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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20579
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FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
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DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): NOVEMBER 3, 1998
REVLON CONSUMER PRODUCTS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
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<CAPTION>
<S> <C> <C>
DELAWARE 1-11334 13-3662953
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
</TABLE>
625 MADISON AVENUE
NEW YORK, NEW YORK 10022
(Address of principal executive offices, including zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 527-4000
NOT APPLICABLE
(Former name or former address, if changed since last report)
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ITEM 5. OTHER EVENTS
On June 8, 1998, Revlon Consumer Products Corporation ("RCPC", "Products
Corporation" or the "Company") announced that it intends to dispose of its
85% interest in The Cosmetic Center, Inc., its retail store subsidiary.
Accordingly, the Company's reported financial results beginning with the
six-month period ended June 30, 1998 reflected the retail stores as
discontinued operations. As a result, the Company has restated its audited
financial statements for the years ended December 31, 1997 and 1996 to be on
a comparable basis. The restated financial statements, together with
Management's Discussion and Analysis of Results of Operations and Financial
Condition thereon, are filed as Exhibits 99.2 and 99.1, respectively, and are
incorporated herein by reference.
On November 3, 1998, RCPC announced that it intended to offer a new series
of debt securities to refinance the Company's $200 million aggregate
principal amount of 9 1/2% Senior Notes Due 1999 (the "Old Notes"), which
become due on June 1, 1999, through open market purchases or otherwise. On
November 4, 1998, the Company announced that it had offered $250,000,000
aggregate principal amount of its 9% Senior Notes due 2006 (the "9% Notes"),
which offering is scheduled to close on Friday, November 6, 1998. As
previously announced, a portion of the net proceeds of the 9% Notes will be
used to refinance the Old Notes, including through open market purchases. The
Company intends to use the balance of the net proceeds from the sale of the
9% Notes for general corporate purposes, including to temporarily reduce
indebtedness under the working capital lines under its credit agreement.
Pending the refinancing of the Old Notes, such net proceeds will be retained
by RCPC and a portion of such proceeds will be used to temporarily reduce
indebtedness under the working capital lines under RCPC's credit agreement
and under other short-term facilities. The offering of the 9% Notes will not
be registered under the Securities Act of 1933, as amended, and the 9% Notes
may not be offered or sold in the United States absent registration or an
applicable exemption from the registration requirements.
Attached as Exhibit 99.3 hereto and incorporated by reference is the press
release, dated November 3, 1998, that announced the Company's intent to offer
the 9% Notes and redeem the Old Notes.
Attached as Exhibit 99.4 hereto and incorporated by reference is the press
release, dated November 4, 1998, that announced the offering and the final
terms of the 9% Notes.
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ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS
The following exhibits are filed as part of this report:
EXHIBIT NO.
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99.1 Management's Discussion and Analysis of Financial Condition and Results of Operations of
RCPC and Subsidiaries.
99.2 Consolidated Financial Statements of RCPC and Subsidiaries and Independent Auditors' Report
thereon.
99.3 Press release dated November 3, 1998 of RCPC.
99.4 Press release dated November 4, 1998 of RCPC.
</TABLE>
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SIGNATURES
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 hereunto duly authorized.
REVLON CONSUMER PRODUCTS CORPORATION
Dated: November 3, 1998
By: /s/ Lawrence E. Kreider
------------------------
Name: Lawrence E. Kreider
Title: Senior Vice President,
Controller and
Chief Accounting Officer
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EXHIBIT INDEX
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<S> <C>
99.1 Management's Discussion and Analysis of Financial Condition and Results of Operations of
RCPC and Subsidiaries.
99.2 Consolidated Financial Statements of RCPC and Subsidiaries and Independent Auditors' Report
thereon.
99.3 Press release dated November 3, 1998 of RCPC.
99.4 Press release dated November 4, 1998 of RCPC.
</TABLE>
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EXHIBIT 99.1
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
OVERVIEW
The Company operates in a single business segment with many different
products, which include an extensive array of glamorous, exciting and
innovative cosmetics and skin care, fragrance and personal care products, and
professional products, consisting of hair and nail care products principally
for use in and resale by professional salons. In addition, the Company also
has a licensing group.
The Company presents its business geographically as its United States
operation, which comprises the Company's business in the United States, and
its International operation, which comprises its business outside of the
United States.
During the second quarter of 1998, the Company determined to exit the
retail and outlet store business. Accordingly, all prior period financial
information has been restated to reflect the retail and outlet store business
as a discontinued operation.
RESULTS OF OPERATIONS
The following table sets forth the Company's net sales by operation for
each of the last two years:
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YEAR ENDED DECEMBER
31,
----------------------
1997 1996
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Net sales:
United States $1,300.2 $1,182.3
International 938.4 909.8
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$2,238.6 $2,092.1
========== ==========
</TABLE>
The following table sets forth certain statements of operations data as a
percentage of net sales for each of the last two years:
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<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1997 1996
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Cost of sales ................................ 33.2% 32.9%
Gross profit ................................. 66.8 67.1
Selling, general and administrative expenses 57.0 57.5
Business consolidation costs and other, net . 0.1 --
Operating income ............................. 9.7 9.6
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
NET SALES
Net sales were $2,238.6 and $2,092.1 for 1997 and 1996, respectively, an
increase of $146.5, or 7.0% or 9.5% on a constant U.S. dollar basis,
primarily as a result of successful new product introductions worldwide,
increased demand in the United States, increased distribution internationally
into the expanding self-select distribution channel and the further
development of new international markets.
United States. The United States operation's net sales increased to
$1,300.2 for 1997 from $1,182.3 for 1996, an increase of $117.9, or 10.0%.
Net sales improved for 1997, primarily as a result of continued
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consumer acceptance of new product offerings and general improvement in
consumer demand for the Company's color cosmetics. These results were
partially offset by a decline in the Company's fragrance business caused by
downward trends in the mass fragrance industry and the Company's strategy to
de-emphasize new fragrance products. Even though consumer sell-through for
the REVLON and ALMAY brands, as described below in more detail, has increased
significantly, the Company's sales to its customers have been during 1997 and
may continue to be impacted by retail inventory balancing and reductions
resulting from consolidation in the chain drugstore industry in the U.S.
REVLON brand color cosmetics continued as the number one brand in dollar
market share in the self-select distribution channel with a share of 21.6%
for 1997 versus 21.4% for 1996. Market share, which is subject to a number of
conditions, can vary from quarter to quarter as a result of such things as
timing of new product introductions and advertising and promotional spending.
New product introductions (including, in 1997, certain products launched
during 1996) generated incremental net sales in 1997, principally as a result
of launches of products in the COLORSTAY collection, including COLORSTAY eye
makeup and face products such as powder and blush, COLORSTAY haircolor,
launched in the third quarter of 1997, TOP SPEED nail enamel, launched in the
third quarter of 1997, and launches of REVLON AGE DEFYING line extensions,
the STREETWEAR collection, NEW COMPLEXION face makeup, LINE & SHINE lip
makeup and launches of products in the ALMAY AMAZING collection, including
lip makeup, eye makeup, face makeup and concealer, ALMAY ONE COAT, and ALMAY
TIME-OFF REVITALIZER.
International. The International operation's net sales increased to $938.4
for 1997 from $909.8 for 1996, an increase of $28.6, or 3.1% on a reported
basis or 8.8% on a constant U.S. dollar basis. Net sales improved for 1997,
principally as a result of increased distribution into the expanding
self-select distribution channel, successful new product introductions,
including the continued roll-out of the COLORSTAY cosmetics collection and
the further development of new international markets. This was partially
offset by the Company's decision to exit the unprofitable
demonstrator-assisted channel in Japan in the second half of 1996,
unfavorable economic conditions in several international markets, and, on a
reported basis, the unfavorable effect on sales of a stronger U.S. dollar
against certain foreign currencies, primarily the Spanish peseta, the Italian
lira and several other European currencies, the Australian dollar, the South
African rand and the Japanese yen. New products such as COLORSTAY haircolor
and STREETWEAR were introduced in select international markets in the second
half of 1997. During 1997, the International operation's sales were divided
into the following geographic areas: Europe, which is comprised of Europe,
the Middle East and Africa (in which net sales increased by 3.4% on a
reported basis to $417.9 for 1997 as compared to 1996 or an increase of 11.3%
on a constant U.S. dollar basis); the Western Hemisphere, which is comprised
of Canada, Mexico, Central America, South America and Puerto Rico (in which
net sales increased by 11.1% on a reported basis to $346.6 for 1997 as
compared to 1996 or an increase of 14.5% on a constant U.S. dollar basis);
and the Far East (in which net sales decreased by 10.3% on a reported basis
to $173.9 for 1997 as compared to 1996 or a decrease of 5.5% on a constant
U.S. dollar basis). Excluding in both periods the effect of the Company's
strategy of exiting the demonstrator-assisted distribution channel in Japan,
Far East net sales on a constant U.S. dollar basis for 1997 would have been
at approximately the same level as those in 1996.
The Company's operations in Brazil are significant and, along with
operations in certain other countries, have been subject to, and may continue
to be subject to, significant political and economic uncertainties. In
Brazil, net sales, operating income and income before taxes were $130.9,
$16.0 and $7.7, respectively, for 1997 compared to $132.7, $25.1 and $20.0,
respectively, for 1996. Results of operations in Brazil for 1997 were
adversely impacted by competitive activity affecting the Company's toiletries
business.
Cost of sales
As a percentage of net sales, cost of sales was 33.2% for 1997 compared to
32.9% for 1996. The increase in cost of sales as a percentage of net sales
included factors which enhanced overall operating income, including increased
sales of the Company's higher cost, enhanced-performance, technology-based
products and increased export sales and other factors including the effect of
weaker local currencies on
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the cost of imported purchases and competitive pressures on the Company's
toiletries business in certain International markets. These factors were
partially offset by the benefits of improved overhead absorption against
higher production volumes and more efficient global production and
purchasing.
S,G&A expenses
As a percentage of net sales, S,G&A expenses were 57.0% for 1997, an
improvement from 57.5% for 1996. S,G&A expenses other than advertising and
consumer-directed promotion expenses, as a percentage of net sales, improved
to 39.2% for 1997 compared with 40.5% for 1996, primarily as a result of
reduced general and administrative expenses, improved productivity and lower
distribution costs in 1997 compared with those in 1996. In accordance with
its business strategy, the Company increased advertising and
consumer-directed promotion expenditures in 1997 compared with 1996 to
support growth in existing product lines, new product launches and increased
distribution in the self-select distribution channel in many of the Company's
markets in the International operation. Advertising and consumer-directed
promotion expenses increased by 11.8% to $397.4, or 17.8% of net sales, for
1997 from $355.5, or 17.0% of net sales, for 1996.
Business consolidation costs and other, net
Business consolidation costs and other, net, in 1997 include severance,
writedowns of certain assets to their estimated net realizable value and
other related costs to rationalize factory operations in certain operations
in accordance with the Company's business strategy, partially offset by
related gains from the sales of certain factory operations and an
approximately $12.7 settlement of a claim in the second quarter of 1997.
These business consolidations are intended to lower the Company's operating
costs and increase efficiency in the future.
Operating income
As a result of the foregoing, operating income increased by $16.1, or
8.1%, to $216.1 for 1997 from $200.0 for 1996.
Other expenses/income
Interest expense was $133.7 for 1997 compared to $133.4 for 1996. The
slight increase in interest expense in 1997 is due to higher average
outstanding borrowings, partially offset by lower interest rates.
Foreign currency losses, net, were $6.4 for 1997 compared to $5.7 for
1996. The increase in foreign currency losses for 1997 as compared to 1996
resulted primarily from a non recurring gain recognized in 1996 in connection
with the Company's simplification of its international corporate structure
and from the strengthening of the U.S. dollar versus currencies in the Far
East and most European currencies, partially offset by the stabilization of
the Venezuelan bolivar and Mexican peso versus the devaluations which
occurred during 1996.
Provision for income taxes
The provision for income taxes was $9.3 and $25.5 for 1997 and 1996,
respectively. The decrease was primarily attributable to lower taxable income
in certain International operations, partially as a result of the
implementation of tax planning, including the utilization of net operating
loss carryforwards in certain International operations, and benefits from net
operating loss carryforwards domestically.
Extraordinary item
The extraordinary item in 1997 resulted from the write-off in the second
quarter of 1997 of deferred financing costs associated with the early
extinguishment of borrowings under the credit agreement in effect at that
time (the "1996 Credit Agreement") prior to maturity with proceeds from the
credit agreement which became effective in May 1997 (the "Credit Agreement"),
and costs of approximately $6.3 in connection with the redemption of Products
Corporation's 10 7/8% Sinking Fund Debentures due
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2010 (the "Sinking Fund Debentures"). The extraordinary item in 1996 resulted
from the write-off in the first quarter of 1996 of deferred financing costs
associated with the early extinguishment of borrowings under the credit
agreement in effect at that time (the "1995 Credit Agreement") prior to
maturity with the net proceeds from the March 5, 1996 initial public equity
offering (the "Revlon IPO") and proceeds from the 1996 Credit Agreement.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used for) operating activities was $8.9 and $(10.3)
for 1997 and 1996, respectively. The increase in net cash provided by
operating activities for 1997 compared with net cash used in 1996 resulted
primarily from higher operating income and improved working capital
management, partially offset by increased spending on merchandise display
units in connection with the Company's continued expansion into the
self-select distribution channel.
Net cash used for investing activities was $84.3 and $61.8 for 1997 and
1996, respectively. Net cash used for investing activities for 1997 and 1996
included capital expenditures of $52.3 and $54.7, respectively, and $40.5 and
$7.1, respectively, used for acquisitions. Net cash used for acquisitions in
1997 consisted primarily of cash paid for the acquisition of a South American
hair care manufacturer and its distributor.
