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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
- --- OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
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 33-59650
REVLON CONSUMER PRODUCTS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3662953
(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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OR 12(g) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
-----
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT IS NOT APPLICABLE AS THERE IS NO PUBLIC MARKET THEREFOR. ALL
SHARES OF COMMON STOCK ARE HELD BY ONE AFFILIATE. THE NUMBER OF OUTSTANDING
SHARES OF THE REGISTRANT'S COMMON STOCK, AS OF DECEMBER 31, 2001, WAS 1,000.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
Revlon Consumer Products Corporation ("Products Corporation" and
together with its subsidiaries, the "Company") manufactures, markets and sells
an extensive array of cosmetics and skin care, fragrances and personal care
products. REVLON is one of the world's best-known names in cosmetics and is a
leading mass-market cosmetics brand. The Company believes that its global brand
name recognition, product quality and marketing experience have enabled it to
create one of the strongest consumer brand franchises in the world. The
Company's products are marketed under such well-known brand names as REVLON,
COLORSTAY, REVLON AGE DEFYING, and SKINLIGHTS, as well as ALMAY and ULTIMA II in
cosmetics; ALMAY Kinetin, VITAMIN C ABSOLUTES, ETERNA 27, ULTIMA II and JEANNE
GATINEAU in skin care; CHARLIE and FIRE & ICE in fragrances; and HIGH DIMENSION,
FLEX, MITCHUM, COLORSILK, JEAN NATE AND BOZZANO in personal care products. To
further strengthen its consumer brand franchises, the Company markets each core
brand with a distinct and uniform global image, including packaging and
advertising, while retaining the flexibility to tailor products to local and
regional preferences.
The Company was founded by Charles Revson, who revolutionized the
cosmetics industry by introducing nail enamels matched to lipsticks in fashion
colors over 70 years ago. Today, the Company has the number three position in
the color cosmetics category in the U.S. mass-market distribution channel and
leading market positions in a number of its principal product categories,
including lip, face makeup and nail enamel categories. The Company also has
leading market positions in several product categories in certain markets
outside of the United States, including in Australia, Canada, Mexico and South
Africa. The Company's products are sold in more than 100 countries across five
continents.
All United States market share and market position data herein for the
Company's brands are based upon retail dollar sales, which are derived from
ACNielsen data. ACNielsen measures retail sales volume of products sold in the
United States mass-market distribution channel. Such data represent ACNielsen's
estimates based upon data gathered by ACNielsen from market samples and are
therefore subject to some degree of variance. Additionally, as of August 4,
2001, AC Nielsen's data does not reflect sales volume from Wal-Mart, Inc.
RECENT DEVELOPMENTS
On November 26, 2001 Products Corporation issued and sold $363 million
in aggregate principal amount of 12% Senior Secured Notes due 2005 (the "12%
Notes") at 96.569%, in a private placement, receiving gross proceeds of $350.5
million.
On November 30, 2001 Products Corporation entered into a new credit
agreement (the "2001 Credit Agreement"). The 2001 Credit Agreement provides up
to $250.0 million in credit facilities comprised of $117.9 million in a term
loan facility and $132.1 million in a multi-currency revolving credit facility
(the issuance of the 12% Notes and the 2001 Credit Agreement are referred to
herein as the "2001 Refinancing Transactions"). The proceeds from the offering
of the 12% Notes along with borrowings under the 2001 Credit Agreement were used
to repay all amounts outstanding under the 1997 Credit Agreement (as hereinafter
defined) and to pay fees and expenses incurred in connection with the 2001
Refinancing Transactions, and the balance is available for general corporate
purposes. On or before February 25, 2002, Products Corporation is required to
file a registration statement with the Securities and Exchange Commission (the
"Commission") with respect to an offer to exchange the 12% Notes for registered
notes with substantially the same terms (the "Exchange Offer").
Products Corporation's obligations under the 12% Notes are secured on a
second-priority basis by substantially the same collateral that secures the 2001
Credit Agreement on a first-priority basis, which includes, with certain limited
exceptions, Products Corporation's capital stock, substantially all of Products
Corporation's non-real property assets in the United States, Products
Corporation's facility in Oxford, North Carolina, the capital stock of the
Company's domestic subsidiaries and 66% of the capital stock of Products
Corporation's first-tier foreign subsidiaries.
2
Effective February 14, 2002, Jeffrey M. Nugent, the Company's former
President and Chief Executive Officer, resigned from employment with the
Company. On February 19, 2002, the Company announced its appointment of Jack L.
Stahl as its President and Chief Executive Officer.
PRODUCTS
The Company manufactures and markets a variety of products worldwide.
The following table sets forth the Company's principal brands and certain
selected products.
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PERSONAL
BRAND COSMETICS SKIN CARE FRAGRANCES CARE
PRODUCTS
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REVLON Revlon Eterna 27 Charlie High Dimension
ColorStay Vitamin C Absolutes Ciara Colorsilk
Revlon Age Defying Revlon Absolutes Fire & Ice Frost & Glow
Super Lustrous Absolutely Fabulous ColorStay
Moon Drops Flex
New Complexion Outrageous
Absolutely Fabulous Aquamarine
Line & Shine Mitchum
Skinlights Lady Mitchum
Super Top Speed Hi & Dri
Shine Control Mattifying Jean Nate
High Dimension Revlon Beauty
Illuminance Tools
Wet/Dry
Everylash
StreetWear
ALMAY Almay Almay Kinetin Almay
Time-Off Almay MilkPlus
Amazing
One Coat
Skin Stays Clean
Beyond Powder
Organic Fluoride Plus
ULTIMA II Ultima II Glowtion U II Sheer Scent
Beautiful Nutrient Vital Radiance Ultimately U
Wonderwear CHR
Full Moisture LightCaptor-C
Glowtion
Pucker & Pout
Ultimate Edition
SIGNIFICANT Jeanne Gatineau Jeanne Gatineau Bozzano
REGIONAL BRANDS Cutex Juvena
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Cosmetics and Skin Care. The Company sells a broad range of cosmetics
and skin care products designed to fulfill specifically identified consumer
needs, principally priced in the upper range of the mass-market distribution
channel, including lip makeup, nail color and nail care products, eye and face
makeup and skin care products such as lotions, cleansers, creams, toners and
moisturizers. Many of the Company's products incorporate patented,
patent-pending or proprietary technology.
3
The Company markets several different lines of REVLON lip makeup (which
includes lipstick, lip gloss and liner). The Company's COLORSTAY lipcolor, which
uses patented transfer-resistant technology that provides long wear, is produced
in approximately 38 shades. COLORSTAY LIQUID LIP and COLORSTAY LIP SHINE, a
patented lip technology introduced in 1999, is produced in approximately 64
shades and builds on the strengths of the COLORSTAY foundation by offering
long-wearing benefits in a new product form, which enhances comfort and shine.
