<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: September 30, 1999
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 September 30, 1999, all of which were held by an affiliate of Mafco
Holdings Inc.
Total Pages - 20
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 97.7 $ 34.7
Trade receivables, less allowances of $28.4
and $28.5, respectively ....................... 447.7 536.0
Inventories ......................................... 301.6 264.1
Prepaid expenses and other .......................... 60.9 69.9
---------- ----------
Total current assets .......................... 907.9 904.7
Property, plant and equipment, net ........................ 359.3 378.9
Other assets .............................................. 175.2 181.6
Intangible assets, net .................................... 362.3 372.9
---------- ----------
Total assets .................................. $ 1,804.7 $ 1,838.1
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current liabilities:
Short-term borrowings - third parties ............... $ 34.4 $ 27.9
Current portion of long-term debt - third parties ... 6.3 6.0
Accounts payable .................................... 170.7 134.8
Accrued expenses and other .......................... 390.5 389.7
---------- ----------
Total current liabilities ..................... 601.9 558.4
Long-term debt - third parties ............................ 2,472.0 2,241.1
Long-term debt - affiliates ............................... 24.1 24.1
Other long-term liabilities ............................... 248.1 267.5
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 ............. (1,026.8) (771.6)
Accumulated other comprehensive loss ................ (105.8) (72.6)
---------- ----------
Total stockholder's deficiency ................ (1,541.4) (1,253.0)
---------- ----------
Total liabilities and stockholder's deficiency $ 1,804.7 $ 1,838.1
========== ==========
</TABLE>
See Accompanying 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1999 1998 1999 1998
-------- ------- --------- --------
<S> <C> <C> <C> <C>
Net sales ................................................ $ 452.4 $ 548.6 $ 1,446.9 $ 1,621.7
Cost of sales............................................. 170.0 186.1 510.6 543.4
-------- ------- --------- ---------
Gross profit ........................................ 282.4 362.5 936.3 1,078.3
Selling, general and administrative expenses ............. 403.5 322.6 1,001.0 958.2
Business consolidation costs and other, net............... 4.4 (7.1) 22.1 (7.1)
-------- ------- --------- ---------
Operating (loss) income ............................. (125.5) 47.0 (86.8) 127.2
-------- ------- --------- ---------
Other expenses (income):
Interest expense .................................... 53.7 48.3 158.4 156.1
Interest income ..................................... (0.4) (1.4) (1.9) (7.6)
Amortization of debt issuance costs.................. 1.7 2.0 6.0 6.9
Foreign currency losses, net......................... 0.2 1.9 0.2 4.7
Miscellaneous, net................................... (0.1) 0.4 0.2 3.6
Gain on sale of subsidiary stock .................... -- -- (0.1) (2.6)
-------- ------- --------- ---------
Other expenses, net............................. 55.1 51.2 162.8 161.1
-------- ------- --------- ---------
Loss from continuing operations
before income taxes.................................. (180.6) (4.2) (249.6) (33.9)
Provision (benefit) for income taxes ..................... 1.9 (0.7) 5.6 6.4
-------- ------- --------- ---------
Loss from continuing operations........................... (182.5) (3.5) (255.2) (40.3)
Loss from discontinued operations ........................ -- -- -- (31.5)
Extraordinary items - early extinguishment of debt ....... -- -- -- (51.7)
-------- ------- --------- ---------
Net loss.................................................. $ (182.5) $ (3.5) $ (255.2) $ (123.5)
======== ======= ========= =========
</TABLE>
See Accompanying 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 TOTAL
CAPITAL ACCUMULATED COMPREHENSIVE STOCKHOLDER'S
DEFICIENCY DEFICIT LOSS (a) DEFICIENCY
---------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1998 ........................... $ (408.8) $ (562.2) $ (23.7) $ (994.7)
Comprehensive loss:
Net loss............................... (123.5) (123.5)
Revaluation of marketable securities... (2.4) (2.4)
Currency translation adjustment ....... (10.3)(b) (10.3)
----------
Total comprehensive loss ...................... (136.2)
-------- ----------- -------- ----------
Balance, September 30, 1998 ........................ $ (408.8) $ (685.7) $ (36.4) $ (1,130.9)
======== =========== ======== ==========
Balance, January 1, 1999 ........................... $ (408.8) $ (771.6) $ (72.6) $ (1,253.0)
Comprehensive loss:
Net loss............................... (255.2) (255.2)
Revaluation of marketable securities... (0.9) (0.9)
Currency translation adjustment........ (32.3) (32.3)
----------
Total comprehensive loss ...................... (288.4)
-------- ----------- -------- ----------
Balance, September 30, 1999......................... $ (408.8) $ (1,026.8) $ (105.8) $ (1,541.4)
======== =========== ======== ==========
</TABLE>
- --------------------
(a) Accumulated other comprehensive loss includes a revaluation of
marketable securities of $3.9 and $2.4 as of September 30, 1999 and
1998, respectively, currency translation adjustments of $69.4 and $29.5
as of September 30, 1999 and 1998, respectively, and adjustments for the
minimum pension liability of $32.5 and $4.5 as of September 30, 1999 and
1998, 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 assets outside the United States.
See Accompanying 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>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
-------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................................................... $ (255.2) $ (123.5)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization................................................ 93.6 83.6
Amortization of debt discount................................................ 49.8 52.8
Loss (gain) on sale of business interests and certain assets, net. .......... 1.6 (7.1)
Loss from discontinued operations............................................ -- 31.5
Extraordinary items ......................................................... -- 51.7
Gain on sale of subsidiary stock............................................. (0.1) (2.6)
Change in assets and liabilities:
Decrease in trade receivables .......................................... 74.7 14.2
Increase in inventories ................................................ (44.5) (50.5)
Decrease (increase) in prepaid expenses and
other current assets ...................................... 7.0 (5.8)
Increase in accounts payable ........................................... 39.9 3.0
Decrease in accrued expenses and other
current liabilities........................................ (8.3) (76.4)
Other, net.............................................................. (49.3) (67.2)
-------- -----------
Net cash used for operating activities ........................................... (90.8) (96.3)
-------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................................. (31.4) (40.5)
Acquisition of businesses, net of cash acquired................................... -- (57.6)
Proceeds from the sale of marketable securities, net.............................. -- 337.4
Proceeds from the sale of business interests and certain assets .................. 1.6 13.7
-------- -----------
Net cash (used for) provided by investing activities.............................. (29.8) 253.0
-------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings - third parties............................. 8.1 1.3
Proceeds from the issuance of long-term debt - third parties ..................... 515.1 1,178.9
Repayment of long-term debt - third parties....................................... (336.3) (1,299.2)
Net proceeds from the sale of subsidiary common stock ............................ 0.1 1.1
Proceeds from the issuance of debt - affiliates................................... 67.1 105.9
Repayment of debt - affiliates ................................................... (67.1) (111.1)
Payment of debt issuance costs.................................................... -- (16.5)
-------- -----------
Net cash provided by (used for) financing activities.............................. 187.0 (139.6)
-------- -----------
Effect of exchange rate changes on cash and cash equivalents ..................... (3.4) (2.0)
Net cash used by discontinued operations ......................................... -- (16.9)
-------- -----------
Net increase (decrease) in cash and cash equivalents ........................ 63.0 (1.8)
Cash and cash equivalents at beginning of period ............................ 34.7 37.4
-------- -----------
Cash and cash equivalents at end of period .................................. $ 97.7 $ 35.6
======== ===========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest ............................................................... $ 120.1 $ 116.2
Income taxes, net of refunds............................................ 6.1 9.8
Supplemental schedule of noncash investing activities:
Liabilities assumed in connection with business acquisitions:
Fair value of assets acquired ......................................... $ -- $ 74.5
Cash paid.............................................................. -- (57.6)
-------- -----------
Liabilities assumed.................................................... $ -- $ 16.9
======== ===========
</TABLE>
See Accompanying 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 all of
the rights and obligations of Revlon Worldwide by reason of the Merger including
those under its various agreements.