Net cash provided by financing activities was $84.7 and $77.9 for 1997 and
1996, respectively. Net cash provided by financing activities for 1997
included cash drawn under the 1996 Credit Agreement and the Credit Agreement,
partially offset by the repayment of borrowings under the 1996 Credit
Agreement, the payment of fees and expenses related to entering into the
Credit Agreement, the repayment of borrowings under the Company's Japanese
yen-denominated credit agreement (the "Yen Credit Agreement") and the
redemption of the Sinking Fund Debentures. Net cash provided by financing
activities for 1996 included the net proceeds from the Revlon IPO, cash drawn
under the 1995 Credit Agreement and under the 1996 Credit Agreement,
partially offset by the repayment of borrowings under the 1995 Credit
Agreement, the payment of fees and expenses related to the 1996 Credit
Agreement and the repayment of borrowings under the Yen Credit Agreement.
In May 1997, Products Corporation entered into the Credit Agreement with a
syndicate of lenders, whose individual members change from time to time. The
proceeds of loans made under the Credit Agreement were used for the purpose
of repaying the loans outstanding under the 1996 Credit Agreement and to
redeem the Sinking Fund Debentures and were and will be used for general
corporate purposes or, in the case of the Acquisition Facility, the financing
of acquisitions. See Note 11(a) to the Consolidated Financial Statements. At
December 31, 1997 Products Corporation had approximately $200.0 outstanding
under the Term Loan Facilities, $102.7 outstanding under the Multi-Currency
Facility, $41.9 outstanding under the Acquisition Facility and $34.8 of
issued but undrawn letters of credit under the Special LC Facility.
A subsidiary of Products Corporation is the borrower under the Yen Credit
Agreement, which had a principal balance of approximately yen 4.3 billion as
of December 31, 1997 (approximately $33.3 U.S. dollar equivalent as of
December 31, 1997). In accordance with the terms of the Yen Credit Agreement,
approximately yen 539 million (approximately $5.2 U.S. dollar equivalent) was
paid in January 1996 and approximately yen 539 million (approximately $4.6
U.S. dollar equivalent) was paid in January 1997. In June 1997, Products
Corporation amended and restated the Yen Credit Agreement to extend the term
to December 31, 2000 subject to earlier termination under certain
circumstances. In accordance with the terms of the Yen Credit Agreement, as
amended and restated, approximately yen 539 million (approximately $4.2 U.S.
dollar equivalent as of December 31, 1997) is due in each of March 1998, 1999
and 2000 and yen 2.7 billion (approximately $20.7 U.S. dollar equivalent as
of December 31, 1997) is due on December 31, 2000.
Products Corporation made an optional sinking fund payment of $13.5 and
redeemed all of the outstanding $85.0 principal amount Sinking Fund
Debentures during 1997 with the proceeds of borrowings under the Credit
Agreement. $9.0 aggregate principal amount of previously purchased Sinking
Fund Debentures were used for the mandatory sinking fund payment due July 15,
1997.
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Products Corporation borrows funds from its affiliates from time to time
to supplement its working capital borrowings at interest rates more favorable
to Products Corporation than interest rates under the Credit Agreement. No
such borrowings were outstanding as of December 31, 1997.
On February 2, 1998, Revlon Escrow Corp., an affiliate of Products
Corporation, issued and sold in a private placement $650.0 aggregate
principal amount of 8 5/8% Senior Subordinated Notes due 2008 (the "8 5/8%
Notes") and $250.0 aggregate principal amount of 8 1/8% Senior Notes due 2006
(the "8 1/8% Notes" and, together with the 8 5/8% Notes, the "Notes"), with
the net proceeds of approximately $886 deposited into escrow. The proceeds
from the sale of the Notes were used to finance the redemption by Products
Corporation of $555.0 aggregate principal amount of its 10 1/2% Senior
Subordinated Notes due 2003 (the "Senior Subordinated Notes") and $260.0
aggregate principal amount of its 9 3/8% Senior Notes due 2001 (the "Senior
Notes"). Products Corporation delivered a redemption notice to the holders of
the Senior Subordinated Notes for the redemption of the Senior Subordinated
Notes on March 4, 1998, at which time Products Corporation assumed the
obligations under the 8 5/8% Notes and the related indenture, and to the
holders of the Senior Notes for the redemption of the Senior Notes on April
1, 1998, at which time Products Corporation assumed the obligations under the
8 1/8% Notes and the related indenture. In connection with the redemptions of
the Senior Subordinated Notes on March 4, 1998 and the Senior Notes on April
1, 1998, the Company recorded an extraordinary loss of $51.7 in the first
half of 1998 resulting primarily from the write-off of deferred financing
costs and payment of call premiums on the Senior Subordinated Notes and the
Senior Notes. On May 7, 1998, substantially all of the Notes were exchanged
for registered notes with substantially identical terms (the Notes and the
registered exchange notes shall each be referred to as the Notes). The 8 5/8%
Notes Indenture and the 8 1/8% Notes Indenture (together, the "Notes
Indentures") contain covenants that, among other things, limit (i) the
issuance of additional debt and redeemable stock by Products Corporation,
(ii) the incurrence of liens, (iii) the issuance of debt and preferred stock
by Products Corporation's subsidiaries, (iv) the payment of dividends on
capital stock of Products Corporation and its subsidiaries and the redemption
of capital stock of Products Corporation, (v) the sale of assets and
subsidiary stock, (vi) transactions with affiliates, (vii) consolidations,
mergers and transfers of all or substantially all Products Corporation assets
and (viii) in the case of the 8 5/8% Notes Indenture, the issuance of
additional subordinated debt that is senior in right of payment to the 8 5/8%
Notes. The Notes Indentures also prohibit certain restrictions on
distributions from Products Corporation and subsidiaries of Products
Corporation. All of these limitations and prohibitions, however, are subject
to a number of important qualifications.
The Company's principal sources of funds are expected to be cash flow
generated from operations and borrowings under the Credit Agreement,
refinancings and other existing working capital lines. The Credit Agreement,
the Old Notes and the Notes contain certain provisions that by their terms
limit Products Corporation's and/or its subsidiaries' ability to, among other
things, incur additional debt. The Company's principal uses of funds are
expected to be the payment of operating expenses, working capital and capital
expenditure requirements and debt service payments (including refinancing the
Old Notes).
The Company estimates that capital expenditures for 1998 will be
approximately $65, including upgrades to the Company's management information
systems. Pursuant to a tax sharing agreement, Products Corporation may be
required to make tax sharing payments to Revlon, Inc. (which in turn may be
required to make tax sharing payments to Mafco Holdings Inc.) as if Products
Corporation were filing separate income tax returns, except that no payments
are required by Products Corporation (or Revlon, Inc.) if and to the extent
that Products Corporation is prohibited under the Credit Agreement from
making tax sharing payments to Revlon, Inc. The Credit Agreement prohibits
Products Corporation from making any tax sharing payments other than in
respect of state and local income taxes. Products Corporation currently
anticipates that, as a result of net operating tax losses and prohibitions
under the Credit Agreement, no cash federal tax payments or cash payments in
lieu of taxes pursuant to the tax sharing agreement will be required for
1998.
As of December 31, 1997, Products Corporation was party to a series of
interest rate swap agreements totaling a notional amount of $225.0 in which
Products Corporation agreed to pay on such notional amount a variable
interest rate equal to the six month LIBOR to its counterparties and the
counterparties agreed to pay on such notional amounts fixed interest rates
averaging approximately 6.03%
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per annum. Products Corporation entered into these agreements in 1993 and
1994 (and in the first quarter of 1996 extended a portion equal to a notional
amount of $125.0 through December 2001) to convert the interest rate on
$225.0 of fixed-rate indebtedness to a variable rate. If Products Corporation
had terminated these agreements, which Products Corporation considered to be
held for other than trading purposes, on December 31, 1997 and 1996, a loss
of approximately $0.1 and $3.5, respectively, would have been realized.
Certain other swap agreements were terminated in 1993 for a gain of $14.0 and
were amortized over the original lives of the agreements through 1997. The
amortization of the 1993 realized gain in 1997 and 1996 was approximately
$3.1 and $3.2, respectively. Cash flow from the agreements outstanding at
December 31, 1997 was approximately break even for 1997. Products Corporation
terminated these agreements in January 1998 and realized a gain of
approximately $1.6, which was recognized upon repayment of the hedged
indebtedness.
Products Corporation enters into forward foreign exchange contracts and
option contracts from time to time to hedge certain cash flows denominated in
foreign currencies. At December 31, 1997 and 1996, Products Corporation had
forward foreign exchange contracts denominated in various currencies of
approximately $90.1 and $62.0, respectively, and option contracts of
approximately $94.9 outstanding at December 31, 1997. Such contracts are
entered into to hedge transactions predominantly occurring within twelve
months. If Products Corporation had terminated these contracts on December
31, 1997 and 1996, no material gain or loss would have been realized.
Based upon the Company's current level of operations and anticipated
growth in net sales and earnings as a result of its business strategy, the
Company expects that cash flows from operations and funds from currently
available credit facilities and refinancings of existing indebtedness will be
sufficient to enable the Company to meet its anticipated cash requirements
for the foreseeable future on a consolidated basis, including for debt
service (including refinancing the Old Notes). However, there can be no
assurance that cash flow from operations and funds from existing credit
facilities and refinancing of existing indebtedness will be sufficient to
meet the Company's cash requirements on a consolidated basis. If the Company
is unable to satisfy such cash requirements, the Company could be required to
adopt one or more alternatives, such as reducing or delaying capital
expenditures, restructuring indebtedness, selling assets or operations, or
seeking capital contributions or loans from Revlon, Inc. or affiliates of the
Company. There can be no assurance that any of such actions could be
effected, that they would enable the Company to continue to satisfy its
capital requirements or that they would be permitted under the terms of the
Company's various debt instruments then in effect. The Company currently
expects that at the end of the fourth quarter of 1998 it will not be in
compliance with certain of the financial ratios and tests contained in the
Credit Agreement as a result of, among other things, the expected charges in
connection with the Company's restructuring effort. The Company is currently
negotiating an amendment to such provisions of the Credit Agreement and
expects to have an amendment executed and effective prior to December 31,
1998, although there can be no assurance in this regard. The terms of the
Credit Agreement, the Old Notes and the Notes generally restrict Products
Corporation from paying dividends or making distributions, except that
Products Corporation is permitted to pay dividends and make distributions to
Revlon, Inc., among other things, to enable Revlon, Inc. to pay expenses
incidental to being a public holding company, including, among other things,
professional fees such as legal and accounting, regulatory fees such as
Commission filing fees and other miscellaneous expenses related to being a
public holding company and to pay dividends or make distributions in certain
circumstances to finance the purchase by Revlon, Inc. of its Class A Common
Stock in connection with the delivery of such Class A Common Stock to
grantees under the Revlon, Inc. Amended and Restated 1996 Stock Plan,
provided that the aggregate amount of such dividends and distributions taken
together with any purchases of Revlon, Inc. common stock on the open market
to satisfy matching obligations under the excess savings plan may not exceed
$6.0 per annum.
FORWARD-LOOKING STATEMENTS
This report on Form 8-K dated November 3, 1998 as well as other public
documents of the Company contain forward-looking statements which involve
risks and uncertainties. The Company's actual results may differ materially
from those discussed in such forward-looking statements. Such statements
include, without limitation, the Company's expectations and estimates as to
introduction of new products and
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expansion into markets, future financial performance, including growth in net
sales and earnings and the effect on sales of inventory balancing and
consolidation in the chain drugstore industry in the U.S., cash flows from
operations, improved results from business consolidations, information system
upgrades and globalization of the Company's manufacturing operations, capital
expenditures, the availability of funds from currently available credit
facilities and refinancings of indebtedness, capital contributions or loans
from Revlon, Inc. or affiliates of the Company, the sale of assets, the cost
and timely implementation of the Company's Year 2000 compliance modifications
and the Company's intent to negotiate an amendment to certain financial
covenants in the Credit Agreement. Readers are urged to consider that
statements which use the terms "believes," "does not believe," "no reason to
believe," "expects," "plans," "intends," "estimates," "anticipated,"
"anticipates" and similar expressions, as they relate to the Company or the
Company's management, are intended to identify forward-looking statements.
Such statements reflect the current views of the Company with respect to
future events and are subject to certain risks, uncertainties and
assumptions. In addition to factors that may be described in the Company's
Commission filings, including this filing, the following factors, among
others, could cause the Company's actual results to differ materially from
those expressed in any forward-looking statements made by the Company: (i)
difficulties or delays in developing and introducing new products or failure
of customers to accept new product offerings; (ii) changes in consumer
preferences, including reduced consumer demand for the Company's color
cosmetics and other current products; (iii) difficulties or delays in the
Company's continued expansion into the self-select distribution channel and
into certain markets and development of new markets; (iv) unanticipated costs
or difficulties or delays in completing projects associated with the
Company's strategy to improve operating efficiencies, including information
system upgrades, and to globalize its manufacturing operations; (v) the
inability to refinance indebtedness, secure capital contributions or loans
from Revlon, Inc. or affiliates of the Company or sell assets; (vi) effects
of and changes in economic conditions, including inflation and monetary
conditions, and in trade, monetary, fiscal and tax policies in countries
outside of the U.S. in which the Company operates, including Brazil; (vii)
actions by competitors, including business combinations, technological
breakthroughs, new product offerings and marketing and promotional successes;
(viii) combinations among significant customers or the loss, insolvency or
failure to pay its debts by a significant customer or customers; (ix)
difficulties or delays in realizing improved results from business
consolidations; (x) lower than expected sales as a result of inventory
balancing and consolidation in the chain drugstore industry in the U.S.; (xi)
unanticipated costs or difficulties or delays in implementing the Company's
Year 2000 compliance modifications; and (xii) the inability of the Company to
negotiate an amendment to certain financial covenants in the Credit
Agreement. The Company assumes no responsibility to update forward-looking
information contained herein.
EFFECT OF NEW ACCOUNTING STANDARD
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 130 "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying comprehensive income
and its components in a full set of general-purpose financial statements. The
Company adopted SFAS 130 in fiscal 1998.