SUPER LUSTROUS lipstick is produced in approximately 70 shades. MOON DROPS, a
moisturizing lipstick, is produced in approximately 30 shades. LINE & SHINE
utilizes an innovative product form, combining lipliner and lip gloss in one
package, and is produced in approximately 8 shades. REVLON MOISTURESTAY uses
patented technology to moisturize the lips even after the color wears off, and
is produced in approximately 40 shades. In 2001, the Company launched ABSOLUTELY
FABULOUS Lipcream, a new premium line of emollient-rich lip color which is
produced in 30 shades.
The Company's nail color and nail care lines include enamels, cuticle
preparations and enamel removers. The Company's flagship REVLON nail enamel is
produced in approximately 64 shades and uses a patented formula that provides
consumers with improved wear, application, shine and gloss in a toluene-free and
formaldehyde-free formula. In 2001, the Company launched SUPER TOP SPEED nail
enamel, currently available in approximately 48 shades, containing a patented
speed drying polymer formula which sets in 60 seconds. REVLON has the number two
position in nail enamel in the United States mass-market distribution channel.
The Company also sells CUTEX nail polish remover and nail care products in
certain countries outside the United States.
The Company sells face makeup, including foundation, powder, blush and
concealers, under such REVLON brand names as REVLON AGE DEFYING, which is
targeted for women in the over 35 age bracket; COLORSTAY, which uses patented
transfer-resistant technology that provides long wear and won't rub off
benefits; and NEW COMPLEXION, for consumers in the 18 to 34 age bracket. In
2001, the Company launched SKINLIGHTS skin brighteners, that brightens skin with
sheer washes of color, which created an entirely new category in color
cosmetics.
The Company's eye makeup products include mascaras, eyeliners, eye
shadows and brow color. COLORSTAY eyecolor, mascara and brow color, EVERYLASH
mascara, SOFTSTROKE eyeliners and REVLON WET/DRY eye shadows are targeted for
women in the 18 to 49 age bracket. In 2001, the Company launched ILLUMINANCE, an
eye shadow that "brightens up eyes", and HIGH DIMENSION mascara and eyeliners.
The Company's ALMAY brand consists of a complete line of
hypo-allergenic, dermatologist-tested, fragrance-free cosmetics and skin care
products targeted for consumers who want "a good, healthy for you,"
hypo-allergenic product. ALMAY products include lip makeup, nail color, eye and
face makeup and skin care products. The ALMAY brand flagship ONE COAT franchise
consists of lip makeup and eye makeup products including mascara and eye shadow.
The Company also sells Skin Stays Clean liquid and compact foundation makeup
with its patented "clean pore complex." The ALMAY AMAZING LASTING Collection
features long-wearing mascaras and foundations. In 2001, the Company launched
ALMAY Kinetin Skincare Advanced Anti-Aging Series featuring Kinetin, in a
patented technology.
The Company's STREETWEAR brand consists of a quality, value-priced line
of nail enamels, mascaras, lip and eye liners, lip glosses and body accessories
that are targeted for the young, beauty savvy consumer.
The Company's premium-priced cosmetics and skin care products are sold
under the ULTIMA II brand name, which is the Company's flagship premium-priced
brand sold throughout the world. ULTIMA II products include lip makeup, eye and
face makeup and skin care products including GLOWTION, a line of skin
brighteners that combines skin care and color; FULL MOISTURE foundation and
lipcolor, VITAL RADIANCE, CHR and LIGHTCAPTOR-C skin care products; the
BEAUTIFUL NUTRIENT collection, a complete line of nourishing makeup that
provides advanced nutrient protection against dryness; and WONDERWEAR. The
WONDERWEAR collection includes a long-wearing foundation that uses patented
technology, cheek and eyecolor products that use proprietary technology
providing long wear, and WONDERWEAR lipstick, which uses patented
transfer-resistant technology.
The Company sells Revlon Beauty Tools, which include nail and eye
grooming tools such as clippers, scissors, files, tweezers and eye lash curlers.
Revlon Beauty Tools are sold individually and in sets under the REVLON brand
name and are the number one brand in the United States mass-market distribution
channel.
4
The Company's skin care products, including moisturizers, are sold
under brand names including ETERNA 27, VITAMIN C ABSOLUTES, REVLON ABSOLUTES,
ALMAY Kinetin, ALMAY MILK-PLUS, and ULTIMA II GLOWTION, ULTIMA II CHR, ULTIMA II
LIGHTCAPTOR-C and VITAL RADIANCE. In addition, the Company sells skin care
products in international markets under internationally recognized brand names
and under various regional brands, including the Company's premium-priced JEANNE
GATINEAU. In 2001, the Company launched ALMAY Kinetin Skincare Advanced
Anti-Aging Series featuring Kinetin, a patented technology.
Personal Care Products. The Company sells a broad line of personal care
consumer products, which complements its core cosmetics lines and enables the
Company to meet the consumer's broader beauty care needs. In the mass-market
distribution channel, the Company sells haircare, antiperspirant and other
personal care products, including the FLEX and AQUAMARINE haircare lines
throughout the world and the BOZZANO and JUVENA brands in Brazil; as well as
COLORSILK, FROST & GLOW and COLORSTAY hair coloring lines throughout most of
the world; and the MITCHUM, LADY MITCHUM and HI & DRI antiperspirant brands
throughout the world. The Company also markets hypo-allergenic personal care
products, including moisturizers and antiperspirants, under the ALMAY brand. In
2001, the Company launched its HIGH DIMENSION hair color, a revolutionary
10-minute home permanent hair color, compared to many of our competitors' home
permanent hair color which require two to three times as long.
Fragrances. The Company sells a selection of moderately priced and
premium-priced fragrances, including perfumes, eau de toilettes, colognes and
body sprays. The Company's portfolio includes fragrances such as CHARLIE, CIARA,
FIRE & ICE and ABSOLUTELY FABULOUS.
MARKETING
The Company markets extensive consumer product lines at a range of
retail prices primarily through the mass-market distribution channel and outside
the U.S. also markets select premium lines through demonstrator-assisted
channels. Each line is distinctively positioned and is marketed globally with
consistently recognizable logos, packaging and advertising. The Company's
existing product lines are carefully tailored, and new product lines are
developed, to target specific consumer needs as measured by focus groups and
other market research techniques.
