<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 333-23451
REV HOLDINGS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3933701
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 MADISON AVENUE, NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212-527-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock was 1,000
shares as of June 30, 1998, all of which were held by an affiliate of Mafco
Holdings Inc.
Total Pages - 16
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1998 1997
--------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents .............................................. $ 35.8 $ 37.4
Trade receivables, less allowances of $25.8
and $25.9, respectively .............................................. 458.6 492.5
Inventories ............................................................ 290.0 260.7
Prepaid expenses and other ............................................. 80.5 92.0
Restricted marketable securities ....................................... -- 334.0
---------- ----------
Total current assets ................................................. 864.9 1,216.6
Property, plant and equipment, net ....................................... 360.4 364.0
Other assets ............................................................. 169.7 154.7
Intangible assets, net ................................................... 378.8 319.2
Net assets of discontinued operations .................................... 20.7 45.1
---------- ----------
Total assets ......................................................... $ 1,794.5 $ 2,099.6
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current liabilities:
Short-term borrowings - third parties .................................. $ 45.3 $ 42.7
Current portion of long-term debt - third parties ...................... 205.1 334.8
Accounts payable ....................................................... 183.0 178.8
Accrued expenses and other ............................................. 275.7 356.0
---------- ----------
Total current liabilities ............................................ 709.1 912.3
Long-term debt - third parties ........................................... 1,973.8 1,939.3
Long-term debt - affiliates .............................................. 26.2 30.9
Other long-term liabilities .............................................. 211.4 211.8
Stockholder's deficiency:
Common Stock, par value $1.00 per share; 1,000
shares authorized, issued and outstanding ............................ -- --
Capital deficiency ..................................................... (408.8) (408.8)
Accumulated deficit since June 24, 1992 ................................ (682.2) (562.2)
Accumulated other comprehensive loss ................................... (35.0) (23.7)
---------- ----------
Total stockholder's deficiency ..................................... (1,126.0) (994.7)
---------- ----------
Total liabilities and stockholder's deficiency ..................... $ 1,794.5 $ 2,099.6
========== ==========
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
2
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales ...................................................... $ 575.3 $ 537.7 $ 1,073.1 $ 1,017.7
Cost of sales .................................................. 194.0 181.2 357.3 341.6
----------- ----------- ----------- -----------
Gross profit ............................................. 381.3 356.5 715.8 676.1
Selling, general and administrative expenses .................. 329.8 308.0 635.6 602.5
Business consolidation costs and other, net .................... - - - 5.4
----------- ----------- ----------- -----------
Operating income .......................................... 51.5 48.5 80.2 68.2
----------- ----------- ----------- -----------
Other expenses (income):
Interest expense .......................................... 48.7 55.6 107.8 118.7
Interest and net investment income ........................ (1.1) (6.0) (6.2) (8.7)
Amortization of debt issuance costs ...................... 2.1 3.0 4.9 6.4
Gain on sale of subsidiary stock .......................... (1.1) (0.1) (2.6) (0.2)
Foreign currency losses, net .............................. 1.3 1.0 2.8 2.8
Miscellaneous, net ........................................ 1.4 2.0 3.2 2.7
----------- ----------- ----------- -----------
Other expenses, net .................................. 51.3 55.5 109.9 121.7
----------- ----------- ----------- -----------
Income (loss) from continuing operations
before income taxes ....................................... 0.2 (7.0) (29.7) (53.5)
Provision for income taxes ..................................... 3.4 3.5 7.1 9.0
----------- ----------- ----------- -----------
Loss from continuing operations ................................ (3.2) (10.5) (36.8) (62.5)
Discontinued operations:
(Loss) income from discontinued operations ................ (11.9) 1.0 (16.5) (1.8)
Loss on disposal of discontinued operations ............... (15.0) - (15.0) -
----------- ----------- ----------- -----------
(Loss) income from discontinued operations ................ (26.9) 1.0 (31.5) (1.8)
Extraordinary items - early extinguishments of debt ............ (13.5) (14.9) (51.7) (58.7)
----------- ----------- ----------- -----------
Net loss. ...................................................... $ (43.6) $ (24.4) $ (120.0) $ (123.0)
=========== =========== =========== ===========
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
3
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDER'S DEFICIENCY
AND COMPREHENSIVE LOSS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
CAPITAL ACCUMULATED COMPREHENSIVE COMPREHENSIVE
DEFICIENCY DEFICIT LOSS (a) LOSS
---------- ------- -------- ----
<S> <C> <C> <C> <C>
Balance, January 1, 1997 .................... $ (969.4) $ (474.1) $ (18.2)
Net loss .............................. (123.0) $(123.0)
Net capital contribution ............. 560.4(c)
Currency translation adjustment ....... (8.7) (8.7)
-------- -------- ------- -------
Balance, June 30, 1997 ...................... $ (409.0) $ (597.1) $ (26.9) $(131.7)
======== ======== ======= =======
Balance, January 1, 1998 .................... $ (408.8) $ (562.2) $ (23.7)
Net loss .............................. (120.0) $(120.0)
Revaluation of marketable securities .. (0.1) (0.1)
Currency translation adjustment ....... (11.2)(b) (11.2)(b)
-------- -------- ------- -------
Balance, June 30, 1998 ...................... $ (408.8) $ (682.2) $ (35.0) $(131.3)
======== ======== ======= =======
</TABLE>
- --------------
(a) Accumulated other comprehensive loss principally includes the currency
translation adjustment of $30.4 and $14.5 and the adjustment for the minimum
pension liability of $4.5 and $12.4 as of June 30, 1998 and 1997, respectively.