INFLATION
In general, costs are affected by inflation and the effects of inflation
may be experienced by the Company in future periods. Management believes,
however, that such effects have not been material to the Company during the
past two years in the United States or foreign non-hyperinflationary
countries. The Company operates in certain countries around the world, such
as Brazil, Venezuela and Mexico, that have experienced hyperinflation in the
past two years. The Company's operations in Brazil were accounted for as
operating in a hyperinflationary economy until June 30, 1997. Effective July
1, 1997 Brazil was considered a non-hyperinflationary economy. The impact of
accounting for Brazil as a non-hyperinflationary economy was not material to
the Company's operating results. Effective January 1997, Mexico was
considered a hyperinflationary economy for accounting purposes. In
hyperinflationary foreign countries, the Company attempts to mitigate the
effects of inflation by increasing prices in line with inflation, where
possible, and efficiently managing its working capital levels.
7
<PAGE>
EXHIBIT 99.2
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Independent Auditors' Report ................................................................ F-2
AUDITED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1997 and 1996 ................................ F-3
Consolidated Statements of Operations for each of the years in the two-year period
ended December 31, 1997 .................................................................... F-4
Consolidated Statements of Stockholder's Deficiency for each of the years in the two-year
period ended December 31, 1997 ............................................................. F-5
Consolidated Statements of Cash Flows for each of the years in the two-year period
ended December 31, 1997 .................................................................... F-6
Notes to Consolidated Financial Statements .................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Revlon Consumer Products Corporation:
We have audited the accompanying consolidated balance sheets of Revlon
Consumer Products Corporation and its subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of operations,
stockholder's deficiency and cash flows for each of the years in the two-year
period ended December 31, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Revlon
Consumer Products Corporation and its subsidiaries as of December 31, 1997
and 1996 and the results of their operations and their cash flows for each of
the years in the two-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
New York, New York
January 23, 1998, except for Note 2
which is as of June 8, 1998
F-2
<PAGE>
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 37.4 $ 35.1
Trade receivables, less allowances of $25.9 and $24.9, respectively ... 492.5 426.8
Inventories............................................................ 260.7 249.4
Prepaid expenses and other............................................. 96.2 74.5
-------------- --------------
Total current assets.................................................. 886.8 785.8
Property, plant and equipment, net...................................... 364.0 373.5
Other assets............................................................ 142.7 138.6
Intangible assets, net.................................................. 319.2 279.2
Net assets of discontinued operations................................... 45.1 41.0
-------------- --------------
Total assets.......................................................... $1,757.8 $1,618.1
============== ==============
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current liabilities:
Short-term borrowings--third parties................................... $ 42.7 $ 27.1
Current portion of long-term debt--third parties....................... 5.5 8.8
Accounts payable....................................................... 178.8 159.7
Accrued expenses and other............................................. 356.0 363.8
-------------- --------------
Total current liabilities............................................. 583.0 559.4
Long-term debt--third parties .......................................... 1,388.8 1,321.8
Long-term debt--affiliates.............................................. 30.9 30.4
Other long-term liabilities............................................. 211.8 202.8
Stockholder's deficiency:
Preferred stock, par value $1.00 per share; 1,000 shares authorized,
546 issued and outstanding............................................ 54.6 54.6
Common stock, par value $1.00 per share; 1,000 shares authorized,
issued and outstanding................................................ -- --
Capital deficiency..................................................... (230.8) (231.1)
Accumulated deficit since June 24, 1992................................ (256.8) (301.6)
Adjustment for minimum pension liability............................... (4.5) (12.4)
Currency translation adjustment........................................ (19.2) (5.8)
-------------- --------------
Total stockholder's deficiency........................................ (456.7) (496.3)
-------------- --------------
Total liabilities and stockholder's deficiency........................ $1,757.8 $1,618.1
============== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Net sales................................................... $2,238.6 $2,092.1
Cost of sales............................................... 743.1 688.9
---------- ----------
Gross profit............................................... 1,495.5 1,403.2
Selling, general and administrative expenses................ 1,275.8 1,203.2
Business consolidation costs and other, net................. 3.6 --
---------- ----------
Operating income .......................................... 216.1 200.0
---------- ----------
Other expenses (income):
Interest expense........................................... 133.7 133.4
Interest and net investment income......................... (4.2) (4.4)
Amortization of debt issuance costs........................ 6.6 8.3
Foreign currency losses, net............................... 6.4 5.7
Miscellaneous, net......................................... 5.3 6.3
---------- ----------
Other expenses, net....................................... 147.8 149.3
---------- ----------
Income from continuing operations before income taxes ...... 68.3 50.7
Provision for income taxes.................................. 9.3 25.5
---------- ----------
Income from continuing operations before extraordinary
items...................................................... 59.0 25.2
Income from discontinued operations......................... 0.7 0.4
Extraordinary items -early extinguishments of debt ......... (14.9) (6.6)
---------- ----------
Net income.................................................. $ 44.8 $ 19.0
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIENCY
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
CURRENCY
PREFERRED CAPITAL ACCUMULATED OTHER TRANSLATION
STOCK DEFICIENCY DEFICIT (A) ADJUSTMENTS ADJUSTMENT
----------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996......... $54.6 $(414.3) $(320.6) $(17.0) $ (5.0)
Net income...................... 19.0
Contribution from parent........ 187.8 (e)
Adjustment for minimum pension
liability...................... 4.6
Net capital distribution ...... (0.5) (d)
Currency translation
adjustment..................... (0.8) (c)
Acquisition of business ........ (4.1) (b)
----------- ------------ ------------- ------------- -------------
Balance, December 31, 1996 ...... 54.6 (231.1) (301.6) (12.4) (5.8)
Net income...................... 44.8
Adjustment for minimum pension
liability...................... 7.9
Net capital contribution........ 0.3 (d)
Currency translation adjustment (13.4)
----------- ------------ ------------- ------------- -------------
Balance, December 31, 1997 ...... $54.6 $(230.8) $(256.8) $ (4.5) $(19.2)
=========== ============ ============= ============= =============
</TABLE>
- ------------
(a) Represents net loss since June 24, 1992, the effective date of the
transfer agreements referred to in Note 16.
(b) Represents amounts paid to Revlon Holdings Inc. for the Tarlow
Advertising Division ("Tarlow") (See Note 16).
(c) Includes $2.1 of gains related to the Company's simplification of its
international corporate structure.
(d) Represents changes in capital from the acquisition of the Bill Blass
business (See Note 16).
(e) Represents the capital contribution from Revlon, Inc. with the funds
from its initial public equity offering (the "Revlon IPO").
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................ $ 44.8 $ 19.0
Adjustments to reconcile net income to net cash provided by (used
for) operating activities:
Depreciation and amortization........................................ 99.7 88.7
Income from discontinued operations.................................. (0.7) (0.4)
Extraordinary item................................................... 14.9 6.6
Gain on sale of certain fixed assets, net............................ (4.4) --
Change in assets and liabilities:
Increase in trade receivables ...................................... (70.0) (67.7)
Increase in inventories ............................................ (16.9) (2.7)
Increase in prepaid expenses and other current assets ............. (0.6) (8.0)
Increase in accounts payable ....................................... 17.9 9.4
Decrease in accrued expenses and other current liabilities ........ (2.8) (10.0)
Other, net.......................................................... (73.0) (45.2)
--------- ---------
Net cash provided by (used for) operating activities ................. 8.9 (10.3)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................. (52.3) (54.7)
Acquisition of businesses, net of cash acquired ...................... (40.5) (7.1)
Proceeds from the sale of certain fixed assets ....................... 8.5 --
--------- ---------
Net cash used for investing activities ............................... (84.3) (61.8)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings--third parties ................. 18.0 5.8
Proceeds from the issuance of long-term debt--third parties ......... 760.2 266.4
Repayment of long-term debt--third parties ........................... (690.2) (366.6)
Net contribution from parent.......................................... 0.3 187.3
Proceeds from the issuance of debt--affiliates........................ 120.7 115.0
Repayment of debt--affiliates......................................... (120.2) (115.0)
Acquisition of business from affiliate ............................... -- (4.1)
Payment of debt issuance costs ....................................... (4.1) (10.9)
--------- ---------
Net cash provided by financing activities............................. 84.7 77.9
--------- ---------
Effect of exchange rate changes on cash and cash equivalents ........ (3.6) (0.9)
--------- ---------
Net cash used by discontinued operations.............................. (3.4) (2.7)
--------- ---------
Net increase in cash and cash equivalents ........................... 2.3 2.2
Cash and cash equivalents at beginning of period .................... 35.1 32.9
--------- ---------
Cash and cash equivalents at end of period .......................... $ 37.4 $ 35.1
========= =========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest ........................................................... $ 139.6 $ 139.0
Income taxes, net of refunds ....................................... 10.5 15.4
Supplemental schedule of noncash investing activities:
In connection with business acquisitions, liabilities were assumed
(including minority interest) as follows:
Fair value of assets acquired ...................................... $ 132.7 $ 9.7
Cash paid........................................................... (64.5) (7.2)
--------- ---------
Liabilities assumed................................................. $ 68.2 $ 2.5
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION:
Revlon Consumer Products Corporation ("Products Corporation" and together
with its subsidiaries, the "Company") was formed in April 1992. The Company
operates in a single business segment with many different products, which
include an extensive array of glamorous, exciting and innovative cosmetic and
skin care, fragrance and personal care products, and professional products
(products for use in and resale by professional salons). In the United States
and increasingly in international markets, the Company's products are sold
principally in the self-select distribution channel. The Company also sells
certain products in the demonstrator-assisted distribution channel, sells
consumer and professional products to United States military exchanges and
commissaries, operates retail outlet stores and has a licensing group.
Outside the United States, the Company also sells such consumer products
through department stores and specialty stores, such as perfumeries.
On June 24, 1992, Products Corporation succeeded to assets and liabilities
of the cosmetic and skin care, fragrance and personal care products business
of its then parent company whose name was changed from Revlon, Inc. to Revlon
Holdings Inc. ("Holdings"). Certain consumer products lines sold in
demonstrator-assisted distribution channels considered not integral to the
Company's business and which historically had not been profitable (the
"Retained Brands") and certain other assets and liabilities were retained by
Holdings.
The Consolidated Financial Statements of the Company presented herein
relate to the business to which the Company succeeded and include the assets,
liabilities and results of operations of such business. Assets, liabilities,
revenues, other income, costs and expenses which were identifiable
specifically to the Company are included herein and those identifiable
specifically to the retained and divested businesses of Holdings have been
excluded. Amounts which were not identifiable specifically to either the
Company or Holdings are included herein to the extent applicable to the
Company pursuant to a method of allocation generally based on the respective
proportion of the business of the Company to the applicable total of the
businesses of the Company and Holdings. The operating results of the Retained
Brands and divested businesses of Holdings have not been reflected in the
Consolidated Financial Statements of the Company. Management of the Company
believes that the basis of allocation and presentation is reasonable.
Although the Retained Brands were not transferred to Products Corporation
when the cosmetic and skin care, fragrance and personal care products
business of Holdings was transferred to Products Corporation, Products
Corporation's bank lenders required that all assets and liabilities relating
to such Retained Brands existing on the date of transfer (June 24, 1992),
other than the brand names themselves and certain other intangible assets, be
transferred to Products Corporation. Any assets and liabilities that had not
been disposed of or satisfied by December 31 of the applicable year have been
reflected in the Company's consolidated financial position as of such dates.
However, any new assets or liabilities generated by such Retained Brands
since the transfer date and any income or loss associated with inventory that
has been transferred to Products Corporation relating to such Retained Brands
have been and will be for the account of Holdings. In addition, certain
assets and liabilities relating to divested businesses were transferred to
Products Corporation on the transfer date and any remaining balances as of
December 31 of the applicable year have been reflected in the Company's
Consolidated Balance Sheets as of such dates. At December 31, 1997 and 1996,
the amounts reflected in the Company's Consolidated Balance Sheets aggregated
a net liability of $23.3 and $23.6, respectively, of which $4.9 and $5.2,
respectively, are included in accrued expenses and other and $18.4 as of both
dates is included in other long-term liabilities.
The Consolidated Financial Statements include the accounts of Products
Corporation and its subsidiaries after elimination of all material
intercompany balances and transactions. Further, the
F-7
<PAGE>
Company has made a number of estimates and assumptions relating to the
reporting of assets and liabilities, the disclosure of 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.
Products Corporation is a direct wholly owned subsidiary of Revlon, Inc.,
which is an indirect majority owned subsidiary of MacAndrews & Forbes
Holdings Inc. ("MacAndrews Holdings"), a corporation wholly owned indirectly
through Mafco Holdings Inc. ("Mafco Holdings" and, together with MacAndrews
Holdings, "MacAndrews & Forbes") by Ronald O. Perelman.
CASH AND CASH EQUIVALENTS:
Cash equivalents (primarily investments in time deposits which have
original maturities of three months or less) are carried at cost, which
approximates fair value.
INVENTORIES:
Inventories are stated at the lower of cost or market value. Cost is
principally determined by the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT AND OTHER ASSETS:
Property, plant and equipment is recorded at cost and is depreciated on a
straight-line basis over the estimated useful lives of such assets as
follows: land improvements, 20 to 40 years; buildings and improvements, 5 to
50 years; machinery and equipment, 3 to 17 years; and office furniture and
fixtures and capitalized software development costs, 2 to 12 years. Leasehold
improvements are amortized over their estimated useful lives or the terms of
the leases, whichever is shorter. Repairs and maintenance are charged to
operations as incurred, and expenditures for additions and improvements are
capitalized.
Included in other assets are permanent displays amounting to approximately
$107.7 and $81.8 (net of amortization) as of December 31, 1997 and 1996,
respectively, which are amortized over 3 to 5 years.
INTANGIBLE ASSETS RELATED TO BUSINESSES ACQUIRED:
Intangible assets related to businesses acquired principally represent
goodwill, the majority of which is being amortized on a straight-line basis
over 40 years. The Company evaluates, when circumstances warrant, the
recoverability of its intangible assets on the basis of undiscounted cash
flow projections and through the use of various other measures, which
include, among other things, a review of its image, market share and business
plans. Accumulated amortization aggregated $104.2 and $94.1 at December 31,
1997 and 1996, respectively.
REVENUE RECOGNITION:
The Company recognizes net sales upon shipment of merchandise. Net sales
comprise gross revenues less expected returns, trade discounts and customer
allowances. Cost of sales is reduced for the estimated net realizable value
of expected returns.