REV Holdings is a holding company, formed in 1997, that conducts its
business exclusively through its indirect subsidiary, Revlon Consumer Products
Corporation and its subsidiaries ("Products Corporation"). 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. ("MacAndrews Holdings"), a
corporation wholly owned indirectly through Mafco Holdings Inc. (together with
MacAndrews Holdings "MacAndrews & Forbes") by Ronald O. Perelman.
The accompanying Consolidated Condensed Financial Statements are
unaudited. In management's opinion, all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation have been made.
The Unaudited Consolidated Condensed Financial Statements include the
accounts of the Company after elimination of all material intercompany balances
and transactions. The Company has made a number of estimates and assumptions
relating to the assets and liabilities, the disclosure of contingent assets and
liabilities and the reporting of revenues and expenses to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates. The Unaudited
Consolidated Condensed Financial Statements should be read in conjunction with
the consolidated financial statements and related notes contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
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, for the nine months ended September
30, 1999 and 1998, disbursements and commitments for advertising and promotion
exceeded advertising and promotion expenses by $19.2 and $48.4, respectively,
and such amounts were deferred.
Effective January 1999, the Company adopted Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities," which requires that costs
incurred during start-up activities, including organization costs, be expensed
as incurred. 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
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
Raw materials and supplies.......... $ 90.0 $ 78.2
Work-in-process..................... 19.6 14.4
Finished goods...................... 192.0 171.5
------------ ------------
$ 301.6 $ 264.1
============ ============
(3) BUSINESS CONSOLIDATION COSTS AND OTHER, NET
In the fourth quarter of 1998, the Company committed to a restructuring
plan to realign and reduce personnel, exit excess leased real estate, realign
and consolidate regional activities, reconfigure certain manufacturing
operations and exit certain product lines. In the first quarter of 1999, the
Company recorded a net charge of $8.2 relating to such restructuring plan,
principally for additional employee severance and other personnel benefits, and
continued to implement such restructuring plan during the second quarter of 1999
during which it recorded a charge of $8.5 for employee severance and other
personnel benefits as well as other costs. Also in the second quarter of 1999,
the Company adopted a plan to exit a non-core business as to which a charge of
$1.0 is included in the table below. In the third quarter of 1999, the Company
recorded an additional charge of $3.8 relating to the restructuring plan for
employee severance and other personnel benefits, as well as costs associated
with the exit from a leased facility. In the third quarter of 1999, the Company
also consummated the exit from the non-core business referred to above, as to
which an additional charge of $0.6 is included in the table below.
Of the 720 employees and the 493 employees for whom severance and other
personnel benefits were included in the charges for the fourth quarter 1998 and
the nine month period ended September 30, 1999, respectively, the Company had
terminated 1,013 employees by September 30, 1999.
Details of the activity described above during the nine month period
ended September 30, 1999 are as follows:
BALANCE UTILIZED, NET BALANCE
AS OF ------------------- AS OF
1/1/99 EXPENSES, NET CASH NONCASH 9/30/99
------- ------------- ------- -------- -------
Employee severance and other
personnel benefits..... $ 24.9 $ 20.5 $ (27.2) $ -- $ 18.2
Factory, warehouse, office
and other costs......... 12.1 1.6 (4.9) (0.3) 8.5
------ ------- ------- ------ ------
$ 37.0 $ 22.1 $ (32.1) $ (0.3) $ 26.7
====== ======= ======= ====== ======
In the third quarter of 1998 the Company recognized a gain of
approximately $7.1 on the sale of the wigs and hairpieces portion of its U.S.
operation.
7
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(4) LONG-TERM DEBT
In November 1998, Products Corporation issued and sold $250.0 principal
amount of 9% Senior Notes due 2006 (the "9% Notes"), of which $200.0 was used to
temporarily reduce borrowings under the Credit Agreement (as hereinafter
defined) then in effect in anticipation of the redemption referred to below. On
June 1, 1999, Products Corporation redeemed the $200.0 principal amount of 9
1/2% Senior Notes due 1999 (the "1999 Notes") with borrowings from the Credit
Agreement.
The Credit Agreement contained financial covenants requiring Products
Corporation to maintain minimum interest coverage and to limit its leverage
ratio, among other things. As a result of the loss from continuing operations
before taxes incurred by Products Corporation in the quarter ended September 30,
1999, the interest coverage and leverage ratios specified in the Credit
Agreement were not achieved at September 30, 1999. The Credit Agreement was
amended on November 10, 1999 to (i) eliminate the interest coverage ratio and
leverage ratio covenants from the quarter ended September 30, 1999 through the
year 2000 and to modify those covenants for the years 2001 and 2002; (ii) add a
minimum EBITDA covenant for the year 2000; (iii) limit the amount that Products
Corporation may spend for capital expenditures and investments including
acquisitions; (iv) permit the sale of Products Corporation's worldwide
professional products business and its non-core Latin American brands Colorama,
Juvena, Bozzano and Plusbelle (such sales, the "Asset Sales") (see Note 6); (v)
change the reduction of the aggregate commitment that is required upon
consummation of any Asset Sale to an amount equal to 60% of the Net Proceeds (as
defined in the Credit Agreement) from such Asset Sale as opposed to 100% of such
Net Proceeds as provided under the Credit Agreement prior to the amendment; (vi)
increase the "applicable margin" by 3/4 of 1% and (vii) permit the amendment of
the Japanese yen-denominated credit agreement (the "Yen Credit Agreement")
described below. Until the Asset Sales are consummated, the aggregate commitment
under the Credit Agreement, along with the originally scheduled reductions
thereof, remains as described in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
On November 12, 1999, the borrower under the Yen Credit Agreement
executed an amendment to the Yen Credit Agreement to eliminate the amortization
payment due in March 2000 and to provide that the final maturity date of the
Yen Credit Agreement will be the earlier of (i) the closing date of the sale of
Products Corporation's professional products business and (ii) December 31,
2000.