(b) Accumulated other comprehensive loss and comprehensive loss each include a
reclassification adjustment of $2.2 for realized gains associated with the sale
of certain International operations assets.
(c) Primarily represents a noncash capital contribution of $560.1 from the
Company's indirect parent to cancel the Revlon Worldwide Corporation's Senior
Secured Discount Notes due 1998 (the "Revlon Worldwide Notes").
See Notes to Unaudited Consolidated Condensed Financial Statements.
4
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997
-------- --------
<S> <C> <C>
Net loss .................................................................... $ (120.0) $ (123.0)
Adjustments to reconcile net loss to net cash (used for)
provided by operating activities:
Depreciation and amortization ........................................ 57.0 51.8
Amortization of debt discount ........................................ 37.5 52.5
Loss from discontinued operations .................................... 31.5 1.8
Extraordinary items .................................................. 51.7 58.7
Gain on issuance of subsidiary stock ................................. (2.6) (0.2)
Change in assets and liabilities:
Decrease in trade receivables ................................... 33.1 26.4
Increase in inventories ......................................... (29.5) (38.8)
Decrease in prepaid expenses and other current assets ........... 10.6 3.3
Increase (decrease) in accounts payable ......................... 0.4 (1.0)
Decrease in accrued expenses and other current liabilities ...... (88.4) (72.5)
Other, net ...................................................... (43.9) (42.1)
-------- --------
Net cash used for operating activities ...................................... (62.6) (83.1)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ........................................................ (23.9) (21.4)
Proceeds from the sale of certain fixed assets .............................. 1.2 --
Proceeds from the sale of marketable securities, net ........................ 337.4 --
Acquisition of businesses, net of cash acquired ............................. (57.6) --
Purchase of marketable securities ........................................... -- (319.6)
-------- --------
Net cash provided by (used for) investing activities ........................ 257.1 (341.0)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings - third parties ............ 3.4 (3.8)
Proceeds from the issuance of long-term debt - third parties ................ 1,090.2 987.0
Repayment of long-term debt - third parties ................................. (1,257.4) (537.4)
Net proceeds from issuance of subsidiary common stock ....................... 1.1 0.2
Proceeds from the issuance of debt - affiliates ............................. 77.0 62.3
Repayment of debt - affiliates .............................................. (82.2) (61.9)
Net contribution from parent ................................................ -- 0.3
Payment of debt issuance costs .............................................. (19.0) (18.7)
-------- --------
Net cash (used for) provided by financing activities ........................ (186.9) 428.0
-------- --------
Effect of exchange rate changes on cash and cash equivalents ................ (1.8) (0.9)
Net cash used for discontinued operations ................................... (7.4) (0.9)
-------- --------
Net (decrease) increase in cash and cash equivalents ................. (1.6) 2.1
Cash and cash equivalents at beginning of period ..................... 37.4 35.1
-------- --------
Cash and cash equivalents at end of period ........................... $ 35.8 $ 37.2
======== ========
Supplemental schedule of cash flow information:
Cash paid for:
Interest ........................................................ $67.3 $ 68.2
Income taxes, net of refunds .................................... 7.6 7.2
Supplemental schedule of noncash investing and financing activities:
Liabilities assumed in connection with business acquisitions:
Fair value of assets acquired ................................... $ 74.5 $ --
Cash paid ....................................................... (57.6) --
-------- --------
Liabilities assumed ............................................. $ 16.9 $ --
======== ========
Noncash contribution from indirect parent to cancel the
Revlon Worldwide Notes .......................................... $ -- $ 560.1
</TABLE>
See Notes to Unaudited Consolidated Condensed Financial Statements.
5
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(1) BASIS OF PRESENTATION
Effective August 5, 1997, Revlon Worldwide Corporation ("Revlon
Worldwide") was merged with and into Revlon Worldwide (Parent) Corporation
("Revlon Worldwide (Parent)") (the "Merger"), with Revlon Worldwide (Parent)
surviving the Merger and changing its name to REV Holdings Inc. (together with
its subsidiaries, "REV Holdings" or the "Company"). All references to the
Company for periods prior to the Merger are to Revlon Worldwide and for periods
subsequent to the Merger are to REV Holdings. REV Holdings succeeded to the
rights and obligations of Revlon Worldwide under its various agreements by
reason of the Merger.
