SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1997
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________________ to _______________
Commission file number 1-11178
REVLON, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3662955
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 MADISON AVENUE, NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212-527-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
As of October 27, 1997, 19,886,600 shares of Class A Common Stock and
31,250,000 shares of Class B Common Stock were outstanding. 11,250,000 shares
of Class A Common Stock and all the shares of Class B Common Stock were held by
REV Holdings Inc., an indirectly wholly owned subsidiary of Mafco Holdings Inc.
Total Pages - 17
REVLON, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1996
----------------- -----------------
(Unaudited)
Current assets:
Cash and cash equivalents............................. $ 39.7 $ 38.6
Trade receivables, less allowances of $27.1
and $24.9, respectively............................ 469.4 426.8
Inventories........................................... 379.1 281.1
Prepaid expenses and other............................ 76.0 74.5
----------------- -----------------
Total current assets............................. 964.2 821.0
Property, plant and equipment, net.......................... 384.9 381.1
Other assets................................................ 154.4 139.2
Intangible assets, net...................................... 327.0 280.6
================= =================
Total assets..................................... $ 1,830.5 $ 1,621.9
================= =================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Short-term borrowings - third parties.................. $ 28.3 $ 27.1
Current portion of long-term debt - third parties...... 5.8 8.8
Accounts payable....................................... 178.3 161.9
Accrued expenses and other............................. 331.2 366.2
----------------- -----------------
Total current liabilities......................... 543.6 564.0
Long-term debt - third parties............................... 1,537.9 1,321.8
Long-term debt - affiliates.................................. 30.9 30.4
Other long-term liabilities.................................. 224.9 202.8
Stockholders' deficiency:
Preferred stock, par value $.01 per share, 20,000,000
shares authorized, 546 shares of Series A
Preferred Stock issued and outstanding............ 54.6 54.6
Class A Common Stock, par value $.01 per share;
350,000,000 shares authorized, 19,886,025 and
19,875,000 issued and outstanding,
respectively...................................... 0.2 0.2
Class B Common Stock, par value $.01 per share;
200,000,000 shares authorized, 31,250,000 issued
and outstanding................................... 0.3 0.3
Capital deficiency..................................... (231.1) (231.6)
Accumulated deficit since June 24, 1992................ (300.2) (302.4)
Adjustment for minimum pension liability............... (12.4) (12.4)
Currency translation adjustment........................ (18.2) (5.8)
----------------- -----------------
Total stockholders' deficiency.................... (506.8) (497.1)
----------------- -----------------
Total liabilities and stockholders' deficiency.... $ 1,830.5 $ 1,621.9
================= =================
See Notes to Unaudited Consolidated Condensed Financial Statements.
2
REVLON, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------- ------------------------------------
1997 1996 1997 1996
------------------ ---------------- ---------------- ---------------
Net sales............................... $ 623.5 571.7 $ 1,688.8 $ 1,554.8
Cost of sales........................... 217.1 193.3 585.3 517.2
----------------- ---------------- ---------------- --------------
Gross profit..................... 406.4 378.4 1,103.5 1,037.6
Selling, general and administrative
expenses.............................. 336.2 313.5 962.9 913.7
Business consolidation costs and other,
net................................... (1.0) - 8.4 -
------------------ ---------------- ---------------- --------------
Operating income................. 71.2 64.9 132.2 123.9
------------------ ---------------- ---------------- --------------
Other expenses (income):
Interest expense................. 33.8 34.0 100.7 100.0
Interest and net investment
income......................... (0.7) (0.3) (2.2) (2.3)
Gain on sale of subsidiary
stock.......................... - - (6.0) -
Amortization of debt issuance
costs.......................... 1.5 2.0 5.3 6.5
Foreign currency losses,
net............................ 2.4 1.9 5.2 5.7
Miscellaneous,
net............................ 0.9 0.5 2.9 1.8
------------------ ---------------- ---------------- --------------
Other expenses, net......... 37.9 38.1 105.9 111.7
------------------ ---------------- ---------------- --------------
Income before income taxes.............. 33.3 26.8 26.3 12.2
Provision for income taxes.............. 0.2 5.8 9.2 18.7
------------------ ---------------- ---------------- --------------
Income (loss) before extraordinary
item.................................. 33.1 21.0 17.1 (6.5)
Extraordinary item - early
extinguishment of debt................ - - (14.9) (6.6)
------------------ ---------------- ---------------- -------------
Net income (loss)....................... $ 33.1 $ 21.0 $ 2.2 $ (13.1)
================== ================ ================ =============
Income (loss) per common share:
Income (loss) before
extraordinary item............. $ 0.65 $ 0.41 $ 0.33 $ (0.13)
Extraordinary item............... - - (0.29) (0.14)
------------------ --------------- --------------- -------------
Net income (loss)................ $ 0.65 $ 0.41 $ 0.04 $ (0.27)
================== ================ =============== =============
Weighted average common shares
outstanding.................... 51,133,791 51,125,000 51,129,792 49,208,333
================== ================ ================ =============
See Notes to Unaudited Consolidated Condensed Financial Statements.
