EXHIBIT 99.1
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 business segment with many different
products, which include an extensive array of glamorous, exciting and
innovative cosmetics and skin care, fragrance and personal care products, and
professional products, consisting of hair and nail care products principally
for use in and resale by professional salons. In addition, the Company also
has a licensing group.
The Company presents its business geographically as its United States
operation, which comprises the Company's business in the United States, and
its International operation, which comprises its business outside of the
United States.
During the second quarter of 1998, the Company determined to exit the
retail and outlet store business. Accordingly, all prior period financial
information has been restated to reflect the retail and outlet store business
as a discontinued operation.
RESULTS OF OPERATIONS
The following table sets forth the Company's net sales by operation for
each of the last two years:
YEAR ENDED DECEMBER
31,
----------------------
1997 1996
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Net sales:
United States $1,300.2 $1,182.3
International 938.4 909.8
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$2,238.6 $2,092.1
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The following table sets forth certain statements of operations data as a
percentage of net sales for each of the last two years:
YEAR ENDED
DECEMBER 31,
----------------
1997 1996
------- -------
Cost of sales ................................ 33.2% 32.9%
Gross profit ................................. 66.8 67.1
Selling, general and administrative expenses 57.0 57.5
Business consolidation costs and other, net . 0.1 --
Operating income ............................. 9.7 9.6
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
NET SALES
Net sales were $2,238.6 and $2,092.1 for 1997 and 1996, respectively, an
increase of $146.5, or 7.0% or 9.5% on a constant U.S. dollar basis,
primarily as a result of successful new product introductions worldwide,
increased demand in the United States, increased distribution internationally
into the expanding self-select distribution channel and the further
development of new international markets.
United States. The United States operation's net sales increased to
$1,300.2 for 1997 from $1,182.3 for 1996, an increase of $117.9, or 10.0%.
Net sales improved for 1997, primarily as a result of continued
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consumer acceptance of new product offerings and general improvement in
consumer demand for the Company's color cosmetics. These results were
partially offset by a decline in the Company's fragrance business caused by
downward trends in the mass fragrance industry and the Company's strategy to
de-emphasize new fragrance products. Even though consumer sell-through for
the REVLON and ALMAY brands, as described below in more detail, has increased
significantly, the Company's sales to its customers have been during 1997 and
may continue to be impacted by retail inventory balancing and reductions
resulting from consolidation in the chain drugstore industry in the U.S.
REVLON brand color cosmetics continued as the number one brand in dollar
market share in the self-select distribution channel with a share of 21.6%
for 1997 versus 21.4% for 1996. Market share, which is subject to a number of
conditions, can vary from quarter to quarter as a result of such things as
timing of new product introductions and advertising and promotional spending.
New product introductions (including, in 1997, certain products launched
during 1996) generated incremental net sales in 1997, principally as a result
of launches of products in the COLORSTAY collection, including COLORSTAY eye
makeup and face products such as powder and blush, COLORSTAY haircolor,
launched in the third quarter of 1997, TOP SPEED nail enamel, launched in the
third quarter of 1997, and launches of REVLON AGE DEFYING line extensions,
the STREETWEAR collection, NEW COMPLEXION face makeup, LINE & SHINE lip
makeup and launches of products in the ALMAY AMAZING collection, including
lip makeup, eye makeup, face makeup and concealer, ALMAY ONE COAT, and ALMAY
TIME-OFF REVITALIZER.
