A number of important factors could cause actual results to differ
materially from those contained in any forward-looking statement. In addition to
factors that may be described in the Company's filings with the Commission,
including this filing, the following factors, among others, could cause the
Company's actual results to differ materially from those expressed in any
forward-looking statements made by the Company: (i) difficulties or delays in
developing and introducing new products or failure of customers to accept new
product offerings; (ii) difficulties or delays or unanticipated costs associated
with the Company's implementation of new display walls; (iii) changes in
consumer preferences, including reduced consumer demand for the Company's color
cosmetics and other current products; (iv) 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; (v) actions
by competitors, including business combinations, technological breakthroughs,
new product offerings, promotional spending and marketing and promotional
successes, including increases in market share; (vi) unanticipated costs or
difficulties or delays in completing projects associated with the Company's
strategic plan, including in connection with the implementation of a new ERP
System; (vii) difficulties, delays or unanticipated costs or less than expected
savings and other benefits resulting from the Company's restructuring
activities; (viii) difficulties or delays in achieving the intended results of
the Company's trade terms, including, without limitation, lower returns or
unexpected consequences from the Company's trade terms including the possible
effect on sales; (ix) 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 shares of Revlon, Inc. or equity
securities of REV Holdings or the unavailability of funds under the 2001 Credit
Agreement; (x) higher than expected operating expenses, working capital
expenses, permanent display costs, capital expenditures, restructuring costs or
debt service payments; (xi) difficulties, delays or unexpected costs in sourcing
raw materials or components, and with respect to Europe, products; (xii)
interest rate or foreign exchange rate changes affecting the Company and
21
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
its market sensitive financial instruments; (xiii) unanticipated effects of the
assumptions and estimates underlying the Company's critical accounting policies;
(xiv) unanticipated effects of the Company's adoption of certain new accounting
standards; (xv) combinations among significant customers or the loss, insolvency
or failure to pay debts by a significant customer or customers; and (xvi)
difficulties or delays in receiving payment of certain contingent deferred
purchase price in connection with the sale of certain assets. Factors other than
those listed above could cause the Company's results to differ materially from
expected results. This discussion is provided as permitted by the Private
Securities Litigation Reform Act of 1995.
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 -
10.17 Employment Agreement dated as of February 17, 2002 between
Products Corporation and Jack L. Stahl. (Incorporated by reference to Exhibit
10.17 to the Revlon, Inc. March 31, 2002 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: May 15, 2002
22