3
REVLON, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
1997 1996
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................................... $ 2.2 $ (13.1)
Adjustments to reconcile net income (loss) to net cash (used for)
provided by operating activities:
Depreciation and amortization............................................ 77.5 66.7
Extraordinary item....................................................... 14.9 6.6
Gain on sale of subsidiary stock......................................... (6.0) -
Gain on sale of certain fixed assets, net................................ (1.0) -
Change in assets and liabilities:
Increase in trade receivables...................................... (37.1) (54.0)
Increase in inventories............................................ (48.8) (42.4)
Increase in prepaid expenses and other current
assets........................................................... (4.5) (14.5)
Decrease in accounts payable....................................... (2.6) (23.0)
Decrease in accrued expenses and other current
liabilities...................................................... (48.0) (35.8)
Other, net......................................................... (60.4) (38.5)
-------------- ---------------
Met cash used for operating activities.................................... (113.8) (148.0)
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................................................... (31.0) (39.8)
Acquisition of businesses, net of cash acquired.......................... (53.6) -
Proceeds from the sale of certain fixed assets........................... 2.5 -
-------------- ---------------
Net cash used for investing activities................................... (82.1) (39.8)
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings - third parties.................... 2.5 5.2
Proceeds from the issuance of long-term debt - third parties............. 710.5 240.0
Repayment of long-term debt - third parties.............................. (511.3) (245.1)
Net proceeds from issuance of common stock............................... 0.3 187.8
Proceeds from the issuance of debt - affiliates.......................... 91.1 93.0
Repayment of debt - affiliates........................................... (90.6) (93.0)
Acquisition of business from affiliate................................... - (4.1)
Net contribution from parent............................................. 0.3 0.2
Payment of debt issuance costs........................................... (4.5) (10.9)
-------------- ---------------
Net cash provided by financing activities................................ 198.3 173.1
-------------- ---------------
Effect of exchange rate changes on cash and cash equivalents............. (1.3) (0.4)
-------------- ---------------
Net increase (decrease) in cash and cash
equivalents........................................................... 1.1 (15.1)
Cash and cash equivalents at beginning of
period................................................................ 38.6 36.3
-------------- ---------------
Cash and cash equivalents at end of
period................................................................ $ 39.7 $ 21.2
============== ===============
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest.......................................................... $ 110.0 $ 111.1
Income taxes, net of refunds...................................... 8.8 13.6
Supplemental schedule of noncash investing activities:
In connection with business acquisitions, liabilities were assumed
(including minority interest) as follows:
Fair value of assets acquired..................................... $ 129.4 $ 6.7
Cash paid......................................................... (57.7) (4.2)
--------------- -----------------
Liabilities assumed............................................... $ 71.7 $ 2.5
=============== =================
See Notes to Unaudited Consolidated Condensed Financial Statements.
4
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(1) BASIS OF PRESENTATION
Revlon, Inc. (the "Company") is a holding company, formed in April
1992, that conducts its business exclusively through its direct subsidiary,
Revlon Consumer Products Corporation and its subsidiaries ("Products
Corporation"). The Company is an indirect subsidiary of MacAndrews & Forbes
Holdings Inc., a corporation wholly owned by Mafco Holdings Inc.
The accompanying Consolidated Condensed Financial Statements are
unaudited. In management's opinion, all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation have been made.
The Unaudited Consolidated Condensed Financial Statements include the
accounts of the Company after elimination of all material intercompany balances
and transactions. The Company has made a number of estimates and assumptions
relating to the assets and liabilities, the disclosure of contingent assets and
liabilities and the reporting of revenues and expenses to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
The Company recognizes gains and losses on sales of subsidiary stock
in its Statements of Operations.
Effective January 1997, Mexico was considered a hyperinflationary
economy. 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.
The results of operations and financial position, including working
capital, for interim periods are not necessarily indicative of those to be
expected for a full year, due, in part, to seasonal fluctuations, which are
normal for the Company's business.
The Company matches advertising and promotion expenses with sales
revenues for interim reporting purposes. Advertising and promotion expenses
estimated for a full year are charged to earnings for interim reporting
purposes in proportion to the relationship that net sales for such period bear
to estimated full year net sales. As a result, for the nine months ended
September 30, 1997 and 1996, disbursements and commitments for advertising and
promotion exceeded advertising and promotion expenses by $38.7 and $25.5,
respectively, and such amounts were deferred.