International. The International operation's net sales increased to $938.4
for 1997 from $909.8 for 1996, an increase of $28.6, or 3.1% on a reported
basis or 8.8% on a constant U.S. dollar basis. Net sales improved for 1997,
principally as a result of increased distribution into the expanding
self-select distribution channel, successful new product introductions,
including the continued roll-out of the COLORSTAY cosmetics collection and
the further development of new international markets. This was partially
offset by the Company's decision to exit the unprofitable
demonstrator-assisted channel in Japan in the second half of 1996,
unfavorable economic conditions in several international markets, and, on a
reported basis, the unfavorable effect on sales of a stronger U.S. dollar
against certain foreign currencies, primarily the Spanish peseta, the Italian
lira and several other European currencies, the Australian dollar, the South
African rand and the Japanese yen. New products such as COLORSTAY haircolor
and STREETWEAR were introduced in select international markets in the second
half of 1997. During 1997, the International operation's sales were divided
into the following geographic areas: Europe, which is comprised of Europe,
the Middle East and Africa (in which net sales increased by 3.4% on a
reported basis to $417.9 for 1997 as compared to 1996 or an increase of 11.3%
on a constant U.S. dollar basis); the Western Hemisphere, which is comprised
of Canada, Mexico, Central America, South America and Puerto Rico (in which
net sales increased by 11.1% on a reported basis to $346.6 for 1997 as
compared to 1996 or an increase of 14.5% on a constant U.S. dollar basis);
and the Far East (in which net sales decreased by 10.3% on a reported basis
to $173.9 for 1997 as compared to 1996 or a decrease of 5.5% on a constant
U.S. dollar basis). Excluding in both periods the effect of the Company's
strategy of exiting the demonstrator-assisted distribution channel in Japan,
Far East net sales on a constant U.S. dollar basis for 1997 would have been
at approximately the same level as those in 1996.
The Company's operations in Brazil are significant and, along with
operations in certain other countries, have been subject to, and may continue
to be subject to, significant political and economic uncertainties. In
Brazil, net sales, operating income and income before taxes were $130.9,
$16.0 and $7.7, respectively, for 1997 compared to $132.7, $25.1 and $20.0,
respectively, for 1996. Results of operations in Brazil for 1997 were
adversely impacted by competitive activity affecting the Company's toiletries
business.
Cost of sales
As a percentage of net sales, cost of sales was 33.2% for 1997 compared to
32.9% for 1996. The increase in cost of sales as a percentage of net sales
included factors which enhanced overall operating income, including increased
sales of the Company's higher cost, enhanced-performance, technology-based
products and increased export sales and other factors including the effect of
weaker local currencies on
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the cost of imported purchases and competitive pressures on the Company's
toiletries business in certain International markets. These factors were
partially offset by the benefits of improved overhead absorption against
higher production volumes and more efficient global production and
purchasing.
S,G&A expenses
As a percentage of net sales, S,G&A expenses were 57.0% for 1997, an
improvement from 57.5% for 1996. S,G&A expenses other than advertising and
consumer-directed promotion expenses, as a percentage of net sales, improved
to 39.2% for 1997 compared with 40.5% for 1996, primarily as a result of
reduced general and administrative expenses, improved productivity and lower
distribution costs in 1997 compared with those in 1996. In accordance with
its business strategy, the Company increased advertising and
consumer-directed promotion expenditures in 1997 compared with 1996 to
support growth in existing product lines, new product launches and increased
distribution in the self-select distribution channel in many of the Company's
markets in the International operation. Advertising and consumer-directed
promotion expenses increased by 11.8% to $397.4, or 17.8% of net sales, for
1997 from $355.5, or 17.0% of net sales, for 1996.
Business consolidation costs and other, net
Business consolidation costs and other, net, in 1997 include severance,
writedowns of certain assets to their estimated net realizable value and
other related costs to rationalize factory operations in certain operations
in accordance with the Company's business strategy, partially offset by
related gains from the sales of certain factory operations and an
approximately $12.7 settlement of a claim in the second quarter of 1997.
These business consolidations are intended to lower the Company's operating
costs and increase efficiency in the future.
Operating income
As a result of the foregoing, operating income increased by $16.1, or
8.1%, to $216.1 for 1997 from $200.0 for 1996.
Other expenses/income
Interest expense was $133.7 for 1997 compared to $133.4 for 1996. The
slight increase in interest expense in 1997 is due to higher average
outstanding borrowings, partially offset by lower interest rates.
Foreign currency losses, net, were $6.4 for 1997 compared to $5.7 for
1996. The increase in foreign currency losses for 1997 as compared to 1996
resulted primarily from a non recurring gain recognized in 1996 in connection
with the Company's simplification of its international corporate structure
and from the strengthening of the U.S. dollar versus currencies in the Far
East and most European currencies, partially offset by the stabilization of
the Venezuelan bolivar and Mexican peso versus the devaluations which
occurred during 1996.