REV Holdings is a holding company formed in 1997 that conducts its
business exclusively through its indirect subsidiary, Revlon Consumer Products
Corporation ("Products Corporation") and its subsidiaries. Products Corporation
was formed in April 1992 and, on June 24, 1992, succeeded to 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 83.0% of the outstanding shares of capital stock of Revlon, Inc.
(which represents approximately 97.4% 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., a corporation
wholly owned indirectly by Mafco Holdings Inc.
The accompanying Consolidated Condensed Financial Statements are
unaudited. In management's opinion, all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation have been made.
The Unaudited Consolidated Condensed Financial Statements include the
accounts of the Company after elimination of all material intercompany balances
and transactions. The Company has made a number of estimates and assumptions
relating to the assets and liabilities, the disclosure of contingent assets and
liabilities and the reporting of revenues and expenses to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates. The Unaudited
Consolidated Condensed Financial Statements should be read in conjunction with
the consolidated financial statements and related notes contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997. (See
note 6).
The Company recognizes gains and losses on sales of subsidiary stock
in its Statements of Operations.
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, due, in part, to seasonal fluctuations, which are
normal for the Company's business.
The Company matches advertising and promotion expenses with sales
revenues for interim reporting purposes. Advertising and promotion expenses
estimated for a full year are charged to earnings for interim reporting
purposes in proportion to the relationship that net sales for such period bear
to estimated full year net sales. As a result, in the first half of 1998 and
1997, disbursements and commitments for advertising and promotion exceeded
advertising and promotion expenses by $49.1 and $44.9, respectively, and such
amounts were deferred.
During the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income (loss) and its components in a full set of general-purpose financial
statements. The components of comprehensive income (loss) are comprised of net
income (loss), changes in the currency translation adjustment, the adjustment
for minimum pension liability and changes in marketable securities.
During 1998, the Company adopted Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which requires capitalization of certain development costs of
software to be used internally. The adoption of this statement did not have a
material effect on the Company's financial condition or results of operations.
6
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(2) INVENTORIES
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Raw materials and supplies ................. $ 94.9 $ 82.6
Work-in-process ............................ 21.6 14.9
Finished goods ............................. 173.5 163.2
------- -------
$ 290.0 $ 260.7
======= =======
</TABLE>
(3) LONG-TERM DEBT
(a) On February 2, 1998, Revlon Escrow Corp. ("Revlon Escrow"), 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 (the "8 5/8% Notes
Assumption"), 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 (the "8 1/8% Notes
Assumption" and, together with the 8 5/8% Notes Assumption, the "Assumption").
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 $38.2 and $13.5 in the first and second quarters of 1998,
respectively, 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 are general unsecured obligations of Products
Corporation and are (i) subordinate in right of payment to all existing and
future Senior Debt (as defined in the indenture relating to the 8 5/8% Notes
(the "8 5/8% Notes Indenture")) of Products Corporation, including the Senior
Notes due 1999 (the "1999 Notes"), the 8 1/8% Notes and the indebtedness under
the credit agreement which became effective in May 1997 (as subsequently
amended, the "Credit Agreement"), (ii) pari passu in right of payment with all
future senior subordinated debt, if any, of Products Corporation and (iii)
senior in right of payment to all future subordinated debt, if any, of Products
Corporation. The 8 5/8% Notes are effectively subordinated to the outstanding
indebtedness and other liabilities of Products Corporation's subsidiaries.
Interest is payable on February 1 and August 1.
The 8 5/8% Notes may be redeemed at the option of Products Corporation
in whole or from time to time in part at any time on or after February 1, 2003
at the redemption prices set forth in the 8 5/8% Notes Indenture. In addition,
at any time prior to February 1, 2001, Products Corporation may redeem up to
35% of the aggregate principal amount of the 8 5/8% Notes originally issued at
a redemption price of 108 5/8% of the principal amount thereof, plus accrued
and unpaid interest, if any, thereon to the date fixed for redemption, with,
and to the extent Products Corporation receives, the net cash proceeds of one
or more Public Equity Offerings (as defined in the 8 5/8% Notes Indenture),
provided that at least $422.5 aggregate principal amount of the 8 5/8% Notes
remains outstanding immediately after the occurrence of each such redemption.
Upon a Change of Control (as defined in the 8 5/8% Notes Indenture),
Products Corporation will have the option to redeem the 8 5/8% Notes in whole
at a redemption price equal to the principal amount thereof, plus accrued and
unpaid interest, if any, thereon to the date of redemption plus the Applicable
Premium (as defined in the 8 5/8% Notes Indenture) and, subject to certain
conditions, each holder of the 8 5/8% Notes will have the right to require
Products Corporation to repurchase all or a portion of such holder's 8 5/8%
Notes at a price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest, if any, thereon to the date of repurchase.
7
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
The 8 5/8% Notes Indenture contains 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's assets
and (viii) the issuance of additional subordinated debt that is senior in right
of payment to the 8 5/8% Notes. The 8 5/8% Notes Indenture also prohibits
certain restrictions on distributions from subsidiaries. All of these
limitations and prohibitions, however, are subject to a number of important
qualifications.