8
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(5) GEOGRAPHIC INFORMATION
The Company manages its business on the basis of one reportable
operating segment. The Company is exposed to the risk of changes in social,
political and economic conditions inherent in foreign operations and the
Company's results of operations and the value of its foreign assets and
liabilities are affected by fluctuations in foreign currency exchange rates. The
Company's operations in Brazil have accounted for approximately 3.9% and 5.5% of
the Company's net sales for the third quarter of 1999 and 1998, respectively,
and 3.9% and 5.6% of the Company's net sales for the nine months ended September
30, 1999 and 1998, 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 NINE MONTHS ENDED
GEOGRAPHIC AREAS: SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ---------------------------------
Net sales: 1999 1998 1999 1998
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
United States........................ $ 250.0 $ 334.3 $ 847.1 $ 958.3
International........................ 202.4 214.3 599.8 663.4
------------- ------------- ------------- --------------
$ 452.4 $ 548.6 $ 1,446.9 $ 1,621.7
============= ============= ============= ==============
SEPTEMBER 30, DECEMBER 31,
Long-lived assets: 1999 1998
------------- -------------
United States........................ $ 632.2 $ 646.0
International........................ 264.6 287.4
------------- -------------
$ 896.8 $ 933.4
============= =============
THREE MONTHS ENDED NINE MONTHS ENDED
CLASSES OF SIMILAR PRODUCTS: SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ---------------------------------
Net sales: 1999 1998 1999 1998
------------- ------------ ------------- --------------
Cosmetics, skin care and fragrances.. $ 243.0 $ 307.8 $ 782.7 $ 942.0
Personal care and professional....... 209.4 240.8 664.2 679.7
------------- ------------ ------------- --------------
$ 452.4 $ 548.6 $ 1,446.9 $ 1,621.7
============= ============ ============= ==============
</TABLE>
9
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(6) SUBSEQUENT EVENTS
On October 1, 1999 the Company announced that it had completed its
review of strategic alternatives to maximize shareholder value and had decided
to pursue the sale of its worldwide professional products business and its
non-core Latin American brands Colorama, Juvena, Bozzano and Plusbelle. The
Company is negotiating or in active discussions with prospective purchasers and,
subject to reaching agreement on terms and documentation, anticipates
consummating the sales during the first quarter of 2000. The Company intends
that proceeds, net of fees, expenses and transaction-related charges, will be
applied to reduce borrowings. The Company has determined not to sell its
remaining cosmetics, personal care, fragrances and skin treatment businesses.
In October and November 1999 purported class actions were filed by each
of Thomas Comport, Boaz Spitz, Felix Ezeir and Amy Hoffman and Ted Parris,
individually and on behalf of others similarly situated to them, in the United
States District Court for the Southern District of New York, against Revlon,
Inc. and certain of its present and former officers and directors and against
Revlon, Inc.'s independent auditors in the Comport and Hoffman/Parris cases,
alleging, among other things, violations of Rule 10b-5 under the Securities
Exchange Act of 1934, as amended, through the alleged use of deceptive
accounting practices during the period from October 29, 1997 through October 2,
1998, inclusive, in the Comport and Hoffman/Parris cases and October 30, 1997
through October 1, 1999, inclusive, in the Spitz and Ezeir cases. Each of the
actions seeks a declaration that it is properly brought as a class action, and
unspecified damages, attorney fees and other costs. The Company believes the
allegations contained in these suits to be without merit and intends to
vigorously defend against them.
On November 1, 1999 Revlon, Inc. elected Jeffrey M. Nugent, formerly
worldwide President of Neutrogena Corporation Inc., as President and Chief
Executive Officer, effective December 5, 1999, and George Fellows resigned as
Director and President and Chief Executive Officer.
10
<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 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 has a licensing group.
RESULTS OF OPERATIONS
The following table sets forth the Company's net sales for the three
month and nine month periods ended September 30, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -------------------------------
Net sales: 1999 1998 1999 1998
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
United States................................. $ 250.0 $ 334.3 $ 847.1 $ 958.3
International................................. 202.4 214.3 599.8 663.4
------------ ------------- ------------- ------------
$ 452.4 $ 548.6 $ 1,446.9 $ 1,621.7
============ ============= ============= ============
</TABLE>
The following sets forth certain statements of operations data as a
percentage of net sales for the three month and nine month periods ended
September 30, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -------------------------------
1999 1998 1999 1998
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Cost of sales................................. 37.6% 33.9% 35.3% 33.5%
Gross profit.................................. 62.4 66.1 64.7 66.5
Selling, general and administrative
expenses ("SG&A")......................... 89.2 58.8 69.2 59.1
Business consolidation costs and other, net... 0.9 (1.3) 1.5 (0.4)
Operating (loss) income....................... (27.7) 8.6 (6.0) 7.8
</TABLE>
NET SALES
Net sales were $452.4 and $548.6 for the third quarters of 1999 and
1998, respectively, a decrease of $96.2, or 17.5% on a reported basis (a
decrease of 15.4% on a constant U.S. dollar basis), and were $1,446.9 and
$1,621.7 for the nine months ended September 30, 1999 and 1998, respectively, a
decrease of $174.8, or 10.8% on a reported basis (a decrease of 8.4% on a
constant U.S. dollar basis).
United States. Net sales in the United States were $250.0 for the third
quarter of 1999 compared to $334.3 for the third quarter of 1998, a decrease of
$84.3, or 25.2%, and were $847.1 for the nine months ended September 30, 1999
compared to $958.3 for the nine months ended September 30, 1998, a decrease of
$111.2, or 11.6%. Net sales for the third quarter and nine months ended
September 30, 1999 were adversely affected by slower than anticipated category
growth, competitive activities and a reduction in the level of Company shipments
to certain retailers in accordance with such retailers' new, lower inventory
target levels. The reduction of inventory shipments will continue and is
expected to adversely impact sales at least through the fourth quarter of 1999.