Provision for income taxes
The provision for income taxes was $9.3 and $25.5 for 1997 and 1996,
respectively. The decrease was primarily attributable to lower taxable income
in certain International operations, partially as a result of the
implementation of tax planning, including the utilization of net operating
loss carryforwards in certain International operations, and benefits from net
operating loss carryforwards domestically.
Extraordinary item
The extraordinary item in 1997 resulted from the write-off in the second
quarter of 1997 of deferred financing costs associated with the early
extinguishment of borrowings under the credit agreement in effect at that
time (the "1996 Credit Agreement") prior to maturity with proceeds from the
credit agreement which became effective in May 1997 (the "Credit Agreement"),
and costs of approximately $6.3 in connection with the redemption of Products
Corporation's 10 7/8% Sinking Fund Debentures due
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2010 (the "Sinking Fund Debentures"). The extraordinary item in 1996 resulted
from the write-off in the first quarter of 1996 of deferred financing costs
associated with the early extinguishment of borrowings under the credit
agreement in effect at that time (the "1995 Credit Agreement") prior to
maturity with the net proceeds from the March 5, 1996 initial public equity
offering (the "Revlon IPO") and proceeds from the 1996 Credit Agreement.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used for) operating activities was $8.9 and $(10.3)
for 1997 and 1996, respectively. The increase in net cash provided by
operating activities for 1997 compared with net cash used in 1996 resulted
primarily from higher operating income and improved working capital
management, partially offset by increased spending on merchandise display
units in connection with the Company's continued expansion into the
self-select distribution channel.
Net cash used for investing activities was $84.3 and $61.8 for 1997 and
1996, respectively. Net cash used for investing activities for 1997 and 1996
included capital expenditures of $52.3 and $54.7, respectively, and $40.5 and
$7.1, respectively, used for acquisitions. Net cash used for acquisitions in
1997 consisted primarily of cash paid for the acquisition of a South American
hair care manufacturer and its distributor.
Net cash provided by financing activities was $84.7 and $77.9 for 1997 and
1996, respectively. Net cash provided by financing activities for 1997
included cash drawn under the 1996 Credit Agreement and the Credit Agreement,
partially offset by the repayment of borrowings under the 1996 Credit
Agreement, the payment of fees and expenses related to entering into the
Credit Agreement, the repayment of borrowings under the Company's Japanese
yen-denominated credit agreement (the "Yen Credit Agreement") and the
redemption of the Sinking Fund Debentures. Net cash provided by financing
activities for 1996 included the net proceeds from the Revlon IPO, cash drawn
under the 1995 Credit Agreement and under the 1996 Credit Agreement,
partially offset by the repayment of borrowings under the 1995 Credit
Agreement, the payment of fees and expenses related to the 1996 Credit
Agreement and the repayment of borrowings under the Yen Credit Agreement.
In May 1997, Products Corporation entered into the Credit Agreement with a
syndicate of lenders, whose individual members change from time to time. The
proceeds of loans made under the Credit Agreement were used for the purpose
of repaying the loans outstanding under the 1996 Credit Agreement and to
redeem the Sinking Fund Debentures and were and will be used for general
corporate purposes or, in the case of the Acquisition Facility, the financing
of acquisitions. See Note 11(a) to the Consolidated Financial Statements. At
December 31, 1997 Products Corporation had approximately $200.0 outstanding
under the Term Loan Facilities, $102.7 outstanding under the Multi-Currency
Facility, $41.9 outstanding under the Acquisition Facility and $34.8 of
issued but undrawn letters of credit under the Special LC Facility.
A subsidiary of Products Corporation is the borrower under the Yen Credit
Agreement, which had a principal balance of approximately yen 4.3 billion as
of December 31, 1997 (approximately $33.3 U.S. dollar equivalent as of
December 31, 1997). In accordance with the terms of the Yen Credit Agreement,
approximately yen 539 million (approximately $5.2 U.S. dollar equivalent) was
paid in January 1996 and approximately yen 539 million (approximately $4.6
U.S. dollar equivalent) was paid in January 1997. In June 1997, Products
Corporation amended and restated the Yen Credit Agreement to extend the term
to December 31, 2000 subject to earlier termination under certain
circumstances. In accordance with the terms of the Yen Credit Agreement, as
amended and restated, approximately yen 539 million (approximately $4.2 U.S.
dollar equivalent as of December 31, 1997) is due in each of March 1998, 1999
and 2000 and yen 2.7 billion (approximately $20.7 U.S. dollar equivalent as
of December 31, 1997) is due on December 31, 2000.