The Company undertook a comprehensive review of its advertising
strategy in late 2000 and early 2001. This resulted in a shift from the
historical use of an in-house advertising division to create and execute
advertising to the use of outside agencies to develop advertising campaigns for
a number of the Company's key new product launches and to bring new energy to
the REVLON and ALMAY brands, respectively. Additionally in 2002 the Company will
consolidate all of its advertising for the REVLON and ALMAY brands into a single
advertising agency. The Company believes that this shift to a leading outside
agency will increase the effectiveness and relevance of its worldwide
advertising, as well as result in more efficient media placement.
The Company uses print and television advertising and point-of-sale
merchandising, including displays and samples. The Company's marketing
emphasizes a uniform global image and product for its portfolio of core brands,
including REVLON, COLORSTAY, REVLON AGE DEFYING, ALMAY, ULTIMA II, FLEX,
CHARLIE, and MITCHUM. The Company coordinates advertising campaigns with
in-store promotional and other marketing activities. The Company develops
jointly with retailers carefully tailored advertising, point-of-purchase and
other focused marketing programs. The Company uses network and spot television
advertising, national cable advertising and print advertising in major general
interest, women's fashion and women's service magazines, as well as coupons,
magazine inserts and point-of-sale testers. The Company also uses cooperative
advertising programs with some retailers, supported by Company-paid or
Company-subsidized demonstrators, and coordinated in-store promotions and
displays.
The Company also has developed unique marketing materials such as the
"Revlon Report," a glossy, color pamphlet distributed on merchandising units,
which highlights seasonal and other fashion and color trends, describes the
Company's products that address those trends and contains coupons, rebate offers
and other promotional material to encourage consumers to try the Company's
products. Other marketing materials designed to introduce the Company's newest
products to consumers and encourage trial and purchase include point-of-sale
testers on the Company's display units that provide information about, and
permit consumers to test, the Company's products, thereby achieving the benefits
of an in-store demonstrator without the corresponding cost, magazine inserts
containing samples of the Company's newest products, trial-size products and
"shade samplers," which are collections of trial-size products in different
shades. Additionally, in 2001 the Company relaunched its website devoted to the
REVLON brand, www.revlon.com, and launched a new website for its ALMAY product
lineup, www.almay.com. Each of these websites
5
feature current product and promotional information for the REVLON and ALMAY
brands, respectively, and are updated regularly to stay current with the
Company's new product launches and other advertising and promotional campaigns.
NEW PRODUCT DEVELOPMENT AND RESEARCH AND DEVELOPMENT
The Company believes that it is an industry leader in the development
of innovative and technologically-advanced consumer products. The Company's
marketing and research and development groups identify consumer needs and shifts
in consumer preferences in order to develop new products, tailor line extensions
and promotions and redesign or reformulate existing products to satisfy such
needs or preferences. The Company's research and development group comprises
departments specialized in the technologies critical to the Company's various
product categories, as well as an advanced technology department that promotes
inter-departmental, cross-functional research on a wide range of technologies to
develop new and innovative products. The Company independently develops
substantially all of its new products.
As part of the Company's 2001 strategic plan, one of the Company's key
objectives was to reinvigorate the Company's brands by developing a pipeline of
innovative new products. In 2001, the Company created one of its most extensive
line-ups of new products since the development and introduction of COLORSTAY in
the mid-1990s, with major new product launches including: SKINLIGHTS skin
brighteners, that brightens skin with sheer washes of color, which created an
entirely new category in color cosmetics; ABSOLUTELY FABULOUS Lipcream, a new
premium line of emollient-rich lip color; and SUPER TOP SPEED nail enamel,
currently available in 48 shades, containing a patented speed drying polymer
formula which sets in 60 seconds. In 2001, the Company launched ILLUMINANCE, an
eye shadow that "brightens up eyes." Also in 2001, the Company launched ALMAY
Kinetin Skincare Advanced Anti-Aging Series featuring Kinetin, in a patented
technology, and HIGH DIMENSION hair color, a revolutionary 10-minute home
permanent hair color, compared to many of the Company's competitors' home
permanent hair color which require two to three times as long.
The Company believes that its Edison, New Jersey facility is one of the
most extensive cosmetics research and development facilities in the United
States. The scientists at the Edison facility are responsible for all of the
Company's new product research worldwide, performing research for new products,
ideas, concepts and packaging. The research and development group at the Edison
facility also performs extensive safety and quality tests on the Company's
products, including toxicology, microbiology and package testing. Additionally,
quality control testing is performed at each manufacturing facility.
As of December 31, 2001, the Company employed approximately 160 people
in its research and development activities, including specialists in
pharmacology, toxicology, chemistry, microbiology, engineering, biology,
dermatology and quality control. In 2001, 2000 and 1999, the Company spent
approximately $24.4 million, $27.3 million and $32.9 million, respectively, on
research and development activities.
MANUFACTURING AND RELATED OPERATIONS AND RAW MATERIALS
Since late 2000, the Company completed a number of measures related to
rationalizing its global manufacturing capacity, which are designed to
substantially reduce costs and increase operating efficiencies. The Company sold
or closed approximately 55% of its manufacturing and distribution facility
square footage, including:
o the sale of the Company's Phoenix, Arizona facility in May 2001
(a portion of which the Company leased back through the end of
2001);
o the shutdown of the Company's manufacturing facility in
Mississauga, Canada;
o the sale of the Company's manufacturing facility in Maesteg,
Wales (UK) in July 2001; as part of this sale the Company entered
into a long-term supply agreement with the purchaser pursuant to
which the purchaser manufactures and supplies to the Company
cosmetics and personal care products for sale throughout Europe;
o the closure of the Company's manufacturing facilities in
Auckland, New Zealand (which was completed in late 2000), which
manufacturing activities were consolidated into the Company's
facility in Australia; and
o the sale of the Company's manufacturing facility in Sao Paulo,
Brazil in July 2001 (which was completed as part of the sale of
the Company's Colorama brand); as part of this sale the purchaser
manufactures for the Company in Brazil.
6
In connection with the sale of the Phoenix facility and the closing of
the Canadian facility, the Company consolidated North American manufacturing
into its Oxford, North Carolina facility, which consolidation was completed in
late 2001. Revlon Beauty Tools for sale throughout the world are manufactured
and/or assembled at the Company's Irvington, New Jersey facility.
During 2001, cosmetics and personal care products also were produced at
the Company's facilities in Venezuela, Brazil (which was sold as noted above),
France and South Africa and personal care products in Mexico. The Company
continually reviews its manufacturing needs against its manufacturing capacity
for opportunities to reduce costs and produce more efficiently.
The Company purchases raw materials and components throughout the
world. The Company continuously pursues reductions in cost of goods through the
global sourcing of raw materials and components from qualified vendors,
utilizing its large purchasing capacity to maximize cost savings. The global
sourcing of raw materials and components from accredited vendors also ensures
the quality of the raw materials and components. The Company believes that
alternate sources of raw materials and components exist and does not anticipate
any significant shortages of, or difficulty in obtaining, such materials.