The 8 1/8% Notes are senior unsecured obligations of Products
Corporation and rank pari passu in right of payment with all existing and
future Senior Debt (as defined in the indenture relating to the 8 1/8% Notes
(the "8 1/8% Notes Indenture")) of Products Corporation, including the 1999
Notes and the indebtedness under the Credit Agreement, and senior to the 8 5/8%
Notes and to all future subordinated indebtedness of Products Corporation. The
8 1/8% Notes are effectively subordinated to the outstanding indebtedness and
other liabilities of Products Corporation's subsidiaries. Interest is payable
on February 1 and August 1.
The 8 1/8% Notes may be redeemed at the option of Products Corporation
in whole or from time to time in part at any time on or after February 1, 2002
at the redemption prices set forth in the 8 1/8% Notes Indenture. In addition,
at any time prior to February 1, 2001, Products Corporation may redeem up to
35% of the aggregate principal amount of the 8 1/8% Notes originally issued at
a redemption price of 108 1/8% of the principal amount thereof, plus accrued
and unpaid interest, if any, thereon to the date fixed for redemption, with,
and to the extent Products Corporation receives, the net cash proceeds of one
or more Public Equity Offerings (as defined in the 8 1/8% Notes Indenture),
provided that at least $162.5 aggregate principal amount of the 8 1/8% Notes
remains outstanding immediately after the occurrence of each such redemption.
Upon a Change of Control (as defined in the 8 1/8% Notes Indenture),
Products Corporation will have the option to redeem the 8 1/8% Notes in whole
at a redemption price equal to the principal amount thereof, plus accrued and
unpaid interest, if any, thereon to the date of redemption plus the Applicable
Premium (as defined in the 8 1/8% Notes Indenture) and, subject to certain
conditions, each holder of the 8 1/8% Notes will have the right to require
Products Corporation to repurchase all or a portion of such holder's 8 1/8%
Notes at a price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest, if any, thereon to the date of repurchase.
The 8 1/8% Notes Indenture contains 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 and (vii) consolidations,
mergers and transfers of all or substantially all Products Corporation's
assets. The 8 1/8% Notes Indenture also prohibits certain restrictions on
distributions from subsidiaries. All of these limitations and prohibitions,
however, are subject to a number of important qualifications.
(b) On March 5, 1997, the Company issued and sold in a private
placement $770.0 aggregate principal amount at maturity (net proceeds of
$505.0) of its Senior Secured Discount Notes due 2001 (the "Senior Secured
Discount Notes"). There are no periodic interest payments on the Senior Secured
Discount Notes. In August 1997 substantially all of the Senior Secured Discount
Notes were exchanged for registered notes with substantially identical terms.
(c) During March 1997, $778.4 principal amount at maturity (accreted
value of $694.0) of the Revlon Worldwide Notes was delivered to the Trustee
under the indenture governing the Revlon Worldwide Notes for cancellation. In
connection with the Revlon Worldwide Notes that were canceled, the Company
recorded a capital contribution from its indirect parent of $560.1 and recorded
an extraordinary loss of $43.8, which included the write-off of deferred
financing costs, in the first quarter of 1997. On March 16, 1998, $337.4 of
funds held in an irrevocable trust were used to repay the remaining Revlon
Worldwide Notes upon their maturity.
8
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(4) BUSINESS CONSOLIDATION COSTS AND OTHER, NET
In connection with the business consolidation costs and other, net,
recorded in 1997, the Company made cash payments for severance of $4.7 and cash
payments for other business consolidation costs of $0.5 during the first half
of 1998. As of June 30, 1998, the unpaid balance of the business consolidation
costs included in accrued expenses and other was $5.8.
(5) ACQUISITIONS
During the second quarter of 1998, the Company consummated
acquisitions for a combined purchase price of approximately $62.6, with
resulting goodwill recorded under the purchase method of $63.7.
(6) DISCONTINUED OPERATIONS
In the second quarter of 1998, the Company determined to exit the
retail and outlet store business comprised of its 85% ownership interest in The
Cosmetic Center, Inc. ("CCI") and recorded an estimated loss on disposal of
$15.0. The results of operations of CCI have been reported as a discontinued
operation and, accordingly, all prior periods have been restated. The net
assets of CCI included in the accompanying unaudited consolidated condensed
balance sheets consist primarily of amounts due to Products Corporation and
inventory, offset by third party debt, minority interest and a reserve for
estimated loss on disposal.