Products Corporation made an optional sinking fund payment of $13.5 and
redeemed all of the outstanding $85.0 principal amount Sinking Fund
Debentures during 1997 with the proceeds of borrowings under the Credit
Agreement. $9.0 aggregate principal amount of previously purchased Sinking
Fund Debentures were used for the mandatory sinking fund payment due July 15,
1997.
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Products Corporation borrows funds from its affiliates from time to time
to supplement its working capital borrowings at interest rates more favorable
to Products Corporation than interest rates under the Credit Agreement. No
such borrowings were outstanding as of December 31, 1997.
On February 2, 1998, Revlon Escrow Corp., an affiliate of Products
Corporation, issued and sold in a private placement $650.0 aggregate
principal amount of 8 5/8% Senior Subordinated Notes due 2008 (the "8 5/8%
Notes") and $250.0 aggregate principal amount of 8 1/8% Senior Notes due 2006
(the "8 1/8% Notes" and, together with the 8 5/8% Notes, the "Notes"), with
the net proceeds of approximately $886 deposited into escrow. The proceeds
from the sale of the Notes were used to finance the redemption by Products
Corporation of $555.0 aggregate principal amount of its 10 1/2% Senior
Subordinated Notes due 2003 (the "Senior Subordinated Notes") and $260.0
aggregate principal amount of its 9 3/8% Senior Notes due 2001 (the "Senior
Notes"). Products Corporation delivered a redemption notice to the holders of
the Senior Subordinated Notes for the redemption of the Senior Subordinated
Notes on March 4, 1998, at which time Products Corporation assumed the
obligations under the 8 5/8% Notes and the related indenture, and to the
holders of the Senior Notes for the redemption of the Senior Notes on April
1, 1998, at which time Products Corporation assumed the obligations under the
8 1/8% Notes and the related indenture. In connection with the redemptions of
the Senior Subordinated Notes on March 4, 1998 and the Senior Notes on April
1, 1998, the Company recorded an extraordinary loss of $51.7 in the first
half of 1998 resulting primarily from the write-off of deferred financing
costs and payment of call premiums on the Senior Subordinated Notes and the
Senior Notes. On May 7, 1998, substantially all of the Notes were exchanged
for registered notes with substantially identical terms (the Notes and the
registered exchange notes shall each be referred to as the Notes). The 8 5/8%
Notes Indenture and the 8 1/8% Notes Indenture (together, the "Notes
Indentures") contain covenants that, among other things, limit (i) the
issuance of additional debt and redeemable stock by Products Corporation,
(ii) the incurrence of liens, (iii) the issuance of debt and preferred stock
by Products Corporation's subsidiaries, (iv) the payment of dividends on
capital stock of Products Corporation and its subsidiaries and the redemption
of capital stock of Products Corporation, (v) the sale of assets and
subsidiary stock, (vi) transactions with affiliates, (vii) consolidations,
mergers and transfers of all or substantially all Products Corporation assets
and (viii) in the case of the 8 5/8% Notes Indenture, the issuance of
additional subordinated debt that is senior in right of payment to the 8 5/8%
Notes. The Notes Indentures also prohibit certain restrictions on
distributions from Products Corporation and subsidiaries of Products
Corporation. All of these limitations and prohibitions, however, are subject
to a number of important qualifications.
The Company's principal sources of funds are expected to be cash flow
generated from operations and borrowings under the Credit Agreement,
refinancings and other existing working capital lines. The Credit Agreement,
the Old Notes and the 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 and capital
expenditure requirements and debt service payments (including refinancing the
Old Notes).