DISTRIBUTION
The Company's products are sold in more than 100 countries across five
continents. The Company's worldwide sales force had approximately 500 people as
of December 31, 2001, including a dedicated sales force for cosmetics, skin
care, fragrance and personal care products in the mass-market distribution
channel in the U.S. In addition, the Company utilizes sales representatives and
independent distributors to serve specialized markets and related distribution
channels.
United States and Canada. Net sales in the United States and Canada
accounted for approximately 68% of the Company's 2001 net sales, a majority of
which were made in the mass-market distribution channel. The Company also sells
a broad range of consumer products to United States Government military
exchanges and commissaries. The Company licenses its trademarks to select
manufacturers for products that the Company believes have the potential to
extend the Company's brand names and image. As of December 31, 2001, 11 licenses
were in effect relating to 14 product categories to be marketed principally in
the mass-market distribution channel. Pursuant to such licenses, the Company
retains strict control over product design and development, product quality,
advertising and use of its trademarks. These licensing arrangements offer
opportunities for the Company to generate revenues and cash flow through
royalties.
As part of its strategy to increase consumption of the Company's
products at retail, the Company has increased the number of retail merchandisers
who stock and maintain the Company's point of sale retail displays to insure
high selling SKUs are in stock and to insure the optimal presentation of the
Company's product in retail outlets. Additionally, the Company has upgraded the
technology available to its sales force to provide real-time information
regarding inventory levels and other relevant information.
The Company also intends to update its retail presence and is
evaluating and testing in retail stores a new merchandising wall that is
designed to help drive impulse purchases by consumers. The Company also intends
to update the image of the REVLON brand through the introduction of new graphics
and package designs.
International. Net sales outside the United States and Canada accounted
for approximately 32% of the Company's 2001 net sales. The ten largest countries
in terms of these sales, which include the United Kingdom, Mexico, Australia,
Brazil, France, South Africa, Venezuela, Hong Kong, Argentina and Italy,
accounted for approximately 25% of the Company's net sales in 2001. The Company
distributes its products through drug stores/chemists, hypermarkets/mass volume
retailers and variety stores. The Company also distributes outside the United
States through department stores and specialty stores such as perfumeries. At
December 31, 2001, the Company actively sold its products through wholly-owned
subsidiaries established in 20 countries outside of the United States and
through a large number of distributors and licensees elsewhere around the world.
7
CUSTOMERS
The Company's principal customers include large mass volume retailers
and chain drug stores, including such well-known retailers as Wal-Mart, Target,
Kmart, Walgreen, Rite Aid, CVS, Eckerd, Albertsons Drugs and Longs in the United
States, Boots in the United Kingdom, and Wal-Mart internationally. Wal-Mart and
its affiliates worldwide accounted for approximately 19.9% of the Company's 2001
consolidated net sales, before the EITF Issue 01-9 adjustment. As a result of
the Company's dispositions of certain non-core assets, including certain
international businesses, the Company expects that for future periods a small
number of other customers will, in the aggregate, account for a large portion of
the Company's net sales. Although the Company's loss of Wal-Mart or one or more
other customers that may account for a significant portion of the Company's
sales, or any significant decrease in sales to any of these customers, could
have a material adverse effect on the Company's business, financial condition or
results of operations. The Company has no reason to believe that any such loss
of customer or decrease in sales will occur. In January 2002, Kmart Corporation
filed a bankruptcy petition for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. Less than 5% of the Company's 2001 net sales were made to
Kmart. The Company plans to continue doing business with Kmart for the
foreseeable future and accordingly, based upon the information currently
available, believes that Kmart's bankruptcy proceedings will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
COMPETITION
The consumer products business is highly competitive, characterized by
vigorous competition throughout the world. The Company competes on the basis of
numerous factors, including brand recognition, product quality, performance and
price and the extent to which consumers are educated on product benefits, each
of which have a marked influence on consumers' choices among competing products
and brands. Advertising, promotion, merchandising and packaging, and the timing
of new product introductions and line extensions, also have a significant impact
on buying decisions, and the structure and quality of the Company's sales force
affect product reception, in-store position, permanent display space and
inventory levels in retail outlets. The Company has experienced declines in its
market shares in the U.S. mass market in various product categories since late
1998 and there can be no assurance that such declines will not continue. In
addition, the Company competes in selected product categories against a number
of multinational companies, some of which are larger and have substantially
greater resources than the Company, and which may therefore have the ability to
spend more aggressively on advertising and marketing and have more flexibility
to respond to changing business and economic conditions than the Company.
Certain of the Company's competitors have increased their spending on
discounting and promotional activities in U.S. mass-market cosmetics. In
addition to products sold in the mass-market and demonstrator-assisted
distribution channels, the Company's products also compete with similar products
sold door-to-door or through mail order or telemarketing by representatives of
direct sales companies. The Company's principal competitors include L'Oreal
S.A., The Procter & Gamble Company, Unilever N.V. and The Estee Lauder Companies
Inc.
PATENTS, TRADEMARKS AND PROPRIETARY TECHNOLOGY
The Company's major trademarks are registered in the United States and
in well over 100 other countries, and the Company considers trademark protection
to be very important to its business. Significant trademarks include REVLON,
COLORSTAY, REVLON AGE DEFYING, SKINLIGHTS, ABSOLUTELY FABULOUS, HIGH DIMENSION,
FROST & GLOW, ILLUMINANCE, FLEX, CUTEX (outside the U.S.), MITCHUM, ETERNA 27,
ULTIMA II, ALMAY, ALMAY Kinetin, CHARLIE, JEAN NATE, FIRE & ICE, MOON DROPS,
SUPER LUSTROUS, WONDERWEAR and COLORSILK.
The Company utilizes certain proprietary or patented technologies in
the formulation or manufacture of a number of the Company's products, including
COLORSTAY lipcolor and cosmetics, COLORSTAY hair color, classic REVLON nail
enamel, SKINLIGHTS skin brightener, HIGH DIMENSION hair color, SUPER TOP SPEED
nail enamel, REVLON AGE DEFYING foundation and cosmetics, NEW COMPLEXION makeup,
WONDERWEAR foundation and lipstick, ALMAY Kinetin skin care, TIME-OFF makeup,
AMAZING LASTING cosmetics, ALMAY ONE COAT eye makeup and cosmetics and VITAL
RADIANCE skin care products. The Company also protects certain of its packaging
and component concepts through design patents. The Company considers its
proprietary technology and patent protection to be important to its business.