INCOME TAXES:
Income taxes are calculated using the liability method in accordance with
the provisions of Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes."
The Company is included in the affiliated group of which Mafco Holdings is
the common parent, and the Company's federal taxable income and loss will be
included in such group's consolidated tax return filed by Mafco Holdings. The
Company also may be included in certain state and local tax returns of Mafco
Holdings or its subsidiaries. For all periods presented, federal, state and
local income taxes are provided as if the Company filed its own income tax
returns. On June 24, 1992, Holdings, Revlon, Inc., Products Corporation and
certain of its subsidiaries and Mafco Holdings entered into a tax sharing
agreement, which is described in Notes 13 and 16.
F-8
<PAGE>
PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS:
Products Corporation sponsors pension and other retirement plans in
various forms covering substantially all employees who meet eligibility
requirements. For plans in the United States, the minimum amount required
pursuant to the Employee Retirement Income Security Act, as amended, is
contributed annually. Various subsidiaries outside the United States have
retirement plans under which funds are deposited with trustees or reserves
are provided.
Products Corporation accounts for benefits such as severance, disability
and health insurance provided to former employees prior to their retirement,
if estimable, on a terminal basis in accordance with the provisions of SFAS
No. 5, "Accounting for Contingencies," as amended by SFAS No. 112,
"Employers' Accounting for Postemployment Benefits," which requires companies
to accrue for postemployment benefits when it is probable that a liability
has been incurred and the amount of such liability can be reasonably
estimated, which Products Corporation has concluded is generally when an
employee is terminated.
RESEARCH AND DEVELOPMENT:
Research and development expenditures are expensed as incurred. The
amounts charged against earnings in 1997 and 1996 were $29.7 and $26.3,
respectively.
FOREIGN CURRENCY TRANSLATION:
Assets and liabilities of foreign operations are generally translated into
United States dollars at the rates of exchange in effect at the balance sheet
date. Income and expense items are generally translated at the weighted
average exchange rates prevailing during each period presented. Gains and
losses resulting from foreign currency transactions are included in the
results of operations. Gains and losses resulting from translation of
financial statements of foreign subsidiaries and branches operating in
non-hyperinflationary economies are recorded as a component of stockholder's
deficiency. Foreign subsidiaries and branches operating in hyperinflationary
economies translate nonmonetary assets and liabilities at historical rates
and include translation adjustments in the results of operations.
Effective January 1997, the Company's operations in Mexico have been
accounted for as operating in a hyperinflationary economy. Effective July
1997, the Company's operations in Brazil have been accounted for as is
required for a non-hyperinflationary economy. The impact of the changes in
accounting for Brazil and Mexico were not material to the Company's operating
results in 1997.
SALE OF SUBSIDIARY STOCK:
The Company recognizes gains and losses on sales of subsidiary stock in
its Consolidated Statements of Operations.
CLASSES OF STOCK:
Products Corporation designated 1,000 shares of Preferred Stock as the
Series A Preferred Stock, of which 546 shares are outstanding and held by
Revlon, Inc. The holder of Series A Preferred Stock is not entitled to
receive any dividends. The Series A Preferred Stock is entitled to a
liquidation preference of $100,000 per share before any distribution is made
to the holders of Common Stock. The holder of the Series A Preferred Stock
does not have any voting rights, except as required by law. The Series A
Preferred Stock may be redeemed at any time by Products Corporation, at its
option, for $100,000 per share. However, the terms of Products Corporation's
various debt agreements currently restrict Products Corporation's ability to
effect such redemption.
STOCK-BASED COMPENSATION:
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to account
for stock-based compensation plans using the intrinsic value method
F-9
<PAGE>
prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of Revlon, Inc.'s stock at the date of the grant over the
amount an employee must pay to acquire the stock (See Note 15).
DERIVATIVE FINANCIAL INSTRUMENTS:
Derivative financial instruments are utilized by the Company to reduce
interest rate and foreign exchange risks. The Company maintains a control
environment which includes policies and procedures for risk assessment and
the approval, reporting and monitoring of derivative financial instrument
activities. The Company does not hold or issue derivative financial
instruments for trading purposes.
The differentials to be received or paid under interest rate contracts
designated as hedges are recognized in income over the life of the contracts
as adjustments to interest expense. Gains and losses on terminations of
interest rate contracts designated as hedges are deferred and amortized into
interest expense over the remaining life of the original contracts or until
repayment of the hedged indebtedness. Unrealized gains and losses on
outstanding contracts designated as hedges are not recognized.
Gains and losses on contracts designated to hedge identifiable foreign
currency commitments are deferred and accounted for as part of the related
foreign currency transaction. Gains and losses on all other foreign currency
contracts are included in income currently. Transaction gains and losses have
not been material.
2. DISCONTINUED OPERATIONS
In the second quarter of 1998, the Company determined to exit the retail
and outlet store business and recorded an estimated loss on disposal of
$15.0. Accordingly, all prior periods have been restated to reflect the
results of operations of the retail and outlet store business as a
discontinued operation. The net assets of the discontinued operations consist
primarily of inventory and intangible assets, offset by liabilities,
including third party debt, minority interest and a reserve for estimated
loss on disposal. (See Notes 5 and 11).
3. EXTRAORDINARY ITEMS
The extraordinary item in 1997 resulted from the write-off in the second
quarter of 1997 of deferred financing costs associated with the early
extinguishment of borrowings under a prior 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 early extinguishment of borrowings under a prior credit
agreement and the redemption of the Sinking Fund Debentures were financed by
the proceeds from a new credit agreement which became effective in May 1997
(the "Credit Agreement"). The extraordinary item in 1996 resulted from the
write-off of deferred financing costs associated with the early
extinguishment of borrowings with the net proceeds from the Revlon IPO and
proceeds from a prior credit agreement.
4. BUSINESS CONSOLIDATION COSTS AND OTHER, NET
Business consolidation costs and other, net in 1997 include severance,
writedowns of certain assets to their estimated net realizable value and
other related costs to rationalize factory and warehouse operations in
certain United States and International operations, partially offset by
related gains from the sales of certain factory operations of approximately
$4.3 and an approximately $12.7 settlement of a claim in the second quarter
of 1997. The business consolidation costs include $14.2 for the termination
of approximately 415 factory and administrative employees. By December 31,
1997 the Company terminated approximately 200 employees, made cash payments
for such terminations of approximately $6.4, and made cash payments for other
business consolidation costs of approximately $3.2. As of December 31, 1997,
the unpaid balance of the business consolidation accrual approximated $11.0,
which amount is included in accrued expenses and other.
F-10
<PAGE>
5. ACQUISITIONS
On April 25, 1997, Prestige Fragrance & Cosmetics, Inc. ("PFC"), a wholly
owned subsidiary of Products Corporation, and The Cosmetic Center, Inc.
("CCI") completed the merger of PFC with and into CCI (the "Cosmetic Center
Merger") with CCI (subsequent to the Cosmetic Center Merger, "Cosmetic
Center") surviving the Cosmetic Center Merger. In the Cosmetic Center Merger,
Products Corporation received in exchange for all of the capital stock of PFC
newly issued Class C Common Stock of Cosmetic Center constituting
approximately 85.0% of Cosmetic Center's outstanding common stock.
Accordingly, the Cosmetic Center Merger was accounted for as a reverse
acquisition using the purchase method of accounting, with PFC considered the
acquiring entity for accounting purposes even though Cosmetic Center is the
surviving legal entity. The deemed purchase consideration for the acquisition
was approximately $27.9 and the goodwill associated with the Cosmetic Center
Merger was approximately $10.5. The Company recognized a gain of $6.0
resulting from the sale of subsidiary stock pursuant to the Cosmetic Center
Merger. The gain from the sale of subsidiary stock is included in the income
from discontinued operations in 1997.
In 1997, the Company consummated other acquisitions for a combined
purchase price of $51.6, with resulting goodwill of $35.8. These acquisitions
were not significant to the Company's results of operations. Acquisitions
consummated in 1996 were also not significant to the Company's results of
operations.
6. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- -------
<S> <C> <C>
Raw materials and
supplies.................. $ 82.6 $ 76.6
Work-in-process............ 14.9 19.4
Finished goods............. 163.2 153.4
-------- -------
$260.7 $249.4
======== =======
</TABLE>
7. PREPAID EXPENSES AND OTHER
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------- -------
<S> <C> <C>
Prepaid
expenses........ $40.7 $42.5
Other............ 55.5 32.0
------- -------
$96.2 $74.5
======= =======
</TABLE>
8. PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Land and improvements....................................... $ 32.5 $ 37.5
Buildings and improvements.................................. 193.2 207.6
Machinery and equipment..................................... 203.5 192.4
Office furniture and fixtures and software development
costs...................................................... 73.9 52.3
Leasehold improvements...................................... 37.5 33.1
Construction-in-progress.................................... 30.6 43.3
--------- ---------
571.2 566.2
Accumulated depreciation.................................... (207.2) (192.7)
--------- ---------
$ 364.0 $ 373.5
========= =========
</TABLE>
Depreciation expense for the years ended December 31, 1997 and 1996 was
$38.4 and $37.0, respectively.
F-11
<PAGE>
9. ACCRUED EXPENSES AND OTHER
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
Advertising and promotional costs and accrual for sales
returns....................................................... $147.1 $137.4
Compensation and related benefits.............................. 73.5 95.1
Interest....................................................... 32.1 36.7
Taxes, other than federal income taxes......................... 30.2 34.0
Restructuring and business consolidation costs................. 18.2 6.9
Net liabilities assumed from Holdings.......................... 4.9 5.2
Other.......................................................... 50.0 48.5
-------- --------
$356.0 $363.8
======== ========
</TABLE>
10. SHORT-TERM BORROWINGS
Products Corporation maintained short-term bank lines of credit at
December 31, 1997 and 1996 aggregating approximately $82.3 and $72.7,
respectively, of which approximately $42.7 and $27.1 were outstanding at
December 31, 1997 and 1996, respectively. Interest rates on amounts borrowed
under such short-term lines at December 31, 1997 and 1996 varied from 2.5% to
12.0% and 2.2% to 12.1%, respectively. Compensating balances at December 31,
1997 and 1996 were approximately $6.2 and $7.4, respectively. Interest rates
on compensating balances at December 31, 1997 and 1996 varied from 0.4% to
8.1% and 0.4% to 7.9%, respectively.
11. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
Working capital lines (a)................................. $ 344.6 $ 187.2
Bank mortgage loan agreement due 2000 (b)................. 33.3 41.7
9 1/2% Senior Notes due 1999 (c).......................... 200.0 200.0
9 3/8% Senior Notes due 2001 (d).......................... 260.0 260.0
10 1/2% Senior Subordinated Notes due 2003 (e) ........... 555.0 555.0
10 7/8% Sinking Fund Debentures due 2010 (f).............. -- 79.6
Advances from Holdings (g)................................ 30.9 30.4
Other mortgages and notes payable (8.6%-13.0%) due
through 2001............................................. 1.4 7.1
---------- ---------
1,425.2 1,361.0
Less current portion...................................... (5.5) (8.8)
---------- ---------
$1,419.7 $1,352.2
========== =========
</TABLE>
(a) 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 to
repay the loans outstanding under the 1996 Credit Agreement and to redeem the
Sinking Fund Debentures.
The Credit Agreement provides up to $750.0 and is comprised of five senior
secured facilities:
$200.0 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 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" and together with the Term Loan Facilities, the
Multi-Currency Facility and the Acquisition Facility, the "Credit
Facilities"). The Multi-Currency Facility is available (i) to Products
Corporation in revolving credit loans denominated in U.S. dollars (the
"Revolving Credit Loans"), (ii) to Products Corporation in standby and
commercial
F-12
<PAGE>
letters of credit denominated in U.S. dollars (the "Operating Letters of
Credit") and (iii) to Products Corporation and certain of its international
subsidiaries designated from time to time in revolving credit loans and
bankers' acceptances denominated in U.S. dollars and other currencies (the
"Local Loans"). At December 31, 1997 Products Corporation had approximately
$200.0 outstanding under the Term Loan Facilities, $102.7 outstanding under
the Multi-Currency Facility, $41.9 outstanding under the Acquisition Facility
and $34.8 of issued but undrawn letters of credit under the Special LC
Facility.
The Credit Facilities (other than loans in foreign currencies) bear
interest as of December 31, 1997 at a rate equal to, at Products
Corporation's option, either (A) the Alternate Base Rate plus 1/4 of 1% (or
1.25% for Local Loans); or (B) the Eurodollar Rate plus 1.25%. Loans in
foreign currencies bear interest as of December 31, 1997 at a rate equal to
the Eurocurrency Rate or, in the case of Local Loans, the local lender rate,
in each case plus 1.25%. The applicable margin is reduced (or increased, but
not above 3/4 of 1% for Alternate Base Rate Loans not constituting Local
Loans and 1.75% for other loans) in the event Products Corporation attains
(or fails to attain) certain leverage ratios. Products Corporation pays the
lender a commitment fee as of December 31, 1997 of 3/8 of 1% of the unused
portion of the Credit Facilities, subject to reduction (or increase, but not
above 1/2 of 1%) based on attaining (or failing to attain) certain leverage
ratios. Under the Multi-Currency Facility, the Company pays the lenders an
administrative fee of 1/4% per annum on the aggregate principal amount of
specified Local Loans. Products Corporation also paid certain facility and
other fees to the lenders and agents upon closing of the Credit Agreement.
Prior to its termination date, the commitments under the Credit Facilities
will be reduced by: (i) the net proceeds in excess of $10.0 each year
received during such year from sales of assets by Holdings (or certain of its
subsidiaries), Products Corporation or any of its subsidiaries (and $25.0
with respect to certain specified dispositions), subject to certain limited
exceptions, (ii) certain proceeds from the sales of collateral security
granted to the lenders, (iii) the net proceeds from the issuance by Products
Corporation or any of its subsidiaries of certain additional debt, (iv) 50%
of the excess cash flow of Products Corporation and its subsidiaries (unless
certain leverage ratios are attained) and (v) certain scheduled reductions in
the case of the Term Loan Facilities, which will commence on May 31, 1998 in
the aggregate amount of $1.0 annually over the remaining life of the Credit
Agreement, and in the case of the Acquisition Facility, which will commence
on December 31, 1999 in the amount of $25.0 and in the amounts of $60.0
during 2000, $90.0 during 2001 and $25.0 during 2002 (which reductions will
be proportionately increased if the Acquisition Facility is increased). The
Credit Agreement will terminate on May 30, 2002. The weighted average
interest rates on the Term Loan Facilities, the Multi-Currency Facility and
the Acquisition Facility were 7.1%, 5.4% and 5.7% per annum, respectively, as
of December 31, 1997.