The Company estimates that capital expenditures for 1998 will be
approximately $65, including upgrades to the Company's management information
systems. 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 Inc.) as if Products
Corporation were filing separate income tax returns, except that no payments
are required by Products Corporation (or Revlon, Inc.) if and to the extent
that Products Corporation is prohibited under the Credit Agreement from
making tax sharing payments to Revlon, Inc. The Credit Agreement prohibits
Products Corporation from making any tax sharing payments other than in
respect of state and local income taxes. Products Corporation currently
anticipates that, as a result of net operating tax losses and prohibitions
under the Credit Agreement, no cash federal tax payments or cash payments in
lieu of taxes pursuant to the tax sharing agreement will be required for
1998.
As of December 31, 1997, Products Corporation was party to a series of
interest rate swap agreements totaling a notional amount of $225.0 in which
Products Corporation agreed to pay on such notional amount a variable
interest rate equal to the six month LIBOR to its counterparties and the
counterparties agreed to pay on such notional amounts fixed interest rates
averaging approximately 6.03%
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per annum. Products Corporation entered into these agreements in 1993 and
1994 (and in the first quarter of 1996 extended a portion equal to a notional
amount of $125.0 through December 2001) to convert the interest rate on
$225.0 of fixed-rate indebtedness to a variable rate. If Products Corporation
had terminated these agreements, which Products Corporation considered to be
held for other than trading purposes, on December 31, 1997 and 1996, a loss
of approximately $0.1 and $3.5, respectively, would have been realized.
Certain other swap agreements were terminated in 1993 for a gain of $14.0 and
were amortized over the original lives of the agreements through 1997. The
amortization of the 1993 realized gain in 1997 and 1996 was approximately
$3.1 and $3.2, respectively. Cash flow from the agreements outstanding at
December 31, 1997 was approximately break even for 1997. Products Corporation
terminated these agreements in January 1998 and realized a gain of
approximately $1.6, which was recognized upon repayment of the hedged
indebtedness.
Products Corporation enters into forward foreign exchange contracts and
option contracts from time to time to hedge certain cash flows denominated in
foreign currencies. At December 31, 1997 and 1996, Products Corporation had
forward foreign exchange contracts denominated in various currencies of
approximately $90.1 and $62.0, respectively, and option contracts of
approximately $94.9 outstanding at December 31, 1997. Such contracts are
entered into to hedge transactions predominantly occurring within twelve
months. If Products Corporation had terminated these contracts on December
31, 1997 and 1996, no material gain or loss would have been realized.
Based upon the Company's current level of operations and anticipated
growth in net sales and earnings as a result of its business strategy, the
Company expects that cash flows from operations and funds from currently
available credit facilities and refinancings of existing indebtedness will be
sufficient to enable the Company to meet its anticipated cash requirements
for the foreseeable future on a consolidated basis, including for debt
service (including refinancing the Old Notes). However, there can be no
assurance that cash flow from operations and funds from existing credit
facilities and refinancing of existing indebtedness will be sufficient to
meet the Company's cash requirements on a consolidated basis. If the Company
is unable to satisfy such cash requirements, the Company could be required to
adopt one or more alternatives, such as reducing or delaying capital
expenditures, restructuring indebtedness, selling assets or operations, or
seeking capital contributions or loans from Revlon, Inc. or affiliates of the
Company. There can be no assurance that any of such actions could be
effected, that they would enable the Company to continue to satisfy its
capital requirements or that they would be permitted under the terms of the
Company's various debt instruments then in effect. The Company currently
expects that at the end of the fourth quarter of 1998 it will not be in
compliance with certain of the financial ratios and tests contained in the
Credit Agreement as a result of, among other things, the expected charges in
connection with the Company's restructuring effort. The Company is currently
negotiating an amendment to such provisions of the Credit Agreement and
expects to have an amendment executed and effective prior to December 31,
1998, although there can be no assurance in this regard. The terms of the
Credit Agreement, the Old Notes and the 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 to pay dividends or make distributions in certain
circumstances to finance the purchase by Revlon, Inc. of its Class A Common
Stock in connection with the delivery of such Class A Common Stock to
grantees under the Revlon, Inc. Amended and Restated 1996 Stock Plan,
provided that the aggregate amount of such dividends and distributions taken
together with any purchases of Revlon, Inc. common stock on the open market
to satisfy matching obligations under the excess savings plan may not exceed
$6.0 per annum.