8
GOVERNMENT REGULATION
The Company is subject to regulation by the Federal Trade Commission
and the Food and Drug Administration (the "FDA") in the United States, as well
as various other federal, state, local and foreign regulatory authorities. The
Oxford, North Carolina manufacturing facility is registered with the FDA as a
drug manufacturing establishment, permitting the manufacture of cosmetics that
contain over-the-counter drug ingredients such as sunscreens. Compliance with
federal, state, local and foreign laws and regulations pertaining to discharge
of materials into the environment, or otherwise relating to the protection of
the environment, has not had, and is not anticipated to have, a material effect
upon the capital expenditures, earnings or competitive position of the Company.
State and local regulations in the United States that are designed to protect
consumers or the environment have an increasing influence on the Company's
product claims, contents and packaging.
INDUSTRY SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS
The Company operates in a single segment. Certain geographic, financial
and other information of the Company is set forth in Note 18 of the Notes to
Consolidated Financial Statements of the Company.
EMPLOYEES
As of December 31, 2001, the Company employed the equivalent of
approximately 6,000 full-time persons. As of December 31, 2001, approximately
130 of such employees in the United States were covered by collective bargaining
agreements. The Company believes that its employee relations are satisfactory.
Although the Company has experienced minor work stoppages of limited duration in
the past in the ordinary course of business, such work stoppages have not had a
material effect on the Company's results of operations or financial condition.
ITEM 2. PROPERTIES
The following table sets forth as of December 31, 2001 the Company's
major manufacturing, research and warehouse/distribution facilities, all of
which are owned except where otherwise noted.
APPROXIMATE FLOOR
LOCATION USE SPACE SQ. FT.
- -------- --- -------------
Oxford, North Carolina............... Manufacturing, warehousing, distribution and office 1,012,000
Edison, New Jersey................... Research and office (leased) 175,000
Irvington, New Jersey................ Manufacturing, warehousing and office 96,000
Caracas, Venezuela................... Manufacturing, distribution and office 145,000
Kempton Park, South Africa........... Warehousing, distribution and office (leased) 127,000
Canberra, Australia.................. Warehousing, distribution and office 125,000
Isando, South Africa................. Manufacturing, warehousing, distribution and office 94,000
During 2001, Products Corporation sold or closed its facilities in
Phoenix, Arizona and Mississauga, Canada (and consolidated the cosmetics
manufacturing operations into the Company's Oxford, North Carolina facility),
Maesteg, Wales (UK), Sao Paulo, Brazil, and New Zealand (see "Manufacturing and
Related Operations and Raw Materials"). In addition to the facilities described
above, the Company owns and leases additional facilities in various areas
throughout the world, including the lease for the Company's executive offices in
New York, New York (346,000 square feet, of which approximately 6,000 square
feet were sublet to affiliates of the Company and approximately 171,000 square
feet were sublet to unaffiliated third parties as of December 31, 2001).
Management considers the Company's facilities to be well-maintained and
satisfactory for the Company's operations, and believes that the Company's
facilities and third party contractual supplier arrangements provide sufficient
capacity for its current and expected production requirements.
9
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various routine legal proceedings incident
to the ordinary course of its business. The Company believes that the outcome of
all pending legal proceedings in the aggregate is unlikely to have a material
adverse effect on the business or consolidated financial condition of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Revlon, Inc. beneficially owns all of the outstanding shares of common
stock, par value $1.00 per share, of Products Corporation. MacAndrews & Forbes
Holdings Inc. ("MacAndrews Holdings"), a corporation wholly owned indirectly
through Mafco Holdings Inc. ("Mafco Holdings" and, collectively with MacAndrews
Holdings, "MacAndrews & Forbes"), which is indirectly wholly owned by Ronald O.
Perelman, through REV Holdings, Inc. ("REV Holdings"), beneficially owns (i)
11,650,000 shares of the Class A Common Stock of Revlon, Inc. (representing
approximately 57% of the outstanding shares of Class A Common Stock of Revlon,
Inc.), (ii) all of the outstanding 31,250,000 shares of Class B Common Stock of
Revlon, Inc., which together with the shares referenced in clause (i) above
represent approximately 83% of the outstanding shares of Revlon, Inc. common
stock, and (iii) all of the outstanding 4,333 shares of Series B Convertible
Preferred Stock of Revlon, Inc. (each of which is entitled to 100 votes and each
of which is convertible into 100 shares of Class A Common Stock, which
conversion rights are subject to approval by Revlon, Inc.'s stockholders at its
2002 Annual Meeting of Stockholders). Based on the shares referenced in clauses
(i), (ii), and (iii) above, Mr. Perelman through Mafco Holdings (through REV
Holdings) has approximately 97% of the combined voting power of the outstanding
shares of Revlon, Inc. entitled to vote at its 2002 Annual Meeting of
Stockholders. The remaining 8,866,135 shares of Revlon, Inc.'s Class A Common
Stock outstanding at December 31, 2001 are owned by the public. No dividends
were declared or paid during 2001 or 2000. The terms of the 2001 Credit
Agreement, the 8 5/8% Notes, the 8 1/8% Notes, the 9% Notes (each as hereinafter
defined) and the 12% Notes currently restrict the ability of Products
Corporation to pay dividends or make distributions to Revlon, Inc. See the
Consolidated Financial Statements of the Company and the Notes thereto.
ITEM 6. SELECTED FINANCIAL DATA
The Consolidated Statements of Operations Data for each of the years in
the five-year period ended December 31, 2001 and the Balance Sheet Data as of
December 31, 2001, 2000, 1999, 1998 and 1997 are derived from the Consolidated
Financial Statements of the Company, which have been audited by KPMG LLP,
independent certified public accountants. The Selected Consolidated Financial
Data should be read in conjunction with the Consolidated Financial Statements of
the Company and the Notes to the Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(IN MILLIONS)
STATEMENTS OF OPERATIONS DATA (a)(b)(c)(e):
Net sales ................................. $ 1,321.5 $ 1,447.8 $ 1,709.9 $ 2,149.7 $ 2,156.4
Operating income (loss).................... 18.7 (d) 17.6 (f) (210.8)(g) 126.2 (h) 215.4 (i)
(Loss) income from continuing operations... (148.6) (128.0) (369.7) (25.8) 57.8
DECEMBER 31,
------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(IN MILLIONS)
BALANCE SHEET DATA (b)(e):
Total assets............................... $ 991.4 $ 1,104.2 $ 1,560.6 $ 1,831.7 $ 1,759.3
Long-term debt, including current portion.. 1,643.6 1,563.1 1,772.1 1,660.0 1,425.2
Total stockholder's deficiency............. (1,288.8) (1,104.3) (1,013.2) (647.0) (457.0)
10
(a) In November 2001, the FASB Emerging Issues Task Force (the "EITF") reached
consensus on EITF Issue 01-9 entitled, "Accounting for Consideration Given by a
Vendor to a Customer or a Reseller of the Vendor's Products" (the "Guidelines"),
which addresses when sales incentives and discounts should be recognized, as
well as where the related revenues and expenses should be classified in the
financial statements. The Company adopted the earlier portion of these new
Guidelines (formerly EITF Issue 00-14) addressing certain sales incentives
effective January 1, 2001, and accordingly, all prior period financial
statements reflect the implementation of the earlier portion of the Guidelines.