The Credit Facilities, subject to certain exceptions and limitations, are
supported by guarantees from Holdings and certain of its subsidiaries,
Revlon, Inc., Products Corporation and the domestic subsidiaries of Products
Corporation. The obligations of Products Corporation under the Credit
Facilities and the obligations under the aforementioned guarantees are
secured, subject to certain limitations, by (i) mortgages on Holdings'
Edison, New Jersey and Products Corporation's Phoenix, Arizona facilities;
(ii) the capital stock of Products Corporation and its domestic subsidiaries,
66% of the capital stock of its first tier foreign subsidiaries and the
capital stock of certain subsidiaries of Holdings; (iii) domestic
intellectual property and certain other domestic intangibles of (x) Products
Corporation and its domestic subsidiaries (other than Cosmetic Center) and
(y) certain subsidiaries of Holdings; (iv) domestic inventory and accounts
receivable of (x) Products Corporation and its domestic subsidiaries (other
than Cosmetic Center) and (y) certain subsidiaries of Holdings; and (v) the
assets of certain foreign subsidiary borrowers under the Multi-Currency
Facility (to support their borrowings only). The Credit Agreement provides
that the liens on the stock and personal property referred to above may be
shared from time to time with specified types of other obligations incurred
or guaranteed by Products Corporation, such as interest rate hedging
obligations, working capital lines and a subsidiary of Products Corporation's
yen-denominated credit agreement.
The Credit Agreement contains various material restrictive covenants
prohibiting Products Corporation from (i) incurring additional indebtedness
or guarantees, with certain exceptions, (ii) making dividend, tax sharing and
other payments or loans to Revlon, Inc. or other affiliates, with certain
F-13
<PAGE>
exceptions, including among others, permitting Products Corporation 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
("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 common
stock in connection with the delivery of such common stock to grantees under
any stock option plan, provided that the aggregate amount of such dividends
and distributions taken together with any purchases of Revlon, Inc. common
stock on the market to satisfy matching obligations under an excess savings
plan may not exceed $6.0 per annum, (iii) creating liens or other
encumbrances on their assets or revenues, granting negative pledges or
selling or transferring any of their assets except in the ordinary course of
business, all subject to certain limited exceptions, (iv) with certain
exceptions, engaging in merger or acquisition transactions, (v) prepaying
indebtedness, subject to certain limited exceptions, (vi) making investments,
subject to certain limited exceptions, and (vii) entering into transactions
with affiliates of Products Corporation other than upon terms no less
favorable to Products Corporation or its subsidiaries than it would obtain in
an arms' length transaction. In addition to the foregoing, the Credit
Agreement contains financial covenants requiring Products Corporation to
maintain minimum interest coverage and covenants which limit the leverage
ratio of Products Corporation and the amount of capital expenditures.
In January 1996, Products Corporation entered into a credit agreement (the
"1996 Credit Agreement"), which became effective upon consummation of the
Revlon IPO on March 5, 1996. The 1996 Credit Agreement included, among other
things, (i) a term to December 31, 2000 (subject to earlier termination in
certain circumstances), and (ii) credit facilities of $600.0 comprised of
four senior secured facilities: a $130.0 term loan facility, a $220.0
multi-currency facility, a $200.0 revolving acquisition facility and a $50.0
standby letter of credit facility. The weighted average interest rates on the
term loan facility and multi-currency facility were 8.1% and 7.0% per annum,
respectively, as of December 31, 1996.
(b) The Pacific Finance & Development Corp., a subsidiary of Products
Corporation, is the borrower under a yen denominated credit agreement (the
"Yen Credit Agreement"), which had a principal balance of approximately yen
4.3 billion as of December 31, 1997 (approximately $33.3 U.S. dollar
equivalent as of December 31, 1997). In accordance with the terms of the Yen
Credit Agreement, approximately yen 539 million (approximately $5.2 U.S.
dollar equivalent) was paid in January 1996 and approximately yen 539 million
(approximately $4.6 U.S. dollar equivalent) was paid in January 1997. In June
1997, Products Corporation amended and restated the Yen Credit Agreement to
extend the term to December 31, 2000 subject to earlier termination under
certain circumstances. In accordance with the terms of the Yen Credit
Agreement, as amended and restated, approximately yen 539 million
(approximately $4.2 U.S. dollar equivalent as of December 31, 1997) is due in
each of March 1998, 1999 and 2000 and yen 2.7 billion (approximately $20.7
U.S. dollar equivalent as of December 31, 1997) is due on December 31, 2000.
The applicable interest rate at December 31, 1997 under the Yen Credit
Agreement was the Euro-Yen rate plus 1.25% which approximated 1.9%. The
interest rate at December 31, 1996, was the Euro-Yen rate plus 2.5%, which
approximated 3.1%.
(c) The Senior Notes due 1999 (the "1999 Senior Notes") are senior
unsecured obligations of Products Corporation and rank pari passu in right of
payment to all existing and future Senior Debt (as defined in the indenture
relating to the 1999 Senior Notes (the "1999 Senior Note Indenture")). The
1999 Senior Notes bear interest at 9 1/2% per annum. Interest is payable on
June 1 and December 1.
The 1999 Senior Notes may not be redeemed prior to maturity. Upon a Change
of Control (as defined in the 1999 Senior Note Indenture) and subject to
certain conditions, each holder of 1999 Senior Notes will have the right to
require Products Corporation to repurchase all or a portion of such holder's
1999 Senior Notes at 101% of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of repurchase. In addition, under
certain circumstances in the event of an Asset Disposition (as defined in the
1999 Senior Note Indenture), Products Corporation will be obligated to make
offers to purchase the 1999 Senior Notes.
The 1999 Senior Note Indenture contains various restrictive covenants
that, among other things, limit (i) the issuance of additional debt and
redeemable stock by Products Corporation, (ii) the issuance of debt
F-14
<PAGE>
and preferred stock by Products Corporation's subsidiaries, (iii) the
incurrence of liens on the assets of Products Corporation and its
subsidiaries which do not equally and ratably secure the 1999 Senior Notes,
(iv) the payment of dividends on and redemption of capital stock of Products
Corporation and its subsidiaries and the redemption of certain subordinated
obligations of Products Corporation, except that the 1999 Senior Note
Indenture permits Products Corporation 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 up
to $5.0 per annum (subject to allowable increases) 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
any stock option plan, (v) the sale of assets and subsidiary stock, (vi)
transactions with affiliates and (vii) consolidations, mergers and transfers
of all or substantially all of Products Corporation's assets. The 1999 Senior
Note Indenture also prohibits certain restrictions on distributions from
subsidiaries. All of these limitations and prohibitions, however, are subject
to a number of important qualifications.
(d) The 9 3/8% Senior Notes due 2001 (the "Senior Notes") are senior
unsecured obligations of Products Corporation and rank pari passu in right of
payment to all existing and future Senior Debt (as defined in the indenture
relating to the Senior Notes (the "Senior Note Indenture")). The Senior Notes
bear interest at 9 3/8% per annum. Interest is payable on April 1 and October
1.
The Senior Notes may be redeemed at the option of Products Corporation in
whole or in part at any time on or after April 1, 1998 at the redemption
prices set forth in the Senior Note Indenture, plus accrued and unpaid
interest, if any, to the date of redemption. Upon a Change of Control (as
defined in the Senior Note Indenture), Products Corporation will have the
option to redeem the Senior Notes in whole or in part at a redemption price
equal to the principal amount thereof plus the Applicable Premium (as defined
in the Senior Note Indenture), plus accrued and unpaid interest, if any, to
the date of redemption, and, subject to certain conditions, each holder of
Senior Notes will have the right to require Products Corporation to
repurchase all or a portion of such holder's Senior Notes at 101% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the
date of repurchase. In addition, under certain circumstances in the event of
an Asset Disposition (as defined in the Senior Note Indenture), Products
Corporation will be obligated to make offers to purchase the Senior Notes.
The Senior Note Indenture contains various restrictive covenants that,
among other things, limit (i) the issuance of additional indebtedness and
redeemable stock by Products Corporation, (ii) the issuance of indebtedness
and preferred stock by Products Corporation's subsidiaries, (iii) the
incurrence of liens on the assets of Products Corporation and its
subsidiaries which do not equally and ratably secure the Senior Notes, (iv)
the payment of dividends on capital stock of Products Corporation and its
subsidiaries and the redemption of capital stock and certain subordinated
obligations of Products Corporation, except that the Senior Note Indenture
permits Products Corporation 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 up to $5.0
per annum (subject to allowable increases) 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
any stock option plan, (v) the sale of assets and subsidiary stock, (vi)
transactions with affiliates and (vii) consolidations, mergers and transfers
of all or substantially all of Products Corporation's assets. The Senior Note
Indenture also prohibits certain restrictions on distributions from
subsidiaries of Products Corporation. All of these limitations and
prohibitions, however, are subject to a number of important qualifications.
(e) The Senior Subordinated Notes due 2003 (the "Senior Subordinated
Notes") are unsecured obligations of Products Corporation and are
subordinated in right of payment to all existing and future Senior Debt (as
defined in the indenture relating to the Senior Subordinated Notes (the
"Senior Subordinated Note Indenture")). The Senior Subordinated Notes bear
interest at 10 1/2% per annum. Interest is payable on February 15 and August
15.
F-15
<PAGE>
The Senior Subordinated Notes may be redeemed at the option of Products
Corporation in whole or in part at any time on or after February 15, 1998 at
the redemption prices set forth in the Senior Subordinated Note Indenture,
plus accrued and unpaid interest, if any, to the date of redemption. Upon a
Change of Control (as defined in the Senior Subordinated Note Indenture),
Products Corporation will have the option to redeem the Senior Subordinated
Notes in whole or in part at a redemption price equal to the principal amount
thereof plus the Applicable Premium (as defined in the Senior Subordinated
Note Indenture), plus accrued and unpaid interest, if any, to the date of
redemption, and, subject to certain conditions, each holder of Senior
Subordinated Notes will have the right to require Products Corporation to
repurchase all or a portion of such holder's Senior Subordinated Notes at
101% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the date of repurchase. In addition, under certain circumstances in
the event of an Asset Disposition (as defined in the Senior Subordinated Note
Indenture), Products Corporation will be obligated to make offers to purchase
the Senior Subordinated Notes.
The Senior Subordinated Note Indenture contains various restrictive
covenants that, among other things, limit (i) the issuance of additional
indebtedness and redeemable stock by Products Corporation, (ii) the issuance
of indebtedness and preferred stock by Products Corporation's subsidiaries,
(iii) the incurrence of liens on the assets of Products Corporation and its
subsidiaries to secure debt other than Senior Debt (as defined in the Senior
Subordinated Note Indenture) or debt of a subsidiary, unless the Senior
Subordinated Notes are equally and ratably secured, (iv) the payment of
dividends on capital stock of Products Corporation and its subsidiaries and
the redemption of capital stock and certain subordinated obligations of
Products Corporation, except that the Senior Subordinated Note Indenture
permits Products Corporation 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 up to $5.0
per annum (subject to allowable increases) 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
any stock option plan, (v) the sale of assets and subsidiary stock, (vi)
transactions with affiliates and (vii) consolidations, mergers and transfers
of all or substantially all of Products Corporation's assets. The Senior
Subordinated Note Indenture also prohibits certain restrictions on
distributions from subsidiaries of Products Corporation. All of these
limitations and prohibitions, however, are subject to a number of important
qualifications.
(f) Products Corporation redeemed all the outstanding $85.0 principal
amount of Sinking Fund Debentures during 1997 with the proceeds of borrowings
under the Credit Agreement.
(g) During 1992, Holdings made an advance of $25.0 to Products
Corporation. This advance was evidenced by a noninterest-bearing demand note
payable by Products Corporation, the payment of which was subordinated to the
obligations of Products Corporation under the credit agreement in effect at
that time. Holdings agreed not to demand payment under the note so long as
any indebtedness remained outstanding under the credit agreement in effect at
that time. In February 1995, the $13.3 in notes due to Products Corporation
under the Financing Reimbursement Agreement, referred to in Note 16, was
offset against the $25.0 note and Holdings agreed not to demand payment under
the resulting $11.7 note so long as certain indebtedness remains outstanding.
In October 1993, Products Corporation borrowed from Holdings approximately
$23.2 (as adjusted and subject to further adjustment for certain expenses)
representing amounts received by Holdings from an escrow account relating to
divestiture by Holdings of certain of its predecessor businesses. In July
1995, Products Corporation borrowed from Holdings approximately $0.8,
representing certain amounts received by Holdings relating to an arbitration
arising out of the sale by Holdings of certain of its businesses. In 1995,
Products Corporation borrowed from Holdings approximately $5.6, representing
certain amounts received by Holdings from the sale by Holdings of certain of
its businesses. In June 1996, $10.9 in notes due to Products Corporation
under the Financing Reimbursement Agreement from Holdings was offset against
the $11.7 demand note (referred to above) payable by Products Corporation to
Holdings. In June 1997, Products Corporation borrowed
F-16
<PAGE>
from Holdings approximately $0.5, representing certain amounts received by
Holdings from the sale of a brand and the inventory relating thereto. At
December 31, 1997 the balance of $30.9 is evidenced by noninterest-bearing
promissory notes payable to Holdings that are subordinated to Products
Corporation's obligations under the Credit Agreement.