REVLON brand color cosmetics continued as the number one brand in
dollar market share in the U.S. self-select distribution channel. New products
in the nine months ended September 30, 1999 included EVERYLASH mascara,
MOISTURESTAY
11
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
SHEER LIP COLOR, REVLON AGE DEFYING compact makeup, WET/DRY EYE SHADOW, ALMAY
STAY SMOOTH lip makeup and mascara, ALMAY FOUNDATION with the Skin Stays Clean
attributes, products in the ALMAY ONE COAT collection, MITCHUM COOL DRY
antiperspirant and COLORSTAY Liquid Lip.
International. Net sales outside the United States were $202.4 for the
third quarter of 1999 compared to $214.3 for the comparable 1998 period, a
decrease of $11.9, or 5.6%, on a reported basis (an increase of 0.4% on a
constant U.S. dollar basis), and were $599.8 for the nine months ended September
30, 1999 compared to $663.4 for the nine months ended September 30, 1998, a
decrease of $63.6, or 9.6%, on a reported basis (a decrease of 3.5% on a
constant U.S. dollar basis). Net sales for the third quarter and nine months
ended September 30, 1999 on a constant U.S. dollar basis were affected by
unfavorable economic conditions in certain markets outside the U.S., which
restrained consumer and trade demand, and lower sales in certain markets. The
decrease in net sales for the third quarter and the nine months ended September
30, 1999 on a reported basis also reflects the unfavorable effect on sales of a
stronger U.S. dollar against certain foreign currencies, particularly the
Brazilian real, partially offset by the weakening of the U.S. dollar against the
Japanese yen. Sales outside the United States are divided into three geographic
regions. In Europe, which is comprised of Europe, the Middle East and Africa,
net sales decreased by 2.5% on a reported basis to $89.0 for the third quarter
of 1999 as compared to the third quarter of 1998 (an increase of 2.6% on a
constant U.S. dollar basis), and decreased by 8.8% on a reported basis to $271.2
for the nine months ended September 30, 1999 as compared to the nine months
ended September 30, 1998 (a decrease of 5.1% 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 decreased by 14.3% on a
reported basis to $77.0 for the third quarter of 1999 as compared to the third
quarter of 1998 (a decrease of 2.4% on a constant U.S. dollar basis), and
decreased by 14.5% on a reported basis to $223.3 for the nine months ended
September 30, 1999 as compared to the nine months ended September 30, 1998 (a
decrease of 1.5% on a constant U.S. dollar basis). The Company's operations in
Brazil are significant. In Brazil, net sales were $17.5 on a reported basis for
the third quarter of 1999 compared to $30.1 for the third quarter of 1998, a
decrease of $12.6, or 41.9% (a decrease of 7.6% on a constant U.S. dollar
basis), and were $56.9 for the nine months ended September 30, 1999 on a
reported basis compared to $91.3 for the nine months ended September 30, 1998, a
decrease of $34.4, or 37.7% (a decrease of 3.5% on a constant U.S. dollar
basis). On a reported basis, net sales in Brazil were adversely affected by the
stronger U.S. dollar against the Brazilian real. In the Far East, net sales
increased by 9.6% on a reported basis to $36.4 for the third quarter of 1999 as
compared to the third quarter of 1998 (an increase of 1.2% on a constant U.S.
dollar basis), and increased by 0.6% on a reported basis to $105.3 for the nine
months ended September 30, 1999 as compared to the nine months ended September
30, 1998 (a decrease of 3.2% on a constant U.S. dollar basis). Net sales outside
the United States, including, without limitation, in Brazil, were, and may
continue to be, adversely impacted by generally weak economic conditions,
political and economic uncertainties, including, without limitation, currency
fluctuations and competitive activities in certain markets.
Cost of sales
As a percentage of net sales, cost of sales was 37.6% for the third
quarter of 1999 compared to 33.9% for the third quarter of 1998, and 35.3% for
the nine months ended September 30, 1999 compared to 33.5% for the nine months
ended September 30, 1998. The increase in cost of sales as a percentage of net
sales for the third quarter and nine months ended September 30, 1999 compared to
the comparable 1998 periods is due to changes in product mix, the effect of
weaker local currencies on the cost of imported purchases by subsidiaries
outside the U.S. and the effect of lower net sales.
SG&A expenses
As a percentage of net sales, SG&A expenses were 89.2% ($403.5) for the
third quarter of 1999 compared to 58.8% ($322.6) for the third quarter of 1998,
and were 69.2% ($1,001.0) for the nine months ended September 30, 1999 compared
to 59.1% ($958.2) for the nine months ended September 30, 1998. SG&A expenses in
the 1999 periods reflect increased brand support as a percentage of net sales
partially offset by cost savings achieved from the Company's restructuring
program. The increases in SG&A expenses as a percentage of net sales are due in
large measure to the reduced levels of sales coupled with the Company's decision
to maintain throughout the second half of 1999 brand support intended to drive
consumer purchasing and facilitate the inventory reduction process by U.S.
retailers referred to earlier.
12
<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 fourth quarter of 1998, the Company committed to a restructuring
plan to realign and reduce personnel, exit excess leased real estate, realign
and consolidate regional activities, reconfigure certain manufacturing
operations and exit certain product lines. In the first quarter of 1999, the
Company recorded a net charge of $8.2 relating to such restructuring plan,
principally for additional employee severance and other personnel benefits and
continued to implement such restructuring plan during the second quarter of 1999
during which it recorded a charge of $8.5 for employee severance and other
personnel benefits as well as other costs. Also in the second quarter of 1999,
the Company adopted a plan to exit a non-core business as to which a charge of
$1.0 is included in business consolidation costs and other, net. In the third
quarter of 1999, the Company recorded an additional charge of $3.8 relating to
the restructuring plan for employee severance and other personnel benefits, as
well as costs associated with the exit from a leased facility. In the third
quarter of 1999, the Company also consummated the exit from the non-core
business referred to above, as to which an additional charge of $0.6 is included
in business consolidation costs and other, net. In the third quarter of 1998 the
Company recognized a gain of approximately $7.1 on the sale of the wigs and
hairpieces portion of its U.S. operation.
Operating (loss) income
As a result of the foregoing, operating (loss) for the third quarter of
1999 was $(125.5) compared to operating income of $47.0 for the third quarter of
1998 and an operating (loss) of $(86.8) for the nine months ended September 30,
1999 compared to operating income of $127.2 for the nine months ended September
30, 1998.
Other expenses/(income)
Interest expense was $53.7 for the third quarter of 1999 compared to
$48.3 for the third quarter of 1998 and $158.4 for the nine months ended
September 30, 1999 compared to $156.1 for the nine months ended September 30,
1998. The increase in interest expense for the third quarter and nine months
ended September 30, 1999 as compared to the comparable 1998 periods is due to
higher average outstanding debt, higher interest rates under the Credit
Agreement and higher interest expense attributable to the Senior Secured
Discount Notes due 2001 (the "Senior Secured Discount Notes"), partially offset
by lower interest rates as a result of the refinancings in 1998.