(b) In September 2001, Revlon, Inc. acquired from Holdings (as hereinafter
defined) and contributed to Products Corporation all of the assets and
liabilities of the Charles of the Ritz business. The transaction has been
accounted for at historical cost in a manner similar to that of a pooling of
interests and, accordingly, all prior period financials statements presented
have been restated as if the acquisition took place at the beginning of such
periods. (See Note 15 to the Consolidated Financial Statements).
(c) On July 16, 2001, the Company completed the disposition of the Colorama
brand in Brazil. Accordingly, the selected financial data includes the results
of operations of the Colorama brand through the date of disposition.
(d) Includes restructuring costs and other, net, and additional consolidation
costs associated with the shutdown of the Phoenix and Canada facilities of $38.1
million and $43.6 million, respectively. (See Note 2 to the Consolidated
Financial Statements).
(e) On March 30, 2000 and May 8, 2000, the Company completed the dispositions of
its worldwide professional products line and the Plusbelle brand in Argentina,
respectively. Accordingly, the selected financial data include the results of
operations of the professional products line and the Plusbelle brand through the
dates of their respective dispositions.
(f) Includes restructuring costs and other, net, and additional consolidation
costs associated with the shutdown of the Phoenix facility of $54.1 million and
$4.9 million, respectively. (See Note 2 to the Consolidated Financial
Statements).
(g) Includes restructuring costs and other, net of $40.2 million and executive
separation costs of $22.0 million. (See Note 2 to the Consolidated Financial
Statements).
(h) Includes restructuring costs and other, net, aggregating $35.8 million.
(i) Includes restructuring costs and other, net, of $3.6 million.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN MILLIONS)
OVERVIEW
The Company operates in a single segment and manufactures, markets and
sells an extensive array of cosmetics and skin care, fragrances and personal
care products. In addition, the Company has a licensing group.
On March 30, 2000, May 8, 2000, and July 16, 2001 Products Corporation
completed the dispositions of its worldwide professional products line,
Plusbelle brand in Argentina and Colorama brand in Brazil, respectively.
Accordingly, the Consolidated Condensed Financial Statements include the results
of operations of the professional products line and the Plusbelle and Colorama
brands through the dates of their respective dispositions.
During the first quarter of 2001, to reflect the integration of
management reporting responsibilities, the Company reclassified Canada's results
from its international operations to its United States operations. Management's
discussion and analysis data reflects this change for all periods presented.
In November 2001, the EITF reached consensus on EITF Issue 01-9, which
addresses when sales incentives and discounts should be recognized, as well as
where the related revenues and expenses should be classified in the financial
statements. The Company adopted the earlier portion of these new Guidelines
(formerly EITF Issue 00-14) addressing certain sales incentives effective
January 1, 2001, and accordingly, all prior period financial statements reflect
the implementation of the earlier portion of the Guidelines.
In September 2001, Revlon, Inc. acquired from Holdings and contributed
to Products Corporation all of the assets and liabilities of the Charles of the
Ritz business. The transaction has been accounted for at historical cost in a
manner similar to that of a pooling of interests and, accordingly, all prior
period financials statements presented have been restated as if the acquisition
took place at the beginning of such periods.
Discussion of Critical Accounting Policies:
In the ordinary course of business, the Company has made a number of
estimates and assumptions relating to the reporting of results of operations and
financial condition in the preparation of its financial statements in conformity
with accounting principles generally accepted in the United States of America.
Actual results could differ significantly from those estimates under different
assumptions and conditions. The Company believes that the following discussion
addresses the Company's most critical accounting policies, which are those that
are most important to the portrayal of the Company's financial condition and
results and require management's most difficult, subjective and complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain.
Sales Returns:
The Company allows customers to return their unsold products when they
meet certain Company-established criteria as outlined in the Company's trade
terms. The Company regularly reviews and revises when deemed necessary its
estimates of sales returns based primarily upon actual returns, planned product
discontinuances, and promotional sales, which would permit customers to return
items based upon the Company's trade terms. The Company records estimated sales
returns as a reduction to sales, cost of sales and accounts receivable and an
increase to inventory. Cost of sales includes the cost of refurbishment of
returned products. Returned products which are recorded as inventories are
valued based upon expected realizablity. The physical condition and
marketability of the returned products are the major factors considered by the
Company in estimating realizable value. Actual returns, as well as realized
values on returned products, may differ significantly, either favorably or
unfavorably, from our estimates if factors such as economic conditions, customer
inventory levels or competitive conditions differ from our expectations.
Trade Support Costs:
In order to support the retail trade, the Company has various
performance-based arrangements with retailers to reimburse them for all or a
portion of their promotional activities related to the Company's products. The
12
Company regularly reviews and revises, when deemed necessary, estimates of costs
to the Company for these promotions based on estimates of what has been incurred
by the retailers. Actual costs incurred by the Company may differ significantly
if factors such as the level and success of the retailers' programs or other
conditions differ from our expectations.
Inventories:
Inventories are stated at the lower of cost or market value. Cost is
principally determined by the first-in, first-out method. The Company records
adjustments to the value of inventory based upon its forecasted plans to sell
its inventories. The physical condition (e.g., age and quality) of the
inventories is also considered in establishing its valuation. These adjustments
are estimates, which could vary significantly, either favorably or unfavorably,
from actual requirements if future economic conditions, customer inventory
levels or competitive conditions differ from our expectations.
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. Changes in
circumstances such as technological advances, changes to the Company's business
model or changes in the Company's capital strategy can result in the actual
useful lives differing from the Company's estimates. In those cases where the
Company determines that the useful life of property, plant and equipment should
be shortened, the Company would depreciate the net book value in excess of the
salvage value, over its revised remaining useful life thereby increasing
depreciation expense. Factors such as changes in the planned use of fixtures or
software or closing of facilities could result in shortened useful lives.
Long-lived assets, including fixed assets and intangibles other than
goodwill, are reviewed by the Company for impairment whenever events or changes
in circumstances indicate that the carrying amount of any such asset may not be
recoverable. The estimate of cash flow is based upon, among other things,
certain assumptions about expected future operating performance. The Company's
estimates of undiscounted cash flow may differ from actual cash flow due to,
among other things, technological changes, economic conditions, changes to its
business model or changes in its operating performance. If the sum of the
undiscounted cash flows (excluding interest) is less than the carrying value,
the Company recognizes an impairment loss, measured as the amount by which the
carrying value exceeds the fair value of the asset.