(h) In connection with the Cosmetic Center Merger, on April 25, 1997
Cosmetic Center entered into a loan and security agreement (the "Cosmetic
Center Facility"). Cosmetic Center paid the then outstanding balance of $14.0
on CCI's former credit agreement with borrowings under the Cosmetic Center
Facility. On April 28, 1997, Cosmetic Center used approximately $21.2 of
borrowings under the Cosmetic Center Facility to fund the cash election
associated with the Cosmetic Center Merger. The Cosmetic Center Facility,
which expires on April 30, 1999, provides up to $70.0 of revolving credit
tied to a borrowing base of 65% of Cosmetic Center's eligible inventory, as
defined in the Cosmetic Center Facility. Borrowings under the Cosmetic Center
Facility are collateralized by Cosmetic Center's accounts receivable and
inventory and proceeds therefrom. Under the Cosmetic Center Facility,
Cosmetic Center may borrow at the London Inter-Bank Offered Rate ("LIBOR")
plus 2.25% or at the lending bank's prime rate plus 0.5%. Cosmetic Center
also pays a commitment fee equal to one-quarter of one percent per annum.
Interest is payable on a monthly basis except for interest on LIBOR rate
loans with a maturity of less than three months, which is payable at the end
of the LIBOR rate loan period and interest on LIBOR rate loans with a
maturity of more than three months, which is payable every three months. If
Cosmetic Center terminates the Cosmetic Center Facility, Cosmetic Center is
obligated to pay a prepayment penalty of $0.7 if the termination occurs
before the first anniversary date of the Cosmetic Center Facility and $0.2 if
the termination occurs after the first anniversary date. The Cosmetic Center
Facility contains various restrictive covenants and requires Cosmetic Center
to maintain a minimum tangible net worth and an interest coverage ratio. At
December 31, 1997, approximately $39.0 was outstanding under the Cosmetic
Center Facility with an interest rate of 8.1%. The borrowings under the
Cosmetic Center Facility are included as part of net assets of discontinued
operations in the consolidated balance sheet. (See Note 2).
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 the rate under the Credit Agreement. No such
borrowings were outstanding at December 31, 1997 or 1996.
The aggregate amounts of long-term debt maturities and sinking fund
requirements (at December 31, 1997), in the years 1998 through 2002 are $5.5,
$205.4, $26.2, $278.5 and $354.6, respectively, and $555.0 thereafter.
12. FINANCIAL INSTRUMENTS
As of December 31, 1997, Products Corporation was party to a series of
interest rate swap agreements totaling a notional amount of $225.0 in which
Products Corporation agreed to pay on such notional amount a variable
interest rate equal to the six month LIBOR to its counterparties and the
counterparties agreed to pay on such notional amount 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. If Products Corporation had terminated these agreements, which Products
Corporation considered to be held for other than trading purposes, on
December 31, 1997 and 1996, a loss of approximately $0.1 and $3.5,
respectively would have been realized. Certain other swap agreements were
terminated in 1993 for a gain of $14.0 that was amortized over the original
lives of the agreements through 1997. The amortization of the 1993 realized
gain in 1997 and 1996 was approximately $3.1 and $3.2, respectively. Cash
flow from the agreements outstanding at December 31, 1997 was approximately
break even for 1997. In anticipation of repayment of the hedged indebtedness,
Products Corporation terminated these agreements in January 1998 and realized
a gain of approximately $1.6, which will be recognized upon repayment of the
hedged indebtedness.
Products Corporation enters into forward foreign exchange contracts and
option contracts from time to time to hedge certain cash flows denominated in
foreign currencies. At December 31, 1997 and 1996,
F-17
<PAGE>
Products Corporation had forward foreign exchange contracts denominated in
various currencies of approximately $90.1 and $62.0, respectively, and option
contracts of approximately $94.9 outstanding at December 31, 1997. Such
contracts are entered into to hedge transactions predominantly occurring
within twelve months. If Products Corporation had terminated these contracts
on December 31, 1997 and 1996, no material gain or loss would have been
realized.
The fair value of the Company's long-term debt is estimated based on the
quoted market prices for the same issues or on the current rates offered to
the Company for debt of the same remaining maturities. The estimated fair
value of long-term debt at December 31, 1997 and 1996 was approximately $39.0
and $37.3 more than the carrying value of $1,425.2 and $1,361.0,
respectively. Because considerable judgment is required in interpreting
market data to develop estimates of fair value, the estimates are not
necessarily indicative of the amounts that could be realized or would be paid
in a current market exchange. The effect of using different market
assumptions or estimation methodologies may be material to the estimated fair
value amounts.
Products Corporation also maintains standby and trade letters of credit
with certain banks for various corporate purposes under which Products
Corporation is obligated, of which approximately $40.6 and $40.9 (including
amounts available under credit agreements in effect at that time) were
maintained at December 31, 1997 and 1996, respectively. Included in these
amounts are $27.7 and $26.4, respectively, in standby letters of credit which
support Products Corporation's self-insurance programs (See Note 16). The
estimated liability under such programs is accrued by Products Corporation.
The carrying amounts of cash and cash equivalents, trade receivables,
accounts payable and short-term borrowings approximate their fair values.
13. INCOME TAXES
In June 1992, Holdings, Revlon, Inc., Products Corporation and certain of
its subsidiaries, and Mafco Holdings entered into a tax sharing agreement (as
subsequently amended, the "Tax Sharing Agreement"), pursuant to which Mafco
Holdings has agreed to indemnify Revlon, Inc. and Products Corporation
against federal, state or local income tax liabilities of the consolidated or
combined group of which Mafco Holdings (or a subsidiary of Mafco Holdings
other than Revlon, Inc. and Products Corporation or its subsidiaries) is the
common parent for taxable periods beginning on or after January 1, 1992
during which Revlon, Inc. and Products Corporation or a subsidiary of
Products Corporation is a member of such group. Pursuant to the Tax Sharing
Agreement, for all taxable periods beginning on or after January 1, 1992,
Products Corporation will pay to Revlon, Inc., which in turn will pay Mafco
Holdings, amounts equal to the taxes that such corporation would otherwise
have to pay if they were to file separate federal, state or local income tax
returns (including any amounts determined to be due as a result of a
redetermination arising from an audit or otherwise of the consolidated or
combined tax liability relating to any such period which is attributable to
Products Corporation), except that Products Corporation will not be entitled
to carry back any losses to taxable periods ending prior to January 1, 1992.
No payments are required by Products Corporation or Revlon, Inc. if and to
the extent that Products Corporation is prohibited under the Credit Agreement
from making tax sharing payments to Revlon, Inc. The Credit Agreement
prohibits Products Corporation from making any tax sharing payments other
than in respect of state and local income taxes. Since the payments to be
made by Products Corporation under the Tax Sharing Agreement will be
determined by the amount of taxes that Products Corporation would otherwise
have to pay if it were to file separate federal, state or local income tax
returns, the Tax Sharing Agreement will benefit Mafco Holdings to the extent
Mafco Holdings can offset the taxable income generated by Products
Corporation against losses and tax credits generated by Mafco Holdings and
its other subsidiaries. As a result of net operating tax losses and
prohibitions under the Credit Agreement there were no federal tax payments or
payments in lieu of taxes pursuant to the Tax Sharing Agreement for 1997 or
1996. Products Corporation has a liability of $0.9 to Revlon, Inc. in respect
of federal taxes for 1997 under the Tax Sharing Agreement.
Pursuant to the asset transfer agreement referred to in Note 16, Products
Corporation assumed all tax liabilities of Holdings other than (i) certain
income tax liabilities arising prior to January 1, 1992 to the extent such
liabilities exceeded reserves on Holdings' books as of January 1, 1992 or
were not of the nature reserved for and (ii) other tax liabilities to the
extent such liabilities are related to the business and assets retained by
Holdings.
F-18
<PAGE>
The Company's income (loss) before income taxes and the applicable
provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1997 1996
-------- -------
<S> <C> <C>
Income (loss) before income taxes:
Domestic.................................... $ 83.8 $10.2
Foreign..................................... (15.5) 40.5
-------- -------
$ 68.3 $50.7
======== =======
Provision (benefit) for income taxes:
Federal..................................... $ 0.9 $ --
State and local............................. 1.1 1.2
Foreign..................................... 7.3 24.3
-------- -------
$ 9.3 $25.5
======== =======
Current..................................... $ 32.3 $22.7
Deferred.................................... 10.4 6.6
Benefits of operating loss carryforwards ... (34.5) (4.7)
Carryforward utilization applied to
goodwill................................... 1.1 1.0
Effect of enacted change of tax rates ...... -- (0.1)
-------- -------
$ 9.3 $25.5
======== =======
</TABLE>
The effective tax rate on income (loss) before income taxes is reconciled
to the applicable statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
Statutory federal income tax rate.............................. 35.0% 35.0%
State and local taxes, net of federal income tax benefit ...... 1.1 1.6
Foreign and U.S. tax effects attributable to operations
outside the U.S............................................... 13.1 35.7
Nondeductible amortization expense............................. 4.5 5.8
Change in domestic valuation allowance......................... (43.3) (29.2)
Other.......................................................... 3.2 1.4
-------- --------
Effective rate................................................. 13.6% 50.3%
======== ========
</TABLE>
F-19
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to doubtful
accounts............................................... $ 3.3 $ 3.9
Inventories............................................. 10.5 11.7
Net operating loss carryforwards........................ 206.9 257.4
Restructuring and related reserves...................... 9.4 10.2
Employee benefits....................................... 28.7 31.7
State and local taxes................................... 13.1 12.8
Self-insurance.......................................... 3.8 3.6
Advertising, sales discounts and returns and coupon
redemptions ........................................... 26.0 23.6
Other................................................... 25.3 23.9
--------- ---------
Total gross deferred tax assets........................ 327.0 378.8
Less valuation allowance............................... (279.3) (333.8)
--------- ---------
Net deferred tax assets................................ 47.7 45.0
Deferred tax liabilities:
Plant, equipment and other assets....................... (50.8) (43.9)
Inventories............................................. (0.2) (0.2)
Other................................................... (5.3) (6.9)
--------- ---------
Total gross deferred tax liabilities................... (56.3) (51.0)
--------- ---------
Net deferred tax liability............................. $ (8.6) $ (6.0)
========= =========
</TABLE>
The valuation allowance for deferred tax assets at January 1, 1997 was
$333.8. The valuation allowance decreased by $54.5 and $10.2 during the years
ended December 31, 1997 and 1996, respectively.
During 1997 and 1996, certain of the Company's foreign subsidiaries used
operating loss carryforwards to credit the current provision for income taxes
by $4.0 and $4.7, respectively. Certain other foreign operations generated
losses during 1997 and 1996 for which the potential tax benefit was reduced
by a valuation allowance. During 1997, the Company used domestic operating
loss carryforwards to credit the current provision for income taxes by $18.5
and the deferred provision for income taxes by $12.0. At December 31, 1997,
the Company had tax loss carryforwards of approximately $578.9 which expire
in future years as follows: 1998-$21.1; 1999-$25.3; 2000-$9.3; 2001-$15.9;
and beyond-$386.4; unlimited-$120.9. Approximately $43.6 of the tax loss
carryforwards at December 31, 1997 is attributable to discontinued
operations, all of which expire beyond 2001 and which may not be available to
the Company upon the disposal of such operations. The Company will receive a
benefit only to the extent it has taxable income during the carryforward
periods in the applicable jurisdictions.
Appropriate United States and foreign income taxes have been accrued on
foreign earnings that have been or are expected to be remitted in the near
future. Unremitted earnings of foreign subsidiaries which have been, or are
currently intended to be, permanently reinvested in the future growth of the
business aggregated approximately $18.7 at December 31, 1997, excluding those
amounts which, if remitted in the near future, would not result in
significant additional taxes under tax statutes currently in effect.
14. POSTRETIREMENT BENEFITS
PENSIONS:
Products Corporation uses a September 30 date for measurement of plan
obligations and assets.
F-20
<PAGE>
The following tables reconcile the funded status of Products Corporation's
significant pension plans with the respective amounts recognized in the
Consolidated Balance Sheets at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------
OVERFUNDED UNDERFUNDED
PLANS PLANS TOTAL
------------ ------------- ----------
<S> <C> <C> <C>
Actuarial present value of benefit obligation:
Accumulated benefit obligation as of September 30,
1997, includes vested benefits of $304.5. .............$ (269.3) $ (45.2) $(314.5)
============ ============= ==========
Projected benefit obligation as of September 30, 1997
for service rendered ..................................$ (309.3) $ (55.5) $(364.8)
Fair value of plan assets as of September 30, 1997 ...... 305.0 1.9 306.9
------------ ------------- ----------
Plan assets less than projected benefit obligation ...... (4.3) (53.6) (57.9)
Amounts contributed to plans during fourth quarter 1997 . 0.3 0.6 0.9
Unrecognized net (assets) obligation..................... (1.3) 0.2 (1.1)
Unrecognized prior service cost.......................... 6.5 3.2 9.7
Unrecognized net loss.................................... 0.2 12.7 12.9
Adjustment to recognize additional minimum liability .... -- (6.5) (6.5)
------------ ------------- ----------
Prepaid (accrued) pension cost.........................$ 1.4 $ (43.4) $ (42.0)
============ ============= ==========
DECEMBER 31, 1996
OVERFUNDED UNDERFUNDED
PLANS PLANS TOTAL
------------ ------------- ----------
Actuarial present value of benefit obligation:
Accumulated benefit obligation as of September 30,
1996, includes vested benefits of $286.9...............$ (163.7) $(131.4) $(295.1)
============ ============= ==========
Projected benefit obligation as of September 30, 1996
for service rendered ..................................$ (198.1) $(141.4) $(339.5)
Fair value of plan assets as of September 30, 1996 ..... 173.3 81.6 254.9
------------ ------------- ----------
Plan assets less than projected benefit obligation ...... (24.8) (59.8) (84.6)
Amounts contributed to plans during fourth quarter 1996 . 0.2 0.5 0.7
Unrecognized net (assets) obligation..................... (1.5) 0.2 (1.3)
Unrecognized prior service cost.......................... 5.2 3.9 9.1
Unrecognized net loss.................................... 20.2 20.5 40.7
Adjustment to recognize additional minimum liability .... -- (15.3) (15.3)
------------ ------------- ----------
Accrued pension cost...................................$ (0.7) $ (50.0) $ (50.7)
============ ============= ==========
</TABLE>
The weighted average discount rate assumed was 7.75% for 1997 and 1996 for
domestic plans. For foreign plans, the weighted average discount rate was
7.1% and 7.9% for 1997 and 1996, respectively. The rate of future
compensation increases was 5.3% for 1997 and 1996 for domestic plans and was
a weighted average of 5.3% and 5.1% for 1997 and 1996, respectively, for
foreign plans. The expected long-term rate of return on assets was 9.0% for
1997 and 1996 for domestic plans and a weighted average of 10.1% for 1997 and
10.4% for 1996 for foreign plans.