Foreign currency losses, net, were $0.2 for the third quarter of 1999
compared to $1.9 in the third quarter of 1998 and $0.2 for the nine months ended
September 30, 1999 compared to $4.7 for the nine months ended September 30,
1998. Foreign currency losses, net, for the third quarter and the nine months
ended September 30, 1998 were comprised primarily of losses in several markets
in Latin America.
Provision (benefit) for income taxes
The provision (benefit) for income taxes was $1.9 for the third quarter
of 1999 compared to $(0.7) for the third quarter of 1998 and $5.6 for the nine
months ended September 30, 1999 compared to $6.4 for the nine months ended
September 30, 1998. The decrease during the nine months ended September 30, 1999
compared with the corresponding 1998 period was primarily due to lower taxable
income outside the United States.
Discontinued operations
During 1998, the Company determined to exit the retail and outlet store
business comprised of its approximately 85% ownership interest in The Cosmetic
Center, Inc. ("CCI") and, accordingly, the results of operations of CCI have
been reported as discontinued operations for the 1998 periods along with the
then estimated loss on disposal of such operations. By the end of 1998, the
Company completed the disposition of its approximately 85% equity interest in
CCI.
13
<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 $51.7 in the 1998 period resulted from the
write-off of deferred financing costs and payment of call premiums associated
with the redemption in March 1998 of Products Corporation's 10 1/2% Senior
Subordinated Notes due 2003 (the "Senior Subordinated Notes") and the redemption
in April 1998 of Products Corporation's 9 3/8% Senior Notes due 2001 (the
"Senior Notes").
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities was $90.8 and $96.3 for the nine
months ended September 30, 1999 and 1998, respectively. The decrease in net cash
used for operating activities for the nine months ended September 30, 1999
compared to the nine months ended September 30, 1998 was the result of changes
in working capital, partially offset by operating losses and increased use of
cash for business consolidation costs during the nine months ended September 30,
1999.
Net cash (used for) provided by investing activities was $(29.8) and
$253.0 for the nine months ended September 30, 1999 and 1998, respectively. Net
cash used for investing activities in the 1999 period included proceeds from the
consummation of the exit from and sale of a small non-core business. Net cash
provided by investing activities for the 1998 period included proceeds from the
sale of marketable securities that were used to repay the remaining Revlon
Worldwide Notes upon their maturity, proceeds from the sale of the wigs and
hairpieces portion of the Company's U.S. operation and certain fixed assets,
partially offset by cash paid in connection with acquisitions. Both periods
included capital expenditures.
Net cash provided by (used for) financing activities was $187.0 and
$(139.6) for the nine months ended September 30, 1999 and 1998, respectively.
Net cash provided by financing activities for the nine months ended September
30, 1999 included cash drawn under the Credit Agreement, partially offset by
repayments of borrowings under the Credit Agreement, redemption of the 1999
Notes and repayments under the Yen Credit Agreement. Net cash used for financing
activities for the nine months ended September 30, 1998 included the repayment
of the remaining portion of the Revlon Worldwide Notes, the payment of fees and
expenses related to the issuance of Products Corporation's 8 5/8% Senior
Subordinated Notes due 2008 (the "8 5/8% Notes") and Products Corporation's
8 1/8% Senior Notes due 2006 (the "8 1/8% Notes"), the redemption of the Senior
Subordinated Notes and the Senior Notes, and the repayment of borrowings under
the Yen Credit Agreement, partially offset by proceeds from the issuance of the
8 5/8% Notes, the 8 1/8% Notes and cash drawn under the Credit Agreement. During
the nine months ended September 30, 1998, net cash used by discontinued
operations was $16.9.
In May 1997, Products Corporation entered into a credit agreement (as
subsequently amended, the "Credit Agreement") with a syndicate of lenders, whose
individual members change from time to time. The Credit Agreement provides up to
$748.0 and is comprised of five senior secured facilities: $198.0 in two term
loan facilities (the "Term Loan Facilities"), a $300.0 multi-currency facility
(the "Multi-Currency Facility"), a $200.0 revolving acquisition facility, which
may also be used for general corporate purposes and which may be increased to
$400.0 under certain circumstances with the consent of a majority of the lenders
(the "Acquisition Facility"), and a $50.0 special standby letter of credit
facility (the "Special LC Facility"). At September 30, 1999, the Company had
approximately $198.0 outstanding under the Term Loan Facilities, $259.9
outstanding under the Multi-Currency Facility, $200.0 outstanding under the
Acquisition Facility and $28.8 of issued but undrawn letters of credit under the
Special LC Facility.
The Credit Agreement contained financial covenants requiring Products
Corporation to maintain minimum interest coverage and to limit its leverage
ratio, among other things. As a result of the loss from continuing operations
before taxes incurred by Products Corporation in the quarter ended September 30,
1999, the interest coverage and leverage ratios specified in the Credit
Agreement were not achieved at September 30, 1999. The Credit Agreement was
amended on November 10, 1999 to (i) eliminate the interest coverage ratio and
leverage ratio covenants from the quarter ended September 30, 1999 through the
year 2000 and to modify those covenants for the years 2001 and 2002; (ii) add a
minimum EBITDA covenant for the year 2000; (iii) limit the amount that Products
Corporation may spend for capital expenditures and investments including
acquisitions; (iv) permit the sale of Products Corporation's worldwide
professional products business and its non-core Latin American brands Colorama,
Juvena, Bozzano and Plusbelle; (v) change the reduction of the aggregate
commitment that is required upon consummation of any Asset Sale to an amount
equal to 60% of the Net Proceeds (as defined in the Credit Agreement) from such
Asset Sale as opposed
14
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
to 100% of such Net Proceeds as provided under the Credit Agreement prior to the
amendment; (vi) increase the "applicable margin" by 3/4 of 1% and (vii) permit
the amendment of the Yen Credit Agreement described below. Until the Asset Sales
are consummated, the aggregate commitment under the Credit Agreement, along with
the originally scheduled reductions thereof, remains as described in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
A subsidiary of Products Corporation is the borrower under the Yen
Credit Agreement, which had a principal balance of approximately (yen)1.0
billion as of September 30, 1999 (approximately $9.5 U.S. dollar equivalent as
of September 30, 1999) after giving effect to the payment of approximately
(yen)539 million (approximately $4.6 U.S. dollar equivalent) in March 1999. On
November 12, 1999, the borrower under the Yen Credit Agreement executed an
amendment to the Yen Credit Agreement to eliminate the amortization payment due
in March 2000 and to provide that the final maturity date of the Yen Credit
Agreement will be the earlier of (i) the closing date of the sale of Products
Corporation's professional products business and (ii) December 31, 2000.