Pension Benefits:
The Company sponsors pension and other retirement plans in various
forms covering substantially all employees who meet eligibility requirements.
Several statistical and other factors which attempt to anticipate future events
are used in calculating the expense and liability related to the plans. These
factors include assumptions about the discount rate, expected return on plan
assets and rate of future compensation increases as determined by the Company,
within certain guidelines. In addition, the Company's actuarial consultants also
use subjective factors such as withdrawal and mortality rates to estimate these
factors. The actuarial assumptions used by the Company may differ materially
from actual results due to changing market and economic conditions, higher or
lower withdrawal rates or longer or shorter life spans of participants. These
differences may result in a significant impact to the amount of pension expense
recorded by the Company. Due to decreases in interest rates and declines in the
income of assets in the plans, it is expected that the pension expense for 2002
will be significantly higher than in recent years.
RESULTS OF OPERATIONS
In order to provide a more meaningful comparison of results from
operations, the Company's discussion is presented on an ongoing operations
basis. The following table sets forth certain summary unaudited data for the
Company for each of the last three years reconciling the Company's actual as
reported results to the ongoing operations, after giving effect to the
following: (i) the disposition of the worldwide professional products line, and
the Plusbelle and Colorama brands, assuming such transactions occurred on
January 1, 1999; (ii) the elimination of restructuring costs in the period
incurred; and (iii) the elimination of additional costs associated with the
closing of the Phoenix and Canada facilities that were included in cost of sales
and selling, general and administrative expenses ("SG&A") and executive
severance costs that were included in selling, general and administrative
expenses in the period incurred (after giving effect thereto, the "Ongoing
Operations"). The adjustments are based upon available
13
information and certain assumptions that our management believes are reasonable
and do not represent pro forma adjustments prepared in accordance with
Regulation S-X. The summary unaudited data for the Ongoing Operations does not
purport to represent the results of operations or our financial position that
actually would have occurred had the foregoing transactions referred to in (i)
above been consummated on January 1, 1999.
YEAR ENDED DECEMBER 31, 2001:
- ---------------------------------------------------
PRODUCT LINE, RESTRUCTURING
BRANDS AND COSTS AND ONGOING
AS REPORTED FACILITIES SOLD OTHER, NET OPERATIONS
--------------- --------------- --------------- ---------------
Net sales ......................................... $ 1,321.5 $ (16.4) $ - $ 1,305.1
Gross profit ...................................... 777.3 (6.5) 38.2 809.0
Selling, general and administrative expenses....... 720.5 (9.1) (5.4) 706.0
Restructuring costs and other, net ................ 38.1 - (38.1) -
YEAR ENDED DECEMBER 31, 2000:
- ---------------------------------------------------
PRODUCT LINE, RESTRUCTURING
BRANDS AND COSTS AND ONGOING
AS REPORTED FACILITIES SOLD OTHER, NET OPERATIONS
--------------- --------------- --------------- ---------------
Net sales ......................................... $ 1,447.8 $ (144.1) $ - $ 1,303.7
Gross profit ...................................... 873.5 (77.8) 4.9 800.6
Selling, general and administrative expenses ...... 801.8 (72.2) - 729.6
Restructuring costs and other, net ................ 54.1 - (54.1) -
YEAR ENDED DECEMBER 31, 1999:
- ---------------------------------------------------
PRODUCT LINE, RESTRUCTURING
BRANDS AND COSTS AND ONGOING
AS REPORTED FACILITIES SOLD OTHER, NET OPERATIONS
--------------- --------------- --------------- ---------------
Net sales ......................................... $ 1,709.9 $ (441.1) $ - $ 1,268.8
Gross profit ...................................... 983.6 (261.3) - 722.3
Selling, general and administrative expenses ...... 1,154.2 (231.8) (22.0) 900.4
Restructuring costs and other, net ................ 40.2 (3.9) (36.3) -
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Net sales
Net sales were $1,321.5 and $1,447.8 for 2001 and 2000, respectively, a
decrease of $126.3, or 8.7% on a reported basis (a decrease of 6.0% on a
constant U.S. dollar basis). The decline in consolidated net sales for year
ended 2001 as compared with the year ended 2000 is primarily due to the sale of
the worldwide professional products line and the Plusbelle brand in Argentina in
the first and third quarters of 2000, respectively, and the Colorama brand in
Brazil in July of 2001.
Net sales of the Ongoing Operations were $1,305.1 and $1,303.7 for 2001
and 2000, respectively (an increase of 2.6% on a constant U.S. dollar basis).
United States and Canada. Net sales in the United States and Canada
were $901.0 for 2001 compared with $895.8 for 2000, an increase of $5.2, or
0.6%. Net sales of the Company's Ongoing Operations in the United States and
Canada were $901.0 for 2001, compared with $860.1 for 2000, an increase of
$40.9, or 4.8%. The increase for
14
2001 of 4.8%, was driven primarily by lower sales returns and allowances of
$55.7 as a result of the Company's revised trade terms, which was partially
offset by reduced sales volume of $14.8. This volume decline is net of $14.0 of
increased sales in the fourth quarter of 2001 resulting from the decision by
major U.S. retail customers to shift planned plan-o-gram timing for 2002 new
products.
International. Net sales in the Company's international operations were
$420.5 for the 2001, compared with $552.0 for 2000, a decrease of $131.5, or
23.8% on a reported basis (a decrease of 17.7% on a constant U.S. dollar basis).
The decline for year ended 2001 as compared with the year ended 2000 is
primarily due to the sale of the worldwide professional products line and the
Plusbelle brand in Argentina in 2000, respectively, and the Colorama brand in
Brazil in July of 2001.
Net sales in the Company's international Ongoing Operations ("Ongoing
International Operations") were $404.1 and $443.6 for 2001 and 2000,
respectively, a decrease of $39.5, or 8.9%, on a reported basis (a decrease of
2.4% on a constant U.S. dollar basis).
Ongoing International Operations sales are divided by the Company into
three geographic regions. In Europe and Africa, which comprises Europe, the
Middle East and Africa, net sales decreased by 8.8% on a reported basis to
$160.2 for 2001, as compared with 2000 (a decrease of 1.6% on a constant U.S.
dollar basis). In Latin America, which comprises Mexico, Central America, South
America and Puerto Rico, net sales decreased by 7.4% on a reported basis to
$131.9 for 2001, as compared with 2000 (a decrease of 2.1% on a constant U.S.
dollar basis). In the Far East, net sales decreased by 10.8% on a reported basis
to $112.0 for 2001, as compared with 2000 (a decrease of 3.9% on a constant U.S.
dollar basis). Net sales in the Company's international operations may be
adversely affected by weak economic conditions, political uncertainties, adverse
currency fluctuations, and competitive activities.