Plan assets consist primarily of common stock, mutual funds and fixed
income securities, which are stated at fair market value and cash equivalents
which are stated at cost, which approximates fair market value.
In accordance with the provisions of SFAS No. 87, "Employers' Accounting
for Pensions," the Company recorded an additional liability to the extent
that, for certain U.S. plans, the unfunded accumulated benefit obligation
exceeded recorded liabilities. At December 31, 1997, the additional
F-21
<PAGE>
liability was recognized by recording an intangible asset to the extent of
unrecognized prior service costs of $1.0, a due from affiliates of $1.0 and a
charge to stockholder's deficiency of $4.5. At December 31, 1996, the
additional liability was recognized by recording an intangible asset to the
extent of unrecognized prior service costs of $1.8, a due from affiliates of
$1.1, and a charge to stockholder's deficiency of $12.4.
Net periodic pension cost for the pension plans consisted of the following
components:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
Service cost-benefits earned during the
period........................................ $ 11.7 $ 10.6
Interest cost on projected benefit obligation . 26.0 24.3
Actual return on plan assets................... (55.8) (30.4)
Net amortization and deferrals................. 35.6 15.1
-------- --------
17.5 19.6
Portion allocated to Holdings.................. (0.3) (0.3)
-------- --------
Net periodic pension cost of the Company ...... $ 17.2 $ 19.3
======== ========
</TABLE>
A substantial portion of the Company's employees in the United States are
covered by defined benefit retirement plans. To the extent that aggregate
pension costs could be identified as relating to the Company or to Holdings,
such costs have been so apportioned. The components of the net periodic
pension cost applicable solely to the Company are not presented as it is not
practical to segregate such information between Holdings and the Company. In
1997 and 1996, there was a settlement loss of $0.2 and $0.3, respectively,
and a curtailment loss of $0.1 and $1.0, respectively, resulting from
workforce reductions.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS:
The Company also has sponsored an unfunded retiree benefit plan, which
provides death benefits payable to beneficiaries of certain key employees and
former employees. Participation in this plan is limited to participants
enrolled as of December 31, 1993. The Company also administers a medical
insurance plan on behalf of Holdings, the cost of which has been apportioned
to Holdings. Net periodic postretirement benefit cost for each of the years
ended December 31, 1997 and 1996 was $0.7 which consists primarily of
interest on the accumulated postretirement benefit obligation. The Company's
date of measurement of plan obligations is September 30. At December 31, 1997
and 1996, the portion of accumulated benefit obligation attributable to
retirees was $7.3 and $6.9, respectively, and to other fully eligible
participants, $1.4 and $1.3, respectively. The amount of unrecognized gain at
December 31, 1997 and 1996 was $1.9 and $1.2, respectively. At December 31,
1997 and 1996, the accrued postretirement benefit obligation recorded on the
Company's Consolidated Balance Sheets was $10.6 and $9.4, respectively. Of
these amounts, $1.9 and $2.0 was attributable to Holdings and was recorded as
a receivable from affiliates at December 31, 1997 and 1996, respectively. The
weighted average discount rate used in determining the accumulated
postretirement benefit obligation at September 30, 1997 and 1996 was 7.75%.
15. STOCK COMPENSATION PLAN
At December 31, 1997 and 1996, Revlon, Inc. had a stock-based compensation
plan (the "Plan"), which is described below. Products Corporation applies APB
Opinion No. 25 and related Interpretations in accounting for the Plan. Under
APB Opinion No. 25, because the exercise price of Revlon, Inc.'s employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation cost has been recognized. Had compensation cost for
Revlon, Inc.'s Plan been determined consistent with SFAS No. 123, Products
Corporation's net income for 1997 of $44.8 ($19.0 in 1996) would have been
reduced to the pro forma amounts of $32.5 for 1997 ($15.8 in 1996). The fair
value of each option grant is estimated on the date of the grant using the
Black-Scholes option-pricing model assuming no dividend yield, expected
volatility of approximately 39% in 1997 and 31% in 1996; weighted average
F-22
<PAGE>
risk-free interest rate of 6.54% in 1997 and 5.99% in 1996; and a seven year
expected average life for the Plan's options issued in 1997 and 1996. The
effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of future amounts.
Under the Plan, Revlon, Inc. may grant options to its employees for up to
an aggregate of 5.0 million shares of Class A Common Stock. Non-qualified
options granted under the Plan have a term of 10 years during which the
holder can purchase shares of Class A Common Stock at an exercise price which
must be not less than the market price on the date of the grant. Options
granted in 1996 to certain executive officers will not vest as to any portion
until the third anniversary of the grant date and will thereupon become 100%
vested, except that upon termination of employment by Revlon, Inc. other than
for "cause," death or "disability" under the applicable employment agreement,
such options will vest with respect to 25% of the shares subject thereto (if
the termination is between the first and second anniversaries of the grant)
and 50% of the shares subject thereto (if the termination is between the
second and third anniversaries of the grant). Primarily all other option
grants, including options granted to certain executive officers in 1997 will
vest 25% each year beginning on the first anniversary of the date of grant
and will become 100% vested on the fourth anniversary of the date of grant.
During 1997, Revlon, Inc. granted to Mr. Perelman, Chairman of the Executive
Committee, an option to purchase 300,000 shares of Revlon, Inc.'s Class A
Common Stock, which will vest in full on the fifth anniversary of the grant
date. At December 31, 1997 there were 98,450 options exercisable under the
Plan. At December 31, 1996 there were no options exercisable under the Plan.
A summary of the status of the Plan as of December 31, 1997 and 1996 and
changes during the years then ended is presented below:
<TABLE>
<CAPTION>
SHARES WEIGHTED AVERAGE
(000) EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at
2/28/96............... -- --
Granted................ 1,010.2 $24.37
Exercised.............. -- --
Forfeited.............. (119.1) 24.00
---------
Outstanding at
12/31/96.............. 891.1 24.37
Granted................ 1,485.5 32.64
Exercised.............. (12.1) 24.00
Forfeited.............. (85.1) 29.33
---------
Outstanding at
12/31/97.............. 2,279.4 29.57
=========
</TABLE>
The weighted average fair value of each option granted during 1997 and
1996 approximated $16.42 and $11.00, respectively.
The following table summarizes information about the Plan's options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
- -----------------------------------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED
RANGE OF OUTSTANDING YEARS AVERAGE
EXERCISE PRICES (000) REMAINING EXERCISE PRICE
- ---------------- ------------- ----------- --------------
<S> <C> <C> <C>
$24.00 to $29.88 817.9 8.17 $24.05
31.38 to 33.88 1,067.8 9.02 31.40
34.88 to 50.75 393.7 9.38 36.10
-------------
24.00 to 50.75 2,279.4 8.78 29.57
=============
</TABLE>
F-23
<PAGE>
16. RELATED PARTY TRANSACTIONS
TRANSFER AGREEMENTS
In June 1992, Revlon, Inc. and Products Corporation entered into an asset
transfer agreement with Holdings and certain of its wholly owned subsidiaries
(the "Asset Transfer Agreement"), and Revlon, Inc. and Products Corporation
entered into a real property asset transfer agreement with Holdings (the
"Real Property Transfer Agreement" and, together with the Asset Transfer
Agreement, the "Transfer Agreements"), and pursuant to such agreements, on
June 24, 1992 Holdings transferred assets to Products Corporation and
Products Corporation assumed all the liabilities of Holdings, other than
certain specifically excluded assets and liabilities (the liabilities
excluded are referred to as the "Excluded Liabilities"). Holdings retained
the Retained Brands. Holdings agreed to indemnify Revlon, Inc. and Products
Corporation against losses arising from the Excluded Liabilities, and Revlon,
Inc. and Products Corporation agreed to indemnify Holdings against losses
arising from the liabilities assumed by Products Corporation. The amounts
reimbursed by Holdings to Products Corporation for the Excluded Liabilities
for 1997 and 1996 were $0.4 and $1.4, respectively.
OPERATING SERVICES AGREEMENT
In June 1992, Revlon, Inc., Products Corporation and Holdings entered into
an operating services agreement (as amended and restated, and as subsequently
amended, the "Operating Services Agreement") pursuant to which Products
Corporation manufactures, markets, distributes, warehouses and administers,
including the collection of accounts receivable, the Retained Brands for
Holdings. Pursuant to the Operating Services Agreement, Products Corporation
is reimbursed an amount equal to all of its and Revlon, Inc.'s direct and
indirect costs incurred in connection with furnishing such services, net of
the amounts collected by Products Corporation with respect to the Retained
Brands, payable quarterly. The net amounts reimbursed by Holdings to Products
Corporation for such direct and indirect costs for 1997 and 1996 were $1.4
and $5.1, respectively. Holdings also pays Products Corporation a fee equal
to 5% of the net sales of the Retained Brands, payable quarterly. The fees
paid by Holdings to Products Corporation pursuant to the Operating Services
Agreement for services with respect to the Retained Brands for 1997 and 1996
were approximately $0.3 and $0.6, respectively.
REIMBURSEMENT AGREEMENTS
Revlon, Inc., Products Corporation and MacAndrews Holdings have entered
into reimbursement agreements (the "Reimbursement Agreements") pursuant to
which (i) MacAndrews Holdings is obligated to provide (directly or through
affiliates) certain professional and administrative services, including
employees, to Revlon, Inc. and its subsidiaries, including Products
Corporation, and purchase services from third party providers, such as
insurance and legal and accounting services, on behalf of Revlon, Inc. and
its subsidiaries, including Products Corporation, to the extent requested by
Products Corporation, and (ii) Products Corporation is obligated to provide
certain professional and administrative services, including employees, to
MacAndrews Holdings (and its affiliates) and purchase services from third
party providers, such as insurance and legal and accounting services, on
behalf of MacAndrews Holdings (and its affiliates) to the extent requested by
MacAndrews Holdings, provided that in each case the performance of such
services does not cause an unreasonable burden to MacAndrews Holdings or
Products Corporation, as the case may be. The Company reimburses MacAndrews
Holdings for the allocable costs of the services purchased for or provided to
the Company and its subsidiaries and for reasonable out-of-pocket expenses
incurred in connection with the provision of such services. MacAndrews
Holdings (or such affiliates) reimburses the Company for the allocable costs
of the services purchased for or provided to MacAndrews Holdings (or such
affiliates) and for the reasonable out-of-pocket expenses incurred in
connection with the purchase or provision of such services. In addition, in
connection with certain insurance coverage provided by MacAndrews Holdings,
Products Corporation obtained letters of credit under the Special LC Facility
(which aggregated approximately $27.7 as of December 31, 1997) to support
certain self-funded risks of MacAndrews Holdings and its affiliates,
including the Company, associated with such insurance coverage. The costs of
such letters of
F-24
<PAGE>
credit are allocated among, and paid by, the affiliates of MacAndrews
Holdings, including the Company, which participate in the insurance coverage
to which the letters of credit relate. The Company expects that these
self-funded risks will be paid in the ordinary course and, therefore, it is
unlikely that such letters of credit will be drawn upon. MacAndrews Holdings
has agreed to indemnify Products Corporation to the extent amounts are drawn
under any of such letters of credit with respect to claims for which neither
Revlon, Inc. nor Products Corporation is responsible. The net amounts
reimbursed by MacAndrews Holdings to the Company for the services provided
under the Reimbursement Agreements for 1997 and 1996 were $4.0 and $2.2,
respectively. Each of Revlon, Inc. and Products Corporation, on the one hand,
and MacAndrews Holdings, on the other, has agreed to indemnify the other
party for losses arising out of the provision of services by it under the
Reimbursement Agreements other than losses resulting from its willful
misconduct or gross negligence. The Reimbursement Agreements may be
terminated by either party on 90 days' notice. The Company does not intend to
request services under the Reimbursement Agreements unless their costs would
be at least as favorable to the Company as could be obtained from
unaffiliated third parties.
TAX SHARING AGREEMENT
Holdings, Revlon, Inc., Products Corporation and certain of its
subsidiaries and Mafco Holdings are parties to the Tax Sharing Agreement,
which is described in Note 13. Since payments to be made under the Tax
Sharing Agreement will be determined by the amount of taxes that Products
Corporation would otherwise have to pay if it were to file separate federal,
state or local income tax returns, the Tax Sharing Agreement will benefit
Mafco Holdings to the extent Mafco Holdings can offset the taxable income
generated by Products Corporation against losses and tax credits generated by
Mafco Holdings and its other subsidiaries.
FINANCING REIMBURSEMENT AGREEMENT
Holdings and Products Corporation entered into a financing reimbursement
agreement (the "Financing Reimbursement Agreement") in 1992, which expired on
June 30, 1996, pursuant to which Holdings agreed to reimburse Products
Corporation for Holdings' allocable portion of (i) the debt issuance cost and
advisory fees related to the capital restructuring of Holdings, and (ii)
interest expense attributable to the higher cost of funds paid by Products
Corporation under the credit agreement in effect at that time as a result of
additional borrowings for the benefit of Holdings in connection with the
assumption of certain liabilities by Products Corporation under the Asset
Transfer Agreement and the repurchase of certain subordinated notes from
affiliates. The amount of interest to be reimbursed by Holdings for 1994 was
approximately $0.8 and was evidenced by noninterest-bearing promissory notes
originally due and payable on June 30, 1995. In February 1995, the $13.3 in
notes then payable by Holdings to Products Corporation under the Financing
Reimbursement Agreement was offset against a $25.0 note payable by Products
Corporation to Holdings and Holdings agreed not to demand payment under the
resulting $11.7 note payable by Products Corporation so long as any
indebtedness remained outstanding under the credit agreement then in effect.