(2) INVENTORIES
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------------- ----------------
Raw materials and supplies............................... $ 90.1 $ 76.7
Work-in-process.......................................... 18.7 19.4
Finished goods........................................... 270.3 185.0
================= ================
$ 379.1 $ 281.1
================= ================
(3) INITIAL PUBLIC OFFERING
On March 5, 1996, the Company completed an initial public offering
(the "Offering") in which it issued and sold 8,625,000 shares of its Class A
Common Stock for $24.00 per share. The proceeds, net of underwriter's discount
and related fees and expenses, of $187.8 were used to repay borrowings
outstanding under the credit agreement in effect at that time (the "1995 Credit
Agreement") and to pay fees and expenses related to the credit agreement which
became effective on March 5, 1996 (the "1996 Credit Agreement").
5
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(4) NET INCOME (LOSS) PER SHARE
The net income (loss) per share has been computed based upon the
weighted average of shares of common stock outstanding. The effect of
unexercised stock options has not been included as it is either immaterial or
anti-dilutive.
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," which establishes new standards for computing and presenting earnings
per share. SFAS No. 128 will be effective for interim and annual financial
statements issued after December 15, 1997. The Company does not believe that
the adoption of SFAS No. 128 will have a material impact on the Company's
reported earnings per share.
(5) EXTRAORDINARY ITEM
The extraordinary item in the nine months ended September 30, 1997
resulted from the write-off in the second quarter of 1997 of deferred
financing costs associated with the extinguishment of borrowings under the 1996
Credit Agreement prior to maturity 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 extinguishment of
borrowings under the 1996 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 the nine months ended September 30, 1996 resulted from the write-off in the
first quarter of 1996 of deferred financing costs associated with the
extinguishment of borrowings under the 1995 Credit Agreement prior to maturity
with the net proceeds from the Offering and proceeds from the 1996 Credit
Agreement.
(6) BUSINESS CONSOLIDATIONS AND OTHER, NET
In the third quarter of 1997, the Company recognized a net gain of
approximately $1.0 on the sale of a factory in one of its International
operations. Costs incurred in connection with the rationalization of this
facility were recorded in the first quarter of 1997 when the building was
determined to be held for sale. In the second quarter of 1997, the Company's
retail subsidiary incurred business consolidation costs, including severance
and other costs, in connection with the consolidation of certain warehouse,
distribution and headquarter operations related to the merger with The Cosmetic
Center, Inc. (See Note 7). In addition, in the first and second quarters of
1997, the Company incurred business consolidation costs in connection with the
implementation of its business strategy to rationalize factory operations,
primarily including severance and other related costs in certain International
operations. These business consolidation costs were partially offset by an
approximately $12.7 settlement of a claim in the second quarter of 1997. As of
September 30, 1997, the balance of the business consolidation liability was
approximately $18.3, which amount is included in accrued expenses and other and
other long-term liabilities.
(7) ACQUISITION
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 "Merger") with CCI
(subsequent to the Merger, "Cosmetic Center") surviving the Merger. In the
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 the outstanding common stock. Accordingly, the Merger
was accounted for as a reverse acquisition using the purchase method of
accounting, so that PFC is considered the acquiring entity for accounting
purposes even though Cosmetic Center is the surviving legal entity. The deemed
purchase price paid for the acquisition was approximately $27.9 and the
goodwill associated with the Merger was approximately $10.5. The Company
recognized a gain of $6.0 resulting from the sale of subsidiary stock pursuant
to the Merger. The results of the Company for the period ended September 30,
1997 include the results of operations of Cosmetic Center since the effective
date of the Merger.
6
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The results of Cosmetic Center as reflected in the accounts of the
Company (which, using the Company's basis of presentation, includes buying,
occupancy and distribution costs in selling, general & administrative ("S,G&A'')
expenses) are as follows (for periods prior to April 25, 1997, only PFC's
results are reported):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- -----------------------------------
1997 1996 1997 1996
---------------- ---------------- ---------------- -------------
Net sales.............................. $ 42.5 $ 20.0 $ 89.0 $ 49.0
Gross profit........................... 15.9 10.3 35.4 24.6
Business consolidation costs........... - - (4.0) -
Operating (loss) income................ (0.9) 0.9 (9.6) (2.7)
The following represents certain summary pro forma information as if
the Merger had occurred at January 1, 1997. The summary pro forma information
below combines the actual results of the Company (including Cosmetic Center
after the Merger) and the results of CCI and PFC prior to the Merger and
reflects increased amortization of goodwill, increased interest expense and
certain income tax adjustments related to the Merger that would have been
incurred had the Merger occurred on January 1, 1997. The summary pro forma
information is not necessarily indicative of the results of operations of the
Company had the Merger occurred at January 1, 1997, nor is it necessarily
indicative of future results.