FORWARD-LOOKING STATEMENTS
This report on Form 8-K dated November 3, 1998 as well as other public
documents of the Company contain forward-looking statements which involve
risks and uncertainties. The Company's actual results may differ materially
from those discussed in such forward-looking statements. Such statements
include, without limitation, the Company's expectations and estimates as to
introduction of new products and
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expansion into markets, future financial performance, including growth in net
sales and earnings and the effect on sales of inventory balancing and
consolidation in the chain drugstore industry in the U.S., cash flows from
operations, improved results from business consolidations, information system
upgrades and globalization of the Company's manufacturing operations, capital
expenditures, the availability of funds from currently available credit
facilities and refinancings of indebtedness, capital contributions or loans
from Revlon, Inc. or affiliates of the Company, the sale of assets, the cost
and timely implementation of the Company's Year 2000 compliance modifications
and the Company's intent to negotiate an amendment to certain financial
covenants in the Credit Agreement. Readers are urged to consider that
statements which use the terms "believes," "does not believe," "no reason to
believe," "expects," "plans," "intends," "estimates," "anticipated,"
"anticipates" and similar expressions, as they relate to the Company or the
Company's management, are intended to identify forward-looking statements.
Such statements reflect the current views of the Company with respect to
future events and are subject to certain risks, uncertainties and
assumptions. In addition to factors that may be described in the Company's
Commission filings, including this filing, the following factors, among
others, could cause the Company's actual results to differ materially from
those expressed in any forward-looking statements made by the Company: (i)
difficulties or delays in developing and introducing new products or failure
of customers to accept new product offerings; (ii) changes in consumer
preferences, including reduced consumer demand for the Company's color
cosmetics and other current products; (iii) difficulties or delays in the
Company's continued expansion into the self-select distribution channel and
into certain markets and development of new markets; (iv) unanticipated costs
or difficulties or delays in completing projects associated with the
Company's strategy to improve operating efficiencies, including information
system upgrades, and to globalize its manufacturing operations; (v) the
inability to refinance indebtedness, secure capital contributions or loans
from Revlon, Inc. or affiliates of the Company or sell assets; (vi) effects
of and changes in economic conditions, including inflation and monetary
conditions, and in trade, monetary, fiscal and tax policies in countries
outside of the U.S. in which the Company operates, including Brazil; (vii)
actions by competitors, including business combinations, technological
breakthroughs, new product offerings and marketing and promotional successes;
(viii) combinations among significant customers or the loss, insolvency or
failure to pay its debts by a significant customer or customers; (ix)
difficulties or delays in realizing improved results from business
consolidations; (x) lower than expected sales as a result of inventory
balancing and consolidation in the chain drugstore industry in the U.S.; (xi)
unanticipated costs or difficulties or delays in implementing the Company's
Year 2000 compliance modifications; and (xii) the inability of the Company to
negotiate an amendment to certain financial covenants in the Credit
Agreement. The Company assumes no responsibility to update forward-looking
information contained herein.
EFFECT OF NEW ACCOUNTING STANDARD
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 130 "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying comprehensive income
and its components in a full set of general-purpose financial statements. The
Company adopted SFAS 130 in fiscal 1998.
INFLATION
In general, costs are affected by inflation and the effects of inflation
may be experienced by the Company in future periods. Management believes,
however, that such effects have not been material to the Company during the
past two years in the United States or foreign non-hyperinflationary
countries. The Company operates in certain countries around the world, such
as Brazil, Venezuela and Mexico, that have experienced hyperinflation in the
past two years. The Company's operations in Brazil were accounted for as
operating in a hyperinflationary economy until June 30, 1997. Effective July
1, 1997 Brazil was considered a non-hyperinflationary economy. The impact of
accounting for Brazil as a non-hyperinflationary economy was not material to
the Company's operating results. Effective January 1997, Mexico was
considered a hyperinflationary economy for accounting purposes. In
hyperinflationary foreign countries, the Company attempts to mitigate the
effects of inflation by increasing prices in line with inflation, where
possible, and efficiently managing its working capital levels.
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