In November 1998, Products Corporation issued and sold $250.0 principal
amount of 9% Notes, of which $200.0 was used to temporarily reduce borrowings
under the Credit Agreement in anticipation of the redemption referred to below.
On June 1, 1999, Products Corporation redeemed the $200.0 principal amount of
1999 Notes with borrowings from the Credit Agreement.
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 September 30, 1999.
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
8 5/8% Notes, the 8 1/8% Notes and the 9% Notes contain certain provisions that
by their terms limit Products Corporation's and/or its subsidiaries' ability to,
among other things, incur additional debt. The 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, expenses in
connection with the Company's restructuring referred to above and debt service
payments. Additionally, the Company expects that it will receive cash proceeds
from the Asset Sales, a portion of which proceeds, net of fees, expenses and
transaction-related charges, will be used to repay indebtedness under the Credit
Agreement.
The Company estimates that capital expenditures for 1999 will be
approximately $45, including upgrades to the Company's management information
systems. The Company estimates that cash payments related to the restructuring
plans referred to in Note 3 will be approximately $55, of which approximately
$38 will be paid in 1999. 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 1999.
Products Corporation enters into forward foreign exchange contracts and
option contracts from time to time to hedge certain cash flows denominated in
foreign currencies. Products Corporation had forward foreign exchange contracts
denominated in various currencies of approximately $11.8 and $30.3 (U.S. dollar
equivalent) outstanding at September 30, 1999 and 1998, respectively, and option
contracts of approximately $12.6 and $24.0 outstanding at September 30, 1999 and
1998, respectively. Such contracts are entered into to hedge transactions
predominantly occurring within twelve months. If Products Corporation had
terminated these contracts on September 30, 1999 and 1998 no material gain or
loss would have been realized.
Based upon the Company's current level of operations and anticipated
net sales and earnings, the Company expects that cash flows from operations and
funds from currently available subsidiary credit facilities and refinancings of
existing subsidiary indebtedness as well as anticipated proceeds during the
first quarter of 2000 from the Asset Sales will be sufficient to enable the
15
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
Company to meet its anticipated cash requirements for the foreseeable future,
including for debt service of its subsidiaries. However, there can be no
assurance that cash flow and anticipated proceeds during the first quarter of
2000 from the Asset Sales 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 other 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 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 8 5/8% Notes, the 8 1/8% Notes and the 9% Notes
generally restrict Products Corporation from paying dividends or making
distributions, except that Products Corporation is permitted to pay dividends
and make distributions to Revlon, Inc., among other things, to enable Revlon,
Inc. to pay expenses incidental to being a public holding company, including,
among other things, professional fees such as legal and accounting, regulatory
fees such as Securities and Exchange Commission (the "Commission") filing fees
and other miscellaneous expenses related to being a public holding company and
to pay dividends or make distributions in certain circumstances to finance the
purchase by Revlon, Inc. of its Class A Common Stock in connection with the
delivery of such Class A Common Stock to grantees under the Revlon, Inc. Second
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
relating to the Senior Secured Discount Notes or any other debt instruments of
the Company and the Company's subsidiaries then in effect.
YEAR 2000
Commencing in 1997, the Company undertook a business process
enhancement program to substantially upgrade management information technology
systems in order to provide comprehensive order processing, production and
accounting support for the Company's business. The Company also developed a
comprehensive plan to address Year 2000 issues. The Year 2000 plan addresses
three main areas: (a) information technology systems; (b) non-information
technology systems (including factory equipment, building systems and other
embedded systems); and (c) business partner readiness (including without
limitation customers, inventory and non-inventory suppliers, service suppliers,
banks, insurance companies and tax and other governmental agencies). To oversee
the process, the Company established a Steering Committee comprised of senior
executives of the Company.
In connection with and as part of the Company's business process
enhancement program, certain information technology systems have been and will
continue to be upgraded to be Year 2000 compliant. In addition, as part of its
Year 2000 plan, the Company identified potential deficiencies related to Year
2000 in certain of its information technology systems, both hardware and
software, and is in the process of addressing them through upgrades and other
remediation. The Company was substantially compliant by the end of the third
quarter of 1999, and it currently expects to complete upgrade and remediation
and testing of its information systems during the fourth quarter of 1999. Such
upgrades, remediation and testing remain to be completed at certain locations in
the European Region that represent less than 5% of worldwide net revenues. With
regard to EDI transactions, the Company has implemented the 4010 EDI transaction
standard and the Company has performed tests with most of its trading partners,
with a few being scheduled for tests during the fourth quarter of 1999. For the
limited number of trading partners using an EDI method other than the 4010
standard, the Company intends to coordinate with them on their approach to Year
2000
16
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
compliance. In respect of non-information technology systems with date sensitive
operating controls, the Company identified those items that required remediation
or replacement, and has completed the upgrade and remediation program.
The Company has identified and contacted and continues to identify and
contact key suppliers, both inventory and non-inventory, key customers and other
strategic business partners, such as banks, pension trust managers and marketing
data suppliers, either by soliciting written responses to questionnaires and/or
by meeting with certain of such third parties. The parties from whom the Company
has received responses to date generally have indicated that their systems are
or will be Year 2000 compliant.
The Company does not expect that incremental out-of-pocket costs of its
Year 2000 program (which do not include costs incurred in connection with the
Company's comprehensive business process enhancement program) will be material.
These costs are expected to continue to be incurred through the end of 1999 and
include the cost of third party consultants, remediation of existing computer
software and replacement and remediation of embedded systems.
The Company believes that at the current time it is difficult to
identify specifically the most reasonably likely worst case Year 2000 scenario.
As with all manufacturers and distributors of products such as those sold by the
Company, a reasonable worst case scenario would be the result of failures of
third parties (including, without limitation, governmental entities and entities
with which the Company has no direct involvement, as well as the Company's
suppliers of goods and services and customers) that continue for more than a
brief period in various geographic areas where the Company's products are
produced or sold at retail or in areas from which the Company's raw materials
and components are sourced. Continuing failures in key geographic areas in the
United States and in certain European, South American and Asian countries that
limit the Company's ability to produce products, its customers' ability to
purchase and pay for the Company's products and/or consumers' ability to shop,
would be likely to have a material adverse effect on the Company's results of
operations and financial condition, although it would be expected that at least
part of any lost sales eventually would be recouped. The extent of such deferred
or lost revenue cannot be estimated at this time. In connection with functions
that represent a particular Year 2000 risk, including the production,
warehousing and distribution of products and the supply of raw materials and
components, the Company has various contingency plans. These contingency plans
include (a) receiving additional raw material and component inventory for items
with long lead-times during December 1999 as a precautionary measure to protect
production and sales in January 2000, (b) pre-staging production material and
generating backup files of critical production and inventory data (via on-line
or hard copy) prior to January 1, 2000 and (c) performing additional start-up
tests of critical systems at critical locations during the weekend of January
2-3, 2000 before the first business day of Year 2000 and during the first week
in January 2000.