Nine Months
Ended
September 30,
1997
-----------------------
Net sales..................................................... $ 1,724.4
Operating income.............................................. 130.1
Income before extraordinary item.............................. $ 14.0
================
Income before extraordinary item per common share............. $ 0.27
================
(8) NEW 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 to repay the
loans outstanding under the 1996 Credit Agreement and to redeem the Sinking
Fund Debentures and will be used for general corporate purposes or, in the case
of the Acquisition Facility (as defined herein), the financing of acquisitions.
The Credit Agreement is comprised of five senior secured facilities: a
$115.0 initial term loan facility (the "Term Loan Facility"), an $85.0 deferred
draw term loan facility (the "Deferred Draw Term Loan Facility" and, together
with the Term Loan Facility, 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 Facility, the Deferred Draw Term
Loan Facility, 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 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
7
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
and bankers' acceptances denominated in U.S. dollars and other currencies
(the "Local Loans"). At September 30, 1997 Products Corporation had
approximately $200.0 outstanding under the Term Loan Facilities, $217.4
outstanding under the Multi-Currency Facility, $36.5 outstanding under the
Acquisition Facility and $34.3 outstanding under the Special LC Facility.
The Credit Facilities (other than loans in foreign currencies) bear
interest as of September 30, 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 September 30, 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 September 30, 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. 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 Revlon Holdings Inc. ("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 and the Multi-Currency Facility
were 7.1% and 6.3% per annum, respectively, as of September 30, 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 "Yen 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
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,
8
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
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.
(9) COSMETIC CENTER CREDIT FACILITY
In connection with the 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 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 secured 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 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 September 30,
1997, Cosmetic Center had approximately $37.4 outstanding under the Cosmetic
Center Facility.
(10) CAPITAL CONTRIBUTION
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 "Blass Business"). 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. For the three months ended September 30, 1997 and 1996, the Blass
Business' net sales were $0.6 and $0.6, respectively, and income (loss) before
income taxes was $0.3 and ($0.1), respectively. For the nine months ended
September 30, 1997 and 1996, the Blass Business' net sales were $1.2 and $1.5,
respectively, and income before income taxes was $0.4 and $0.0, respectively.
9
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
OVERVIEW
The Company operates in a single business segment with many different
products, which include an extensive array of glamorous, exciting and
innovative cosmetics and skin care, fragrance and personal care products, and
professional products, consisting of hair and nail care products principally
for use in and resale by professional salons. In addition, the Company also
operates retail and outlet stores and 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.
RESULTS OF OPERATIONS
The following table sets forth the Company's net sales by operation
for the three months and nine months ended September 30, 1997 and 1996,
respectively:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- -------------------------------
Net sales: 1997 * 1996 * 1997 * 1996 *
---------------- ---------------- ---------------- -------------
United States.............................. $ 389.0 $ 345.3 $ 1,015.8 $ 899.2
International.............................. 234.5 226.4 673.0 655.6
---------------- ---------------- ---------------- -------------
$ 623.5 $ 571.7 $ 1,688.8 $ 1,554.8
================ ================ ================ =============
The following sets forth certain statements of operations data as a
percentage of net sales for the three months and nine months ended September
30, 1997 and 1996, respectively:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- ----------------------------------
1997 * 1996 * 1997 * 1996 *
---------------- ---------------- ---------------- ------------
Cost of sales........................... 34.8 % 33.8 % 34.7 % 33.3 %
Gross profit............................ 65.2 66.2 65.3 66.7
Selling, general and administrative
expenses............................ 53.9 54.8 57.0 58.8
Business consolidation costs and other,
net................................. (0.1) - 0.5 -
Operating income........................ 11.4 11.4 7.8 7.9
* The results of Cosmetic Center, which are included in the Company's results,
for the three months ended September 30, 1997 and 1996 were as follows: Net
sales of $42.5 and $20.0, cost of sales of $26.6 and $9.7, S,G&A expenses of
$16.8 and $9.4 and operating (loss) income of ($0.9) and $0.9. The results of
Cosmetic Center, which are included in the Company's results, for the nine
months ended September 30, 1997 and 1996 were as follows: Net sales of $89.0
and $49.0, cost of sales of $53.6 and $24.4, S,G&A expenses of $41.0 and
$27.3 and operating losses of $9.6 and $2.7. The 1997 period includes business
consolidation costs of $4.0.
Excluding the results of Cosmetic Center, which are included in the
Company's results, for the three months ended September 30, 1997 and 1996, the
above percentages would have been, respectively: cost of sales of 32.8% and
33.3%, gross profit of 67.2% and 66.7%, S,G&A expenses of 55.0% and 55.1%,
business consolidation costs and other, net, of (0.2)% and 0% and operating
income of 12.4% and 11.6%. Excluding the results of Cosmetic Center, which are
included in the Company's results, for the nine months ended September 30, 1997
and 1996, the above percentages would have been, respectively: cost of sales
of 33.2% and 32.7%, gross profit of 66.8% and 67.3%, S,G&A, expenses of 57.6%
and 58.9%, business consolidation costs and other, net, of 0.3% and 0% and
operating income of 8.9% and 8.4%.