In February 1995, the Financing Reimbursement Agreement was amended and
extended to provide that Holdings would reimburse Products Corporation for a
portion of the debt issuance costs and advisory fees related to the credit
agreement then in effect (which portion was approximately $4.7 and was
evidenced by a noninterest-bearing promissory note payable on June 30, 1996)
and 1 1/2 % per annum of the average balance outstanding under the credit
agreement then in effect and the average balance outstanding under working
capital borrowings from affiliates through June 30, 1996 and such amounts
were evidenced by a noninterest-bearing promissory note payable on June 30,
1996. The amount of interest to be reimbursed by Holdings for 1995 was
approximately $4.2. As of December 31, 1995, the aggregate amount of notes
payable by Holdings under the Financing Reimbursement Agreement was $8.9. In
June 1996, $10.9 in notes due to Products Corporation, which included $2.0 of
interest reimbursement from Holdings in 1996, under the Financing
Reimbursement Agreement was offset against an $11.7 demand note payable by
Products Corporation to Holdings.
F-25
<PAGE>
OTHER
Pursuant to a lease dated April 2, 1993 (the "Edison Lease"), Holdings
leases to Products Corporation the Edison research and development facility
for a term of up to 10 years with an annual rent of $1.4 and certain shared
operating expenses payable by Products Corporation which, together with the
annual rent, are not to exceed $2.0 per year. Pursuant to an assumption
agreement dated February 18, 1993, Holdings agreed to assume all costs and
expenses of the ownership and operation of the Edison facility as of January
1, 1993, other than (i) the operating expenses for which Products Corporation
is responsible under the Edison Lease and (ii) environmental claims and
compliance costs relating to matters which occurred prior to January 1, 1993
up to an amount not to exceed $8.0 (the amount of such claims and costs for
which Products Corporation is responsible, the "Environmental Limit"). In
addition, pursuant to such assumption agreement, Products Corporation agreed
to indemnify Holdings for environmental claims and compliance costs relating
to matters which occurred prior to January 1, 1993 up to an amount not to
exceed the Environmental Limit and Holdings agreed to indemnify Products
Corporation for environmental claims and compliance costs relating to matters
which occurred prior to January 1, 1993 in excess of the Environmental Limit
and all such claims and costs relating to matters occurring on or after
January 1, 1993. Pursuant to an occupancy agreement, during 1997 and 1996
Products Corporation rented from Holdings a portion of the administration
building located at the Edison facility and space for a retail store of
Products Corporation. Products Corporation provides certain administrative
services, including accounting, for Holdings with respect to the Edison
facility pursuant to which Products Corporation pays on behalf of Holdings
costs associated with the Edison facility and is reimbursed by Holdings for
such costs, less the amount owed by Products Corporation to Holdings pursuant
to the Edison Lease and the occupancy agreement. The net amount reimbursed by
Holdings to Products Corporation for such costs with respect to the Edison
facility for 1997 and 1996 was $0.7 and $1.1, respectively.
During 1997, a subsidiary of Products Corporation sold an inactive
subsidiary to an affiliate for approximately $1.0.
Effective July 1, 1997, Holdings contributed to Products Corporation
substantially all of the assets and liabilities of the Bill Blass business
not already owned by Products Corporation. The contributed assets
approximated the contributed liabilities and were accounted for at historical
cost in a manner similar to that of a pooling of interests and, accordingly,
prior period financial statements were restated as if the contribution took
place prior to the beginning of the earliest period presented.
In the fourth quarter of 1996, a subsidiary of Products Corporation
purchased an inactive subsidiary from an affiliate for net cash consideration
of approximately $3.0 in a series of transactions in which Products
Corporation expects to realize foreign tax benefits in future years.
Effective January 1, 1996, Products Corporation acquired from Holdings
substantially all of the assets of Tarlow in consideration for the assumption
of substantially all of the liabilities and obligations of Tarlow. Net
liabilities assumed were approximately $3.4. The assets acquired and
liabilities assumed were accounted for at historical cost in a manner similar
to that of a pooling of interests and, accordingly, prior period financial
statements have been restated as if the acquisition took place at the
beginning of the earliest period. Products Corporation paid $4.1 to Holdings
which was accounted for as an increase in capital deficiency. A nationally
recognized investment banking firm rendered its written opinion that the
terms of the purchase are fair from a financial standpoint to Products
Corporation.
Products Corporation leases certain facilities to MacAndrews & Forbes or
its affiliates pursuant to occupancy agreements and leases. These included
space at Products Corporation's New York headquarters and at Products
Corporation's offices in London during 1997 and 1996; in Tokyo during 1996
and in Hong Kong during 1997. The rent paid by MacAndrews & Forbes or its
affiliates to Products Corporation for 1997 and 1996 was $3.8 and $4.6,
respectively.
In July 1995, Products Corporation borrowed from Holdings approximately
$0.8, representing certain amounts received by Holdings relating to an
arbitration arising out of the sale by Holdings of certain of its businesses.
In 1995, Products Corporation borrowed from Holdings approximately $5.6,
representing certain amounts received by Holdings from the sale by Holdings
of certain of its businesses.
F-26
<PAGE>
In June 1997, Products Corporation borrowed from Holdings approximately
$0.5, representing certain amounts received by Holdings from the sale of a
brand and inventory relating thereto. Such amounts are evidenced by
noninterest-bearing promissory notes. Holdings agreed not to demand payment
under such notes so long as any indebtedness remains outstanding under the
Credit Agreement.
The Credit Agreement is supported by, among other things, guarantees from
Holdings and certain of its subsidiaries. The obligations under such
guarantees are secured by, among other things, (i) the capital stock and
certain assets of certain subsidiaries of Holdings and (ii) a mortgage on
Holdings' Edison, New Jersey facility.
Products Corporation borrows funds from its affiliates from time to time
to supplement its working capital borrowings. No such borrowings were
outstanding as of December 31, 1997 or 1996. The interest rates for such
borrowings are more favorable to Products Corporation than interest rates
under the Credit Agreement and, for borrowings occurring prior to the
execution of the Credit Agreement, the credit facility in effect at the time
of such borrowing. The amount of interest paid by Products Corporation for
such borrowings for 1997 and 1996 was $0.6 and $0.5, respectively.
In November 1993, Products Corporation assigned to Holdings a lease for
warehouse space in New Jersey (the "N.J. Warehouse") between Products
Corporation and a trust established for the benefit of certain family members
of the Chairman of the Executive Committee. The N.J. Warehouse had become
vacant as a result of divestitures and restructuring of Products Corporation.
The lease has annual lease payments of approximately $2.3 and terminates on
June 30, 2005. In consideration for Holdings assuming all liabilities and
obligations under the lease, Products Corporation paid Holdings $7.5 (for
which a liability was previously recorded) in three installments of $2.5 each
in January 1994, January 1995 and January 1996. A nationally recognized
investment banking firm rendered its written opinion that the terms of the
lease transfer were fair from a financial standpoint to Products Corporation.
During 1996 and 1995, Products Corporation paid certain costs associated with
the N.J. Warehouse on behalf of Holdings and was reimbursed by Holdings for
such amounts. The amounts reimbursed by Holdings to Products Corporation for
such costs were $0.2 for 1996.
During 1997 and 1996, Products Corporation used an airplane owned by a
corporation of which Messrs. Gittis, Drapkin and, during 1996, Levin were the
sole stockholders, for which Products Corporation paid approximately $0.2 and
$0.2 for 1997 and 1996, respectively.
During 1997, Products Corporation purchased products from an affiliate,
for which it paid approximately $0.9.
During 1997, Products Corporation provided licensing services to an
affiliate, for which Products Corporation has been paid approximately $0.7.
An affiliate of Products Corporation assembles lipstick cases for Products
Corporation. Products Corporation paid approximately $0.9 and $1.0 for such
services for 1997 and 1996, respectively.
17. COMMITMENTS AND CONTINGENCIES
The Company currently leases manufacturing, executive, including research
and development, and sales facilities and various types of equipment under
operating lease agreements. Rental expense was $46.1 and $46.7 for the years
ended December 31, 1997 and 1996, respectively. Minimum rental commitments
under all noncancelable leases, including those pertaining to idled
facilities and the Edison research and development facility, with remaining
lease terms in excess of one year from December 31, 1997 aggregated $146.6;
such commitments for each of the five years subsequent to December 31, 1997
are $32.4, $29.4, $25.8, $22.0 and $20.7, respectively. Such amounts exclude
the minimum rentals to be received in the future under noncancelable
subleases of $4.2 and future minimum lease commitments of the discontinued
operations under noncancelable operating leases with initial lease terms in
excess of one year from December 31, 1997 aggregating $54.5; such commitments
for each of the five years subsequent to December 31, 1997 are $10.8, $10.4,
$8.8, $7.3 and $6.0, respectively.
F-27
<PAGE>
The Company and its subsidiaries are defendants in litigation and
proceedings involving various matters. In the opinion of the Company's
management, based upon advice of its counsel handling such litigation and
proceedings, adverse outcomes, if any, will not result in a material effect
on the Company's consolidated financial condition or results of operations.
18. GEOGRAPHIC SEGMENTS
The Company manages its business on the basis of one reportable segment.
See Note 1 for a brief description of the Company's business. As of December
31, 1997, the Company had operations established in 26 countries outside of
the United States and its products are sold throughout the world. 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 are affected by fluctuations
in foreign currency exchange rates. The Company's operations in Brazil have
accounted for approximately 5.8% and 6.3% of the Company's net sales for 1997
and 1996, respectively. Net sales by geographic area are presented by
attributing revenues from external customers on the basis of where the
products are sold. During 1997 and 1996, one customer and its affiliates
accounted for approximately 10.3% and 10.5% of the Company's consolidated net
sales, respectively. This data is presented in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
the Company has retroactively adopted for all periods presented.
GEOGRAPHIC AREAS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Net sales:
United States.....................$1,300.2 $1,182.3
International..................... 938.4 909.8
---------- ----------
$2,238.6 $2,092.1
========== ==========
AS OF DECEMBER 31,
1997 1996
---------- ----------
Long-lived assets:
United States.....................$ 545.4 $ 545.4
International..................... 280.5 245.9
---------- ----------
$ 825.9 $ 791.3
========== ==========
CLASSES OF SIMILAR PRODUCTS:
YEAR ENDED DECEMBER 31,
----------------------
1997 1996
---------- ----------
Net sales:
Cosmetics, skin care and
fragrances.......................$1,319.6 $1,216.3
Personal care and professional ... 919.0 875.8
---------- ----------
$2,238.6 $2,092.1
========== ==========
</TABLE>
F-28
<PAGE>
EXHIBIT 99.3
REVLON CONSUMER PRODUCTS CORPORATION
INTENDS TO REFINANCE
9 1/2% SENIOR NOTES DUE 1999
NEW YORK, NY -- (November 3, 1998) -Revlon Consumer Products Corporation
("RCPC") announced today that it intends to offer a new series of debt
securities (the "Notes"). The net proceeds of the Notes are intended to be
used to refinance RCPC's $200 million of 9 1/2% Senior Notes Due 1999 (the
"Old Notes"), which become due on June 1, 1999, through open market purchases
or otherwise, and for general corporate purposes. Pending such use, the net
proceeds of the Notes will be used to temporarily repay borrowings under
RCPC's revolving credit facility.
RCPC is a wholly owned subsidiary of Revlon, Inc. (NYSE:REV). The offering
of the Notes will not be registered under the Securities Act of 1933, as
amended, and the Notes may not be offered or sold in the United States absent
registration or an applicable exemption from the registration requirements.
******
Information in this Press Release includes forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such statements include, without limitation, RCPC's
intention to refinance the Old Notes. All such forward-looking statements
involve risks and uncertainties. In addition to factors that are described in
the SEC filings of RCPC, the following factors could cause actual results to
differ materially from those expressed in the forward-looking statements:
difficulties or delays in consummating the sale of the Notes, the proceeds
from which will be used to refinance the Old Notes, as well as other
difficulties in effecting such refinancing.
******
Press Contact: Nancy Risdon
212-527-5791
Investor Relations: Deena Fishman
212-527-5230
<PAGE>
EXHIBIT 99.4
REVLON CONSUMER PRODUCTS CORPORATION
PRICES NOTES OFFERING AND INTENDS TO REFINANCE
9 1/2% SENIOR NOTES DUE 1999
NEW YORK, NY -- (November 4, 1998) -Revlon Consumer Products Corporation
("RCPC") announced today that it has offered $250,000,000 aggregate principal
amount of its 9% Senior Notes due 2006 (the "Notes"), which offering is
scheduled to close on Friday, November 6, 1998. As previously announced, a
portion of the net proceeds of the Notes will be used to refinance RCPC's
$200 million of 9 1/2% Senior Notes Due 1999 (the "Old Notes"), which become
due on June, 1, 1999, including through open market purchases. RCPC intends
to use the balance of the net proceeds from the sale of the Notes for general
corporate purposes, including to temporarily reduce indebtedness under the
working capital lines under its credit agreement. Pending the refinancing of
the Old Notes, such net proceeds will be retained by RCPC and a portion of
such proceeds will be used to temporarily reduce indebtedness under the
working capital lines under RCPC's credit agreement and under other
short-term facilities.
RCPC is a wholly owned subsidiary of Revlon, Inc. (NYSE: REV). The
offering of the Notes will not be registered under the Securities Act of
1933, as amended, and the Notes may not be offered or sold in the United
States absent registration or an applicable exemption from the registration
requirements.
******
Information in this Press Release includes forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such statements include, without limitation, RCPC's
intention to refinance the Old Notes. All such forward-looking statements
involve risks and uncertainties. In addition to factors that are described in
the SEC filings of RCPC, the following factors could cause actual results to
differ materially from those expressed in the forward-looking statements:
difficulties or delays in consummating the sale of the Notes, the proceeds
from which will be used to refinance the Old Notes, as well as other
difficulties in effecting such refinancing.
******
Press Contact: Nancy Risdon
212-527-5791
Investor Relations: Deena Fishman
212-527-5230