The Company's Year 2000 efforts are ongoing and its overall plan, as
well as the contingency plans, will continue to evolve as January 1, 2000
approaches. While the Company currently anticipates continuity of its business
activities, that continuity will be dependent upon its ability, and the ability
of third parties upon which the Company relies directly, or indirectly, to be
Year 2000 compliant. There can be no assurance that the Company and such third
parties will eliminate potential Year 2000 issues in a timely manner or as to
the ultimate cost to the Company of doing so.
EURO CONVERSION
As part of the European Economic and Monetary Union, a single currency
(the "Euro") will replace the national currencies of the principal European
countries (other than the United Kingdom) in which the Company conducts business
and manufacturing. The conversion rates between the Euro and the participating
nations' currencies were fixed as of January 1, 1999, with the participating
national currencies to be removed from circulation between January 1, 2002 and
June 30, 2002 and replaced by Euro notes and coinage. During the transition
period from January 1, 1999 through December 31, 2001, public and private
entities as well as individuals may pay for goods and services using checks,
drafts, or wire transfers denominated either in the Euro or the participating
country's national currency. Under the regulations governing the transition to a
single currency, there is a "no compulsion, no prohibition" rule which states
that no one can be prevented from using the Euro after January 1, 2002 and no
one is obliged to use the Euro before July 2002. In keeping with this rule, the
Company expects to either continue using the national currencies or the Euro for
invoicing or payments. Based upon the information currently available, the
Company does not expect that the transition to the Euro will have a material
adverse effect on the business or consolidated financial condition of the
Company.
17
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has exposure to market risk both as a result of changing
interest rates and movements in foreign currency exchange rates. The Company's
policy is to manage market risk through a combination of fixed and floating rate
debt, the use of derivative financial instruments and foreign exchange forward
and option contracts. The Company does not hold or issue financial instruments
for trading purposes. The qualitative and quantitative information presented in
Item 7A of the Company's Annual Report on Form 10-K for the year ended December
31, 1998 describes significant aspects of the Company's financial instrument
programs which have material market risk as of December 31, 1998. As referred to
above, on June 1, 1999, Products Corporation redeemed the $200.0 principal
amount of 1999 Notes with borrowings from the Credit Agreement. As of September
30, 1999 there had been no other substantive changes in the qualitative and
quantitative information presented in Item 7A at December 31, 1998. The
following table presents the information required by Item 7A as of September 30,
1999 and October 29, 1999.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE FOR YEAR ENDED SEPTEMBER 30,
AVERAGE ---------------------------------------------------
CONTRACTUAL
RATE (a) 2000 2001 2002 2003 2004
----------- ---------------------------------------------------
(US dollar equivalent in millions)
DEBT
<S> <C> <C> <C> <C> <C> <C>
Short-term variable rate (various currencies)....... $ 34.4
Average interest rate (b)..................... 4.8%
Long-term fixed rate ($US).......................... $661.0
Average interest rate......................... 10.75%
Long-term variable rate ($US)....................... 46.0 76.0 $394.3
Average interest rate (b)..................... 9.0% 9.2% 9.3%
Long-term variable rate (various currencies)........ 5.4 4.9 141.5 $ 0.0 $0.0
Average interest rate (b)..................... 3.0% 3.3% 11.0% 7.3% 7.3%
Sub-total - Debt....................................
FORWARD AND OPTION CONTRACTS (c)
British Pound Option Contracts........ 0.6 1.8
Canadian Dollar Forward Contracts....... 1.5 2.5
Option Contracts........ 1.6 5.0
South African Rand Forward Contracts....... 6.6 3.3
Hong Kong Dollar Forward Contracts....... 7.9 1.5
Australian Dollar Forward Contracts....... 1.6 1.5
Option Contracts........ 1.6 2.9
German Deutschemark Forward Contracts....... 1.6 1.5
Option Contracts........ 1.7 2.9
New Zealand Dollar Forward Contracts....... 1.9 1.2
Switzerland Franc Forward Contracts....... 1.3 0.3
</TABLE>
<TABLE>
<CAPTION>
FAIR VALUE FAIR VALUE
SEPT. 30, OCT. 29,
THEREAFTER TOTAL 1999 (d) 1999 (e)
---------- ----------- ----------- -----------
DEBT (US dollar equivalent in millions)
<S> <C> <C> <C> <C>
Short-term variable rate (various currencies)....... $ 34.4 $ 34.4 $ 34.4
Average interest rate (b).....................
Long-term fixed rate ($US).......................... $1,149.2 1,810.2 1,391.4 897.1
Average interest rate......................... 8.6%
Long-term variable rate ($US)....................... 516.3 516.3 516.3
Average interest rate (b).....................
Long-term variable rate (various currencies)........ 0.0 151.8 151.8 151.8
Average interest rate (b)..................... 7.3%
---------- ----------- -----------
Sub-total - Debt.................................... $ 2,512.7 $ 2,093.9 $ 1,599.6
========== =========== ===========
FORWARD AND OPTION CONTRACTS (c)
British Pound Option Contracts........ $ 1.8 $ 0.0 $ 0.0
Canadian Dollar Forward Contracts....... 2.5 (0.1) (0.1)
Option Contracts........ 5.0 (0.2) (0.1)
South African Rand Forward Contracts....... 3.3 (0.3) (0.2)
Hong Kong Dollar Forward Contracts....... 1.5 0.0 0.0
Australian Dollar Forward Contracts....... 1.5 (0.1) (0.1)
Option Contracts........ 2.9 (0.1) (0.1)
German Deutschemark Forward Contracts....... 1.5 0.1 0.2
Option Contracts........ 2.9 0.1 0.1
New Zealand Dollar Forward Contracts....... 1.2 0.0 0.0
Switzerland Franc Forward Contracts....... 0.3 0.0 0.0
</TABLE>
(a) Stated in units of local currency per U.S. dollar.
(b) Weighted average variable rates are based upon implied forward rates from
the yield curves at September 30, 1999.
(c) Maturity amounts for forward and option contracts are stated in contract
notional amounts for all contracts outstanding at September 30, 1999.
(d) The fair value of foreign currency options and forward exchange contracts
at September 30, 1999 is the estimated amount the Company would receive
(pay) to terminate the agreements at September 30, 1999.
(e) The fair value of foreign currency options and forward exchange contracts
at October 29, 1999 is the estimated amount the Company would receive (pay)
to terminate the agreements at October 29, 1999.