10
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
Net sales
Net sales were $623.5 and $571.7 for the third quarter of 1997 and
1996, respectively, an increase of $51.8, or 9.1% or 11.5% on a constant U.S.
dollar basis, and were $1,688.8 and $1,554.8 for the nine months ended
September 30, 1997 and 1996, respectively, an increase of $134.0, or 8.6% or
10.8% on a constant U.S. dollar basis, primarily as a result of successful new
product introductions worldwide, increased demand in the United States, the
impact of net sales of Cosmetic Center after April 25, 1997, 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
$389.0 for the third quarter of 1997 from $345.3 for the third quarter of 1996,
an increase of $43.7, or 12.7%, and increased to $1,015.8 for the nine months
ended September 30, 1997 from $899.2 for the nine months ended September 30,
1996, an increase of $116.6, or 13.0%. Net sales improved for the third quarter
and nine months ended September 30, 1997, primarily as a result of continued
consumer acceptance of new product offerings, general improvement in consumer
demand for the Company's color cosmetics and the inclusion of incremental net
sales from Cosmetic Center after the Merger on April 25, 1997. Downward trends
in the mass fragrance industry prompted the Company to de-emphasize new
fragrance products and to continue its strategy of growing its core cosmetics
business. Accordingly, the Company realized lower than expected sales and
profits from its fragrance portfolio, which will continue in the fourth
quarter. Even though consumer sell-through for the REVLON and ALMAY brands,
as described below in more detail, has increased by double- digit growth
rates, the Company's sales to its customers have been and may continue to
be impacted by retail inventory balancing and reductions resulting from
consolidation in the chain drugstore industry in the U.S. As a result, the
ULTIMA II distribution expansion into select drug stores also has been slower
than expected and is delayed into the second half of 1998. However, results
have been successful in those drug store doors which have begun offering the
ULTIMA II franchise. Net sales comparisons were also impacted by the launch in
the third quarter of 1996 of a professional product line which was not repeated
this year and by lower sales at Cosmetic Center due to post Merger-related
disruptions and the UPS strike in August 1997.
Revlon brand color cosmetics continued as the number one brand in
dollar market share in the self-select distribution channel with a share of
21.8% for the nine-months ended September 30, 1997 versus 21.6% for the
comparable 1996 period. 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 the third quarter and nine months
ended September 30, 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, launches of products in the
ALMAY AMAZING collection, including lip makeup, eye makeup, face makeup and
concealer and ALMAY TIME-OFF REVITALIZER.
International. The International operation's net sales increased to
$234.5 for the third quarter of 1997 from $226.4 for the third quarter of 1996,
an increase of $8.1, or 3.6% on a reported basis or 9.7% on a constant U.S.
dollar basis, and increased to $673.0 for the nine months ended September 30,
1997 from $655.6 for the nine months ended September 30, 1996, an increase of
$17.4, or 2.7% on a reported basis or 7.9% on a constant U.S. dollar basis. Net
sales improved for the third quarter and nine months ended September 30, 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, partially offset by sales
lost in exiting the unprofitable demonstrator-assisted channel in Japan, less
favorable 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 third quarter
of 1997. The International operation's sales are divided into the following
geographic areas: Europe, which is comprised of Europe, the Middle East and
Africa (in which net sales increased by 1.4% to $99.4 for the third quarter of
1997 as compared to the third quarter of 1996, and increased by
11
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
2.1% to $298.9 for the nine months ended September 30, 1997 as compared to
the nine months ended September 30, 1996); the Western Hemisphere, which
is comprised of Canada, Mexico, Central America, South America and Puerto
Rico (in which net sales increased by 15.5% to $90.9 for the third quarter of
1997 as compared to the third quarter of 1996, and increased by 11.1% to $244.5
for the nine months ended September 30, 1997 as compared to the nine months
ended September 30, 1996); and the Far East (in which net sales decreased by
11.1% to $44.2 for the third quarter of 1997 as compared to the third quarter
of 1996, and decreased by 9.2% to $129.6 for the nine months ended September
30, 1997 as compared to the nine months ended September 30, 1996). 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 the third quarter and nine months ended
September 30, 1997 would have been at approximately the same level as those in
the third quarter and nine months ended September 30, 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 (loss) before taxes were $30.2, $1.8 and
($0.3), respectively, for the third quarter of 1997 compared to $31.9, $6.0 and
$4.6, respectively, for the third quarter of 1996 and were $95.9, $10.9 and
$4.6, respectively, for the nine months ended September 30, 1997 compared to
$96.7, $19.7 and $15.9, respectively, for the nine months ended September 30,
1996. Results of operations in Brazil for the 1997 periods were adversely
impacted by competitive activity affecting the Company's toiletries business.