(7) GEOGRAPHIC SEGMENTS
The Company manages its business on the basis of one reportable
segment. The Company is exposed to the risk of changes in social, political and
economic conditions inherent in foreign operations and the Company's results of
operations and the value of its foreign assets and liabilities are affected by
fluctuations in foreign currency exchange rates. The Company's operations in
Brazil have accounted for approximately 5.4% and 5.8% and 5.7% and 6.5% of the
Company's net sales for the second quarter and first half of 1998 and 1997,
respectively. Net sales by geographic area are presented by attributing
revenues from external customers on the basis of where the products are sold.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
GEOGRAPHIC AREAS: JUNE 30, JUNE 30,
------------------- -------------------
Net sales: 1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
United States ............................ $ 339.1 $ 309.2 $ 621.8 $ 579.2
International ............................ 236.2 228.5 451.3 438.5
-------- -------- -------- --------
$ 575.3 $ 537.7 $1,073.1 $1,017.7
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
Long-lived assets: 1998 1997
-------- --------
<S> <C> <C>
United States ............................ $ 630.3 $ 557.4
International ............................ 278.6 280.5
-------- --------
$ 908.9 $ 837.9
======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
CLASSES OF SIMILAR PRODUCTS: JUNE 30, JUNE 30,
------------------- -------------------
Net sales: 1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cosmetics, skin care and fragrances ...... $ 346.4 $ 327.6 $ 658.5 $ 619.4
Personal care and professional ........... 228.9 210.1 414.6 398.3
-------- -------- -------- --------
$ 575.3 $ 537.7 $1,073.1 $1,017.7
======== ======== ======== ========
</TABLE>
9
<PAGE>
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 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
engages in licensing. In the second quarter of 1998, the Company determined to
exit the retail and outlet store business comprised of its 85% ownership
interest in CCI (See note 6).
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.
RESULTS OF OPERATIONS
The following table sets forth the Company's net sales by operation
for the three months and six months ended June 30, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ---------------------
Net sales: 1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
United States ........ $ 339.1 $ 309.2 $ 621.8 $ 579.2
International ........ 236.2 228.5 451.3 438.5
-------- -------- -------- --------
$ 575.3 $ 537.7 $1,073.1 $1,017.7
======== ======== ======== ========
</TABLE>
The following sets forth certain statements of operations data as a
percentage of net sales for the three months and six months ended June 30, 1998
and 1997, respectively:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cost of sales ......................... 33.7% 33.7% 33.3% 33.6%
Gross profit .......................... 66.3 66.3 66.7 66.4
Selling, general and administrative
expenses ............................ 57.3 57.3 59.2 59.2
Business consolidation costs and
other, net .......................... - - - 0.5
Operating income ...................... 9.0 9.0 7.5 6.7
</TABLE>
NET SALES
Net sales were $575.3 and $537.7 for the second quarters of 1998 and
1997, respectively, an increase of $37.6, or 7.0% (or 9.8% on a constant U.S.
dollar basis), and were $1,073.1 and $1,017.7 for the first half of 1998 and
1997, respectively, an increase of $55.4, or 5.4% (or 8.3% on a constant U.S.
dollar basis), primarily as a result of successful new product introductions
worldwide, increased demand in the United States and increased distribution
internationally.
United States. The United States operation's net sales increased to
$339.1 for the second quarter of 1998 from $309.2 for the second quarter of
1997, an increase of $29.9, or 9.7% and increased to $621.8 for the first half
of 1998 from $579.2 for the first half of 1997, an increase of $42.6, or 7.4%.
Net sales improved for the second quarter and first half of 1998, primarily as
a result of continued consumer acceptance of new product offerings and general
improvement in consumer demand for the Company's color cosmetics. Even though
consumer sell-through for the REVLON and ALMAY brands, as described below in
more detail, has increased, the Company's sales to its customers have been and
may continue to be impacted by retail inventory balancing and reductions.
REVLON brand color cosmetics continued as the number one brand in
dollar market share in the self-select distribution channel. New product
introductions (including, in 1998, certain products launched during 1997)
generated incremental net sales in the second quarter and first half of 1998,
principally as a result of launches of TOP SPEED nail enamel, MOISTURESTAY lip
makeup,
10
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(DOLLARS IN MILLIONS)
products in the NEW COMPLEXION line, COLORSTAY haircolor, ALMAY STAY
SMOOTH ANTI-CHAP lip makeup, products in the ALMAY ONE COAT collection and
products in the ULTIMA II BEAUTIFUL NUTRIENT line.
International. The International operation's net sales increased to
$236.2 for the second quarter of 1998 from $228.5 for the second quarter of
1997, an increase of $7.7, or 3.4%, on a reported basis (or 10.0% on a constant
U.S. dollar basis) and increased to $451.3 for the first half of 1998 from
$438.5 for the first half of 1997, an increase of $12.8, or 2.9%, on a reported
basis (or 9.6% on a constant U.S. dollar basis). Net sales improved for the
second quarter and first half of 1998 principally as a result of increased
distribution, including acquisitions, and successful new product introductions.