18
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q for the quarter ended September 30,
1999 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 net sales and earnings, the effect on sales of
lower retailer inventory targets, the Company's intention to drive consumer
spending and facilitate inventory reduction through brand support, the effect on
sales of political and/or economic conditions and competitive activities in
certain markets, the Company's estimate of restructuring activities, costs and
benefits, cash flow from operations, information systems upgrades, the Company's
plan to address the Year 2000 issue, the costs associated with the Year 2000
issue and the results of Year 2000 non-compliance by the Company or by one or
more of the Company's customers, suppliers or other strategic business partners,
capital expenditures, the Company's qualitative and quantitative estimates as to
market risk sensitive instruments, the Company's expectations about the effects
of the transition to the Euro, the availability of funds from currently
available credit facilities and refinancings of indebtedness, the Asset Sales,
and capital contributions or loans from affiliates or the sale of assets or
operations of the Company or additional shares of Revlon, Inc., or the sale of
equity securities of REV Holdings and the Company's intent to pursue the sale of
its professional products business and its non-core regional Latin American
brands, that it will consummate such sales during the first quarter of 2000 and
its expectation regarding the proceeds of such sales. Statements that are not
historical facts, including statements about the Company's beliefs and
expectations, are forward-looking statements. Forward-looking statements can be
identified by, among other things, the use of forward-looking language, such as
"believe," "expects," "may," "will," "should," "seeks," "plans," "scheduled to,"
"anticipates" or "intends" or the negative of those terms, or other variations
of those terms or comparable language, or by discussions of strategy or
intentions. Forward-looking statements speak only as of the date they are made,
and the Company undertakes no obligation to update them. A number of important
factors could cause actual results to differ materially from those contained in
any forward-looking statement. In addition to factors that may be described in
the Company's filings with the Commission, including this filing, the following
factors, among others, could cause the Company's actual results to differ
materially from those expressed in any forward-looking statements made by the
Company: (i) difficulties or delays in developing and introducing new products
or failure of customers to accept new product offerings; (ii) changes in
consumer preferences, including reduced consumer demand for the Company's color
cosmetics and other current products; (iii) 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, secure capital
contributions or loans from affiliates or sell assets or operations of the
Company or additional shares of Revlon, Inc. or equity securities of REV
Holdings; (vi) effects of and changes in political and/or economic conditions,
including inflation and monetary conditions, and in trade, monetary, fiscal and
tax policies in international markets, including but not limited to Brazil;
(vii) actions by competitors, including business combinations, technological
breakthroughs, new products offerings and marketing and promotional successes;
(viii) combinations among significant customers or the loss, insolvency or
failure to pay debts by a significant customer or customers; (ix) lower than
expected sales as a result of difficulties or delays in achieving retailers'
inventory target levels; (x) difficulties in driving consumer purchasing and
facilitating inventory reductions through brand support; (xi) difficulties,
delays or unanticipated costs or less than expected benefits resulting from the
Company's restructuring activities; (xii) interest rate or foreign exchange rate
changes affecting the Company and its market sensitive financial instruments;
(xiii) difficulties, delays or unanticipated costs associated with the
transition to the Euro; (xiv) difficulties, delays or unanticipated costs in
achieving Year 2000 compliance or unanticipated consequences from non-compliance
by the Company or one or more of the Company's customers, suppliers or other
strategic business partners; and (xv) difficulties or delays in pursuing the
Asset Sales, the inability to consummate such sales during the first quarter of
2000 or to secure the expected level of proceeds from such sales.
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 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 have not
yet been determined. In
19
<PAGE>
REV HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of SFAS No. 133, an
Amendment of SFAS No. 133," which has delayed the required implementation of
SFAS No. 133 such that the Company must adopt this new standard no later than
January 1, 2001.
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
4.14 Fourth Amendment, dated as of November 10, 1999, to the
Amended and Restated Credit Agreement, dated as of May 30,
1997, as amended, among Revlon Consumer Products Corporation,
the Borrowing Subsidiaries from time to time parties thereto,
the financial institutions from time to time parties thereto,
the Co-Agents named therein, Citibank, N.A., as Documentation
Agent, Lehman Commercial Paper Inc., as Syndication Agent, The
Chase Manhattan Bank, as Administrative Agent and Chase
Securities Inc., as Arranger. (Incorporated by reference to
Exhibit 4.12 to the Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999 of Revlon, Inc. (the
"Revlon, Inc. September 30, 1999 Form 10-Q")).
4.15 Second Amendment dated as of November 12, 1999 by and among
Pacific Finance & Development Corp. and General Electric
Capital Corporation, assignee of the Long Term Credit Bank of
Japan, to the Third Amended and Restated Credit Agreement
dated as of June 30, 1997. (Incorporated by reference to
Exhibit 4.13 to the Revlon, Inc. September 30, 1999 Form
10-Q).
10.30 Revlon Amended and Restated Executive Deferred Compensation
Plan dated as of August 6, 1999. (Incorporated by reference to
Exhibit 10.27 to the Revlon, Inc. September 30, 1999 Form
10-Q).
10.31 Employment Agreement dated as of May 10, 1999 between Revlon
Consumer Products Corporation and D. Eric Pogue. (Incorporated
by reference to Exhibit 10.28 to the Revlon, Inc. September
30, 1999 Form 10-Q).
(b) REPORTS ON FORM 8-K - NONE
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
REV HOLDINGS INC.
-----------------
Registrant
By: /s/ Todd J. Slotkin By: /s/ Robert F. Sierpinski
--------------------------------- --------------------------------------
Todd J. Slotkin Robert F. Sierpinski
Executive Vice President Vice President, Acting Controller
and Chief Financial Officer and Acting Chief Accounting
Officer
Dated: November 15, 1999
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Sep-30-1999
<CASH> 97,700
<SECURITIES> 0
<RECEIVABLES> 476,100
<ALLOWANCES> 28,400
<INVENTORY> 301,600
<CURRENT-ASSETS> 907,900
<PP&E> 602,800
<DEPRECIATION> 243,500
<TOTAL-ASSETS> 1,804,700
<CURRENT-LIABILITIES> 601,900
<BONDS> 2,472,000
0
0
<COMMON> 1
<OTHER-SE> (1,541,400)
<TOTAL-LIABILITY-AND-EQUITY> 1,804,700
<SALES> 1,446,900
<TOTAL-REVENUES> 1,446,900
<CGS> 510,600
<TOTAL-COSTS> 510,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,400
<INTEREST-EXPENSE> 158,400
<INCOME-PRETAX> (249,600)
<INCOME-TAX> 5,600
<INCOME-CONTINUING> (255,200)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (255,200)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