In Mexico, operating results for the nine months ended September 30, 1997 and
1996 were adversely affected by the continued weakness of the Mexican economy.
Cost of sales
As a percentage of net sales, cost of sales was 34.8% for the third
quarter of 1997 compared to 33.8% for the third quarter of 1996, and 34.7% for
the nine months ended September 30, 1997 compared to 33.3% for the nine months
ended September 30, 1996, respectively. The increase in cost of sales as a
percentage of net sales is due primarily to factors which enhanced overall
operating income including increased sales of the Company's higher cost
enhanced-performance technology-based products, increased export sales and
increased sales of lower margin products (such as those products sold by
Cosmetic Center), and other factors including the effect of weaker local
currencies on 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.
Excluding the results of Cosmetic Center, as a percentage of net sales, cost of
sales would have been 32.8% for the third quarter of 1997 compared to 33.3% for
the third quarter of 1996, and 33.2% for the nine months ended September 30,
1997 compared to 32.7% for the nine months ended September 30, 1996,
respectively.
S,G&A expenses
As a percentage of net sales, S,G&A expenses were 53.9% for the third
quarter of 1997, an improvement from 54.8% for the third quarter of 1996, and
57.0% for the nine months ended September 30, 1997, an improvement from 58.8%
for the nine months ended September 30, 1996. S,G&A expenses other than
advertising expense, as a percentage of net sales, improved to 37.2% for the
third quarter of 1997 compared with 37.9% for the third quarter of 1996 and
improved to 40.7% for the nine months ended September 30, 1997 compared with
42.5% for the nine months ended September 30, 1996, primarily as a result of
reduced general and administrative expenses, improved productivity and lower
distribution costs for the nine months ended September 30, 1997 compared with
the nine months ended September 30, 1996. In accordance with its business
strategy, the Company increased advertising and consumer-directed promotions in
the third quarter and nine months ended September 30, 1997 compared with the
comparable 1996 periods 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 expense increased by 8.1% to $104.5, or 16.8% of net sales, for the
third quarter of 1997 from $96.7, or 16.9% of net sales, for the third quarter
of 1996 and increased by 8.8% to $275.9, or 16.3% of net sales, for the nine
months ended September 30, 1997 from $253.5, or 16.3% of net sales, for the
nine months ended September 30, 1996.
12
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
Business consolidation costs and other, net
In the third quarter of 1997, the Company recognized a net gain of
approximately $1.0 on the sale of a factory in one of its International
operations. Costs incurred in connection with the rationalization of this
facility were recorded in the first quarter of 1997 when the building was
determined to be held for sale. In the second quarter of 1997, Cosmetic Center
incurred business consolidation costs, including severance and other costs in
connection with the Merger and the consolidation of certain warehouse,
distribution and headquarter operations. In addition, in the first and second
quarters of 1997, the Company incurred business consolidation costs in
connection with the implementation of its business strategy to rationalize
factory operations, primarily including severance and other related costs in
certain International operations. These business consolidation costs were
partially offset by 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. A facility
relating to the International operation is held for sale, and the Company
believes it may realize a gain upon any such sale based upon current estimated
market values.
Operating income
As a result of the foregoing, operating income increased by $6.3, or
9.7%, to $71.2 for the third quarter of 1997 from $64.9 for the third quarter
of 1996 and increased by $8.3, or 6.7%, to $132.2 for the nine months ended
September 30, 1997 from $123.9 for the nine months ended September 30, 1996.
Other expenses/income
Interest expense was $33.8 for the third quarter of 1997 compared to
$34.0 for the third quarter of 1996 and $100.7 for the nine months ended
September 30, 1997 compared to $100.0 for the nine months ended September 30,
1996. For the nine months ended September 30, 1997 the slight increase in
interest expense is due to higher average outstanding borrowings partially
offset by lower interest rates.
Gain on sale of subsidiary stock of $6.0 was recognized in the second
quarter of 1997 as a result of the Merger.
Foreign currency losses, net, were $2.4 for the third quarter of 1997
compared to $1.9 for the third quarter of 1996 and $5.2 for the nine months
ended September 30, 1997 compared to $5.7 for the nine months ended September
30, 1996. The increase in foreign currency losses in the third quarter of 1997
as compared to the third quarter of 1996 resulted primarily from the
strengthening of the U.S. dollar versus certain currencies in the Far East. The
reduction for the nine months ended September 30, 1997 as compared to the
corresponding 1996 period resulted primarily from the stabilization of the
Venezuelan bolivar versus the devaluation which occurred during the nine months
ended September 30, 1996 partially offset by the strengthening of the U.S.
dollar versus certain currencies in the Far East and most European currencies.