This was partially offset, on a reported basis, by the unfavorable effect on
sales of a stronger U.S. dollar against most foreign currencies and unfavorable
economic conditions in several international markets. New products such as
MOISTURESTAY lip makeup and TOP SPEED nail enamel were introduced during the
first half of 1998 in select international markets. The International
operation's sales are divided into three geographic areas. In Europe, which is
comprised of Europe, the Middle East and Africa, net sales increased by 2.1% on
a reported basis to $106.4 for the second quarter of 1998 as compared to the
second quarter of 1997 or an increase of 7.2% on a constant U.S. dollar basis,
and increased by 3.2% to $206.1 for the first half of 1998 as compared to the
first half of 1997 or an increase of 9.1% on a constant U.S. dollar basis. In
the Western Hemisphere, which is comprised of Canada, Mexico, Central America,
South America and Puerto Rico, net sales increased by 15.9% on a reported basis
to $91.3 for the second quarter of 1998 as compared to the second quarter of
1997 or an increase of 20.6% on a constant U.S. dollar basis, and increased by
13.2% to $173.7 for the first half of 1998 as compared to the first half of
1997 or an increase of 18.3% on a constant U.S. dollar basis. 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 were
$30.8 and $31.4 for the second quarter of 1998 and 1997, respectively, and were
$61.2 and $65.7 for the first half of 1998 and 1997, respectively. Net sales in
Brazil were adversely affected by the stronger U.S. dollar against the
Brazilian real and competitive activities. In the Far East, net sales decreased
by 15.4% on a reported basis to $38.5 for the second quarter of 1998 as
compared to the second quarter of 1997 or a decrease of 2.1% on a constant U.S.
dollar basis, and decreased by 16.3% to $71.5 for the first half of 1998 as
compared to the first half of 1997 or a decrease of 5.2% on a constant U.S.
dollar basis. Net sales in the Far East were, and may continue to be, adversely
impacted by general economic conditions and competitive activities in certain
markets.
Cost of sales
As a percentage of net sales, cost of sales was 33.7% for the second
quarter of 1998 and 1997, and 33.3% for the first half of 1998 compared to
33.6% for the first half of 1997. Cost of sales as a percentage of net sales
for the second quarter and first half of 1998 compared to the comparable 1997
periods reflects the benefits of improved overhead absorption against higher
production volumes and more efficient global production and purchasing. These
factors were partially offset by changes in product mix and the effect of
weaker local currencies on the cost of imported purchases.
S,G&A expenses
As a percentage of net sales, S,G&A expenses were 57.3% for the second
quarter of 1998 and 1997, and 59.2% for the first half of 1998 and 1997. S,G&A
expenses other than advertising and consumer-directed promotion expenses, as a
percentage of net sales, improved to 39.5% for the second quarter of 1998
compared with 40.3% for the second quarter of 1997, and improved to 41.5% for
the first half of 1998 as compared to 42.4% for the first half of 1997,
primarily as a result of reduced general and administrative expenses, improved
productivity and lower distribution costs. The Company increased advertising
and consumer-directed promotion expenditures in the second quarter and first
half of 1998 compared with the comparable 1997 periods to support growth in
existing product lines, new product launches and increased distribution in many
of the Company's markets in the International operation. Advertising and
consumer-directed promotion expenses increased by 12.5% to $102.6, or 17.8% of
net sales, for the second quarter of 1998 from $91.2, or 17.0% of net sales,
for the second quarter of 1997 and increased by 11.1% to $190.5, or 17.7% of
net sales, for the first half of 1998 from $171.4, or 16.8% of net sales, for
the first half of 1997.
11
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(DOLLARS IN MILLIONS)
Business consolidation costs and other, net
In the first quarter of 1997 the Company incurred business
consolidation costs of approximately $5.4 in connection with the implementation
of its business strategy to rationalize factory operations. These costs
primarily included severance and other related costs in certain International
operations.
Operating income
As a result of the foregoing, operating income increased by $3.0, or
6.2%, to $51.5 for the second quarter of 1998 from $48.5 for the second quarter
of 1997 and increased by $12.0, or 17.6%, to $80.2 for the first half of 1998
from $68.2 for the first half of 1997.
Other expenses/income
Interest expense was $48.7 for the second quarter of 1998 compared to
$55.6 for the second quarter of 1997 and $107.8 for the first half of 1998
compared to $118.7 for the first half of 1997. The decrease in interest expense
for the second quarter and first half of 1998 as compared to the comparable
1997 periods is due to the cancellation of the Revlon Worldwide Notes, lower
interest expense under the Senior Secured Discount Notes and lower interest
rates, partially offset by higher average outstanding borrowings under the
Credit Agreement and a non-recurring interest charge associated with the
refinancing (see Note 3 (a)).
Interest and net investment income was $1.1 for the second quarter of
1998 compared to $6.0 for the second quarter of 1997 and $6.2 for the first
half of 1998 compared to $8.7 for the first half of 1997. Interest and net
investment income consists primarily of interest income recognized on
marketable securities that were purchased by the Company and deposited in an
irrevocable trust to effect the covenant defeasance of the remaining Revlon
Worldwide Notes not previously delivered to the Trustee for cancellation.
Foreign currency losses, net, were $1.3 for the second quarter of 1998
compared to $1.0 for the second quarter of 1997 and $2.8 for the first half of
1998 and 1997, respectively. The foreign currency losses for the second quarter
of 1998 as compared to the second quarter of 1997 primarily reflects a weaker
South African rand against the U.S. dollar.