Provision for income taxes
The provision for income taxes was $0.2 and $5.8 for the third quarter
of 1997 and 1996, respectively, and $9.2 and $18.7 for the nine months ended
September 30, 1997 and 1996, respectively. The decrease was primarily
attributable to the implementation of tax planning involving 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 the nine months ended September 30, 1997
resulted from the write-off in the second quarter of 1997 of deferred
financing costs associated with the extinguishment of borrowings under the 1996
Credit Agreement prior to maturity with proceeds from the Credit Agreement, and
costs of approximately $6.3 in connection with the redemption of Products
Corporation's Sinking Fund Debentures. The extraordinary item in the nine
months ended September 30, 1996 resulted from the write-off in the first
quarter of 1996 of deferred financing costs associated with the extinguishment
of borrowings under the 1995 Credit Agreement prior to maturity with the net
proceeds from the Offering and proceeds from the 1996 Credit Agreement.
13
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities was $113.8 and $148.0 for the
nine months ended September 30, 1997 and 1996, respectively. The decrease in
net cash used for operating activities for the nine months ended September 30,
1997 compared with the nine months ended September 30, 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 $82.1 and $39.8 for the
nine months ended September 30, 1997 and 1996, respectively. Net cash used for
investing activities for both periods consisted primarily of capital
expenditures and in the 1997 period included cash paid in connection with the
cash election pursuant to the Cosmetic Center Merger and the acquisition in the
third quarter of a South American hair care manufacturer and its distributor.
Net cash provided by financing activities was $198.3 and $173.1 for
the nine months ended September 30, 1997 and 1996, respectively. Net cash
provided by financing activities for the nine months ended September 30, 1997
included cash drawn under the 1996 Credit Agreement, the Credit Agreement and
Cosmetic Center's Facility, partially offset by the repayment of borrowings
under the 1996 Credit Agreement, the payment of fees and expenses related to
the Credit Agreement, the repayment of borrowings under the Yen Credit
Agreement, the repayment of borrowings under CCI's former credit agreement and
the redemption of the Sinking Fund Debentures. Net cash provided by financing
activities for the nine months ended September 30, 1996 included the net
proceeds from the Offering, 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 will be used for general corporate purposes or,
in the case of the Acquisition Facility (as defined herein), the financing of
acquisitions.
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 September 30, 1997 (approximately $35.8 U.S. dollar equivalent as
of September 30, 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 $4.5 U.S. dollar equivalent as of September 30, 1997) is due in
each of March 1998, 1999 and 2000 and [Yen]2.7 billion (approximately $22.3
U.S. dollar equivalent as of September 30, 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 on July 15, 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.
Products Corporation borrows funds from its affiliates from time to
time to supplement its working capital borrowings at interest rates more
favorable to Products Corporation than interest rates under the Credit
Agreement. No such borrowings were outstanding as of September 30, 1997.
The Company's principal sources of funds are expected to be cash flow
generated from operations and borrowings under the Credit Agreement and other
existing working capital lines. Various debt instruments and agreements contain
certain provisions that by their terms limit the Company's and/or its
subsidiaries'ability to, among other
14
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
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.
The Company estimates that capital expenditures for 1997 will be
approximately $55, including approximately $10 for upgrades to the Company's
management information systems. Pursuant to a tax sharing agreement, Revlon,
Inc. may be required to make tax sharing payments to Mafco Holdings Inc. as if
Revlon, Inc. were filing separate income tax returns, except that no payments
are required by Revlon, Inc. if and to the extent that Products Corporation is
prohibited under the Credit Agreement from making tax sharing payments to
Revlon, Inc. The Credit Agreement prohibits Products Corporation from making
any cash tax sharing payments other than in respect of state and local income
taxes. Revlon, Inc. anticipates that, as a result of net operating tax losses
and prohibitions under the Credit Agreement, no federal tax payments or
payments in lieu of taxes pursuant to the tax sharing agreement will be made
for 1997.