Provision for income taxes
The provision for income taxes was $3.4 and $3.5 for the second
quarters of 1998 and 1997, respectively, and $7.1 and $9.0 for the first half
of 1998 and 1997, respectively. The decrease was primarily attributable to
lower taxable income in certain International operations.
Discontinued operations
In the second quarter of 1998, the Company determined to exit the
retail and outlet store business comprised of its 85% ownership interest in CCI
and recorded an estimated loss on disposal of $15.0. (Loss) income from
discontinued operations was $(11.9) and $1.0 for the second quarter of 1998 and
1997, respectively, and $(16.5) and $(1.8) for the six months ended June 30,
1998 and 1997, respectively. The 1997 periods include a $6.0 non-recurring gain
resulting from the merger of Prestige Fragrance & Cosmetics, Inc., a wholly
owned subsidiary of Products Corporation, with and into CCI on April 25, 1997,
partially offset by related business consolidation costs of $4.0. The 1998
period includes the Company's share of a non-recurring charge of $10.5 taken by
CCI primarily related to inventory and severance.
12
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(DOLLARS IN MILLIONS)
Extraordinary items
The extraordinary item of $13.5 in the second quarter of 1998 resulted
from the write-off of deferred financing costs and payment of a call premium
associated with the redemption of the Senior Notes. The extraordinary item of
$38.2 in the first quarter of 1998 resulted primarily from the write-off of the
deferred financing costs and the payment of a call premium associated with the
redemption of the Senior Subordinated Notes. The extraordinary item of $14.9 in
the second quarter of 1997 resulted from the write-off of deferred financing
costs associated with the 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, and costs of approximately
$6.3 in connection with the redemption of Products Corporation's 10 7/8%
Sinking Fund Debentures due 2010 (the "Sinking Fund Debentures"). The
extraordinary item of $43.8 in the first quarter of 1997 resulted from the
cancellation of a portion of the Revlon Worldwide Notes and the write-off of
the deferred financing costs associated with such cancellation.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities was $62.6 and $83.1 for the
first half of 1998 and 1997, respectively. The improvement in net cash used for
operating activities for the first half of 1998 compared with the first half of
1997 resulted primarily from higher operating income and improved working
capital management.
Net cash provided by (used for) investing activities was $257.1 and
$(341.0) for the first half of 1998 and 1997, respectively. Net cash provided
by investing activities for the first half of 1998 included proceeds from the
sale of marketable securities that were used to repay the remaining Revlon
Worldwide Notes upon their maturity, partially offset by cash paid in
connection with acquisitions and capital expenditures. Net cash (used for)
investing activities in the first half of 1997 consisted of the purchase of
marketable securities that were deposited in a irrevocable trust to effect the
covenant defeasance of the remaining Revlon Worldwide Notes not previously
delivered to the Trustee for cancellation and capital expenditures.
Net cash (used for) provided by financing activities was $(186.9) and
$428.0 for the first half of 1998 and 1997, respectively. Net cash (used for)
financing activities for the first half of 1998 included the repayment of the
remaining portion of the Revlon Worldwide Notes, the payment of fees and
expenses related to the issuance of the Notes, the redemption of the Senior
Subordinated Notes and the Senior Notes and the repayment of borrowings under
the Company's Japanese yen-denominated credit agreement (the "Yen Credit
Agreement"),partially offset by proceeds from the issuance of the Notes and
cash drawn under the Credit Agreement. During the second quarter of 1998, the
Company loaned $5.0 to CCI to assist it with liquidity needs and its new
business strategy. Net cash provided by financing activities for the first half
of 1997 included cash drawn under the 1996 Credit Agreement and the Credit
Agreement and net proceeds from the issuance of the Senior Secured Discount
Notes partially offset by the purchase of the Revlon Worldwide Notes delivered
to the Trustee for cancellation, repayment of borrowings under the 1996 Credit
Agreement, the payment of fees and expenses related to the Credit Agreement and
the repayment of borrowings under the Yen Credit Agreement.
On February 2, 1998, Revlon Escrow issued and sold the Notes in a
private placement, with the net proceeds deposited into escrow. The proceeds
from the sale of the Notes were used to finance the redemptions of the Senior
Subordinated Notes and 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 consummated the 8 5/8% Notes Assumption, and to the
holders of the Senior Notes for the redemption of the Senior Notes on April 1,
1998, at which time Products Corporation consummated the 8 1/8% Notes
Assumption. On May 7, 1998, substantially all of the Notes were exchanged for
registered notes with substantially identical terms. 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.
13
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(DOLLARS IN MILLIONS)
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
Products Corporation's 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. At June 30, 1998, Products Corporation had
approximately $199.0 outstanding under the Term Loan Facilities, $173.4
outstanding under the Multi-Currency Facility, $99.2 outstanding under the
Acquisition Facility and $34.0 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 3.8 billion
as of June 30, 1998 (approximately $27.2 U.S. dollar equivalent as of June 30,
1998). In accordance with the terms of the Yen Credit Agreement, 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 so amended and restated, approximately Yen 539 million
(approximately $4.2 U.S. dollar equivalent) was paid in March 1998,
approximately Yen 539 million (approximately $3.9 U.S. dollar equivalent as of
June 30, 1998) is due in each of March 1999 and 2000 and Yen 2.7 billion
(approximately $19.4 U.S. dollar equivalent as of June 30, 1998) is due on
December 31, 2000.