As of September 30, 1997, Products Corporation was party to a series
of interest rate swap agreements (which expire at various dates through
December 2001) 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 (5.781% per annum at October 28, 1997) to its
counterparties and the counterparties agreed to pay on such notional amounts
fixed interest rates averaging approximately 6.03% per annum. Products
Corporation entered into these agreements in 1993 and 1994 (and in the first
quarter of 1996 extended a portion equal to a notional amount of $125.0 through
December 2001) to convert the interest rate on $225.0 of fixed-rate
indebtedness to a variable rate. If Products Corporation had terminated these
agreements, which Products Corporation considers to be held for other than
trading purposes, on September 30, 1997, a loss of approximately $1.8 would
have been realized. Certain other swap agreements were terminated in 1993 for a
gain of $14.0. The amortization of the realized gain on these agreements for
the nine months ended September 30, 1997 was approximately $2.4. The remaining
unamortized gain, which is being amortized over the original lives of the
agreements, is $0.7 as of September 30, 1997. Although cash flow from the
presently outstanding agreements was slightly positive for the nine months
ended September 30, 1997, future positive or negative cash flows from these
agreements will depend upon the trend of short-term interest rates during the
remaining lives of such agreements. Based on current interest rate levels,
Products Corporation expects to have break even cash flow from these agreements
in 1997, although no assurances can be given that short-term interest rates
will not rise above current levels. In the event of nonperformance by the
counterparties at any time during the remaining lives of the agreements,
Products Corporation could lose some or all of any possible future positive
cash flows from these agreements. However, Products Corporation does not
anticipate nonperformance by such counterparties, although no assurances can be
given.
Products Corporation enters into forward foreign exchange contracts
from time to time to hedge certain cash flows denominated in foreign
currencies. At September 30, 1997, Products Corporation had forward foreign
exchange contracts denominated in various currencies of approximately $9.8
(U.S. dollar equivalent as of September 30, 1997). If Products Corporation had
terminated these contracts on September 30, 1997, no material gain or loss
would have been realized.
Based upon the Company's current level of operations and anticipated
growth in net sales and earnings as a result of its business strategy, the
Company expects that cash flows from operations and funds from currently
available 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.
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,
seeking capital contributions or loans from affiliates of the Company or
issuing additional shares of capital stock of Revlon, Inc. Revlon, Inc., as a
holding company, will be dependent on the earnings and cash flow of, and
dividends and distributions from Products Corporation to pay its expenses and
to pay any cash dividends or distributions on the Class A Common Stock that may
be authorized by the Board of Directors of Revlon, Inc. The terms of the Credit
Agreement, the Senior Subordinated Notes, the 1999 Senior Notes and the Senior
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
15
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
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. 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 quarterly report on Form 10-Q for the quarter ended September 30,
1997 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 expectation and
estimates as to introduction of new products, future financial performance,
including growth in net sales and earnings, cash flows from operations,
improved results from business consolidations, the possibility of gains from
dispositions of facilities held for sale, capital expenditures and the
availability of funds from currently available credit facilities and
refinancings of indebtedness, capital contributions or loans from affiliates,
the sale of assets or additional shares of Revlon, Inc. Readers are urged to
consider statements which use the terms "believes," "does not believe," "no
reason to believe," "expects," "plans," "intends," "estimates," "anticipated"
or "anticipates" to be uncertain and forward-looking. 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 and reduced consumer
demand for the Company's fragrances; (iii) difficulties or delays in the
Company's continued expansion into the self-select distribution channel and
development of new markets and difficulties or delays in introducing ULTIMA II
into the self-select distribution channel; (iv) unanticipated costs or
difficulties or delays in completing projects associated with the Company's
strategy to improve operating efficiencies, including information system
upgrades; (v) the inability to refinance indebtedness, secure capital
contributions or loans from affiliates or sell assets or additional shares of
Revlon, Inc.; (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) difficulties or delays in realizing improved
results from business consolidations and in realizing gains from the sale of
certain facilities held for sale; and (ix) combinations among significant
customers or the loss, insolvency or failure to pay its debts by a significant
customer or customers. The Company assumes no responsibility to update forward-
looking information contained herein.
16
REVLON, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
EFFECT OF NEW ACCOUNTING STANDARD
In March 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share," which establishes new standards for computing
and presenting earnings per share. SFAS No. 128 will be effective for interim
and annual financial statements issued after December 15, 1997. The Company
does not believe that the adoption of SFAS No. 128 will have a material impact
on the Company's reported earnings per share.
PART II - OTHER INFORMATION
(a) EXHIBITS - NONE
- -----------------
(b) REPORTS ON FORM 8-K - NONE
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REVLON, INC.
-----------
Registrant
By:/s/William J. Fox By:/s/Lawrence E. Kreider
- ------------------------------------ --------------------------------------
William J. Fox Lawrence E. Kreider
Senior Executive Vice President Senior Vice President, Controller
and Chief Financial Officer and Chief Accounting Officer
Dated: November 13, 1997
17
5
1,000
9-MOS
DEC-31-1997
JAN-01-1997
SEP-30-1997
39,700
0
496,500
27,100
379,100
964,200
607,300
222,400
1,830,500
543,600
1,537,900
0
54,600
500
(561,900)
1,830,500
1,688,800
1,688,800
585,300
585,300
0
2,600
100,700
26,300
9,200
17,100
0
(14,900)
0
2,200
0.04
0