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 June 30, 1998.
In the second quarter of 1998, the Company reclassified to short-term
its $200.0 1999 Notes which the Company intends to refinance.
The Company's principal sources of funds are expected to be cash flow
generated from operations and borrowings under the Credit Agreement and other
existing working capital lines. The Credit Agreement, the 1999 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 Senior Secured Discount Notes contain certain provisions
that by their terms limit REV Holdings' 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 1999 Notes).
The Company estimates that capital expenditures for 1998 will be
approximately $65 including upgrades to the Company's management information
systems. Pursuant to tax sharing agreements, REV Holdings and Revlon, Inc. may
be required to make tax sharing payments to Mafco Holdings Inc. 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 1998.
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% 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. 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 and is included in the
first quarter 1998 extraordinary item - early extinguishment of debt.
Products Corporation enters into forward foreign exchange contracts
and option contracts from time to time to hedge certain cash flows denominated
in foreign currencies. Products Corporation had forward foreign exchange
contracts denominated in various
14
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(DOLLARS IN MILLIONS)
currencies of approximately $38.3 and $16.6 (U.S. dollar equivalent) at June
30, 1998 and 1997, respectively, and option contracts of approximately $49.6
(U.S. dollar equivalent) outstanding at June 30, 1998. Such contracts are
entered into to hedge transactions predominantly occurring within twelve
months. If Products Corporation had terminated these contracts on June 30, 1998
and 1997, 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 subsidiary credit facilities and refinancings of existing subsidiary
indebtedness will be sufficient to enable the Company to meet its anticipated
cash requirements for the foreseeable future, including debt service of its
subsidiaries (including refinancing the 1999 Notes). However, there can be no
assurance that cash flow will be sufficient to meet the Company's cash
requirements on a consolidated basis. 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 capital expenditures,
restructuring subsidiary indebtedness, selling assets or operations, selling
its equity securities, seeking capital contributions or loans from affiliates
of the Company or selling additional shares of capital stock of Revlon, Inc.
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
and its subsidiaries' various debt instruments then in effect. The Company, as
a holding company, will be dependent on distributions with respect to its
approximately 83.0% ownership interest in Revlon, Inc. from the net earnings
generated by Products Corporation to pay its expenses and to pay the principal
amount at maturity of the Senior Secured Discount Notes. The terms of the
Credit Agreement, the 1999 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.
The Company currently anticipates that cash flow generated from
operations will be insufficient to pay the principal amount at maturity of the
Senior Secured Discount Notes. Accordingly, the Company currently anticipates
that it will be required to adopt one or more alternatives to pay the principal
amount at maturity of the Senior Secured Discount 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 Senior
Secured Discount Notes or that any of such actions would be permitted by the
terms of the Indenture or any other debt instruments of the Company and the
Company's subsidiaries then in effect.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q for the quarter ended June 30, 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 expansion into markets, future
financial performance, including growth in net sales and earnings, and the
effect on sales of retail inventory balancing and reductions, the effect on
sales of economic conditions and competitive activities in the Far East, the
intent to dispose of CCI and the estimated loss on disposition of CCI, cash
flows from operations, information system upgrades, capital expenditures, the
availability of funds from currently available credit facilities and
refinancings of indebtedness (including the 1999 Notes), capital contributions
or loans from affiliates, the sale of assets or operations of the Company or
additional shares of Revlon, Inc. and the sale of equity securities of REV
Holdings. 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
15
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(DOLLARS IN MILLIONS)
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; (v) the inability to
refinance indebtedness (including the 1999 Notes), secure capital contributions
or loans from affiliates or sell assets or operations of the Company,
additional shares of Revlon, Inc. or equity securities of REV Holdings; (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 and the
effect of economic conditions and competitive activities in the Far East; (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) lower
than expected sales as a result of retail inventory balancing and reductions;
and (x) difficulties, delays or unanticipated costs or greater than expected
losses in connection with the disposition of CCI. The Company assumes no
responsibility to update forward-looking information contained herein.
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The effect of adopting
the statement and the date of such adoption by the Company has not yet been
determined.
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 -
10.28 Amendment, effective June 1, 1998, to the Employment Agreement dated as
of January 1, 1996 between Products Corporation and William J. Fox.
(Incorporated by reference to Exhibit 10.28 to the Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1998 of Revlon, Inc.).
- --------------------
(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/ Irwin Engelman By: /s/ Lawrence E. Kreider
--------------------------------- ---------------------------------
Irwin Engelman Lawrence E. Kreider
Executive Vice President Senior Vice President, Controller
and Chief Financial Officer and Chief Accounting Officer
Dated: August 12, 1998
16
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