The decrease in net sales for 2001, as compared to 2000, for Ongoing
International Operations on a comparable currency basis, was primarily due to
the increased competitive activity in Japan, Hong Kong and Australia (which
factor the Company estimates contributed to an approximately 1.9% reduction in
net sales), a reduction in sales volume in certain tourist related markets in
Latin America (which factor the Company estimates contributed to an
approximately 0.9% reduction in net sales), the conversion of an operation to a
distributor in 2001 (which factor the Company estimates contributed to an
approximately 0.9% reduction in net sales) and difficulties in the economy and
increased sales returns in the Company's Argentine operation (which factor the
Company estimates contributed to an approximately 1.4% reduction in net sales),
offset by increased new products in China, Brazil, South Africa and Mexico
(which factor the Company estimates contributed to an approximately 3.1%
increase in net sales).
Gross profit
Gross profit was $777.3 for 2001, compared with $873.5 for 2000. As a
percentage of net sales, gross profit margins were 58.8% for 2001 compared with
60.3% for 2000. The decline in gross profit and gross profit margin in 2001
compared to 2000 is due to $38.2 ($6.1 of which represents increased
depreciation recorded for the Phoenix facility - See Note 2) and $4.9 of
additional consolidation costs associated with the shutdown of the Phoenix and
Canada facilities in 2001 and 2000, respectively. This decline is partially
offset by the improvement in sales returns and allowances and the dispositions
of lower margin businesses. Gross profit and gross profit margin for Ongoing
Operations were $809.0 and 62.0%, respectively, in 2001 compared with gross
profit and gross profit margin of $800.6 and 61.4% in 2000. The increase in
gross profit margin for 2001 is primarily related to the improvement in sales
returns and allowances versus 2000.
SG&A expenses
SG&A expenses were $720.5 for 2001, compared with $801.8 for 2000. SG&A
expenses for the Ongoing Operations, which excludes $5.4 of additional
consolidation costs associated with the shutdown of the Phoenix and Canada
facilities in 2001, were $706.0 for 2001, compared with $729.6 for 2000. The
decrease in SG&A expenses for our Ongoing Operations for 2001, as compared to
the comparable 2000 period, is due primarily to the reduction of departmental
general and administrative expenses from $330.4 in 2000 to $280.4 for 2001 as a
result of the Company's restructuring efforts, partially offset by an increase
in brand support expenses from $332.9 for the 2000 to $350.7 for 2001.
15
Restructuring costs
In the first quarter of 2000, the Company recorded a charge of $9.5
relating to the 1999 restructuring program that began in the fourth quarter of
1999. The Company continued to implement the 1999 restructuring program during
the second quarter of 2000 during which it recorded a charge of $5.1.
During the third quarter of 2000, the Company continued to re-evaluate
its organizational structure. As part of this re-evaluation, the Company
initiated a new restructuring program in line with the original restructuring
plan developed in late 1998, designed to improve profitability by reducing
personnel and consolidating manufacturing facilities. The Company recorded a
charge of $13.7 in the third quarter of 2000 for programs begun in such quarter,
as well as for the expanded scope of programs previously commenced. The 2000
restructuring program focused on the Company's plans to close its manufacturing
operations in Phoenix, Arizona and Mississauga, Canada and to consolidate its
cosmetics production into its plant in Oxford, North Carolina. The 2000
restructuring program also includes the remaining obligation for excess leased
real estate in the Company's headquarters, consolidation costs associated with
the Company closing its facility in New Zealand, and the elimination of several
domestic and international executive and operational positions, each of which
were effected to reduce and streamline corporate overhead costs. In the fourth
quarter of 2000, the Company recorded a charge of $25.8 related to the 2000
restructuring program, principally for additional employee severance and other
personnel benefits and to consolidate worldwide operations.
In the first, second, third and fourth quarters of 2001, the Company
recorded charges of $14.6, $7.9, $3.0 and $12.6, respectively, related to the
2000 restructuring program, principally for additional employee severance and
other personnel benefits, relocation and other costs related to the
consolidation of worldwide operations. The charge in the fourth quarter of 2001
also was for an adjustment to previous estimates of approximately $6.6.
The Company anticipates annualized savings of approximately $25 to $30
relating to the restructuring charges recorded during 2001.
Other expenses (income)
Interest expense was $140.5 for 2001 compared with $144.5 for 2000. The
decrease in interest expense for 2001, as compared to 2000, is primarily due to
the repayment of borrowings under the 1997 Credit Agreement with the net
proceeds from the disposition of the worldwide professional products line, the
Plusbelle brand in Argentina and the Colorama brand in Brazil and by lower
interest rates under the Credit Agreement, partially offset by interest on the
12% Notes (which were issued in November 2001).
Sale of product line, brands and facilities, net
Described below are the principal sales of certain brands and
facilities entered into by Products Corporations during 2001:
In December 2001, Products Corporation sold a facility in Puerto Rico
for approximately $4. In connection with such disposition, the Company recorded
a pre-tax and after-tax gain on the sale of $3.1 in the fourth quarter of 2001.
In July 2001, Products Corporation completed the disposition of the
Colorama brand of cosmetics and hair care products, as well as Products
Corporation's manufacturing facility located in Sao Paulo, Brazil, for
approximately $57. Products Corporation used $22 of the net proceeds, after
transaction costs and retained liabilities, to permanently reduce commitments
under the 1997 Credit Agreement. In connection with such disposition, the
Company recognized a pre-tax and after-tax loss of $6.7.
In July 2001, Products Corporation completed the disposition of its
subsidiary that owned and operated its manufacturing facility in Maesteg, Wales
(UK), including all production equipment. As part of this sale, Products
Corporation entered into a long-term supply agreement with the purchaser
pursuant to which the purchaser manufactures and supplies to Products
Corporation cosmetics and personal care products for sale throughout Europe. The
purchase price was approximately $20.0, $10.0 of which was received on the
closing date and $10.0 is
16
to be received over a six-year period, a portion of which is contingent upon
certain future events. In connection with such disposition, the Company
recognized a pre-tax and after-tax loss of $8.6.
In May 2001, Products Corporation sold its Phoenix, Arizona facility
for approximately $7 and leased it back through the end of 2001. After
recognition of increased depreciation in the first quarter of 2001, the Company
recorded a loss on the sale of $3.7 in the second quarter of 2001, which is
included in SG&A expenses.
In April 2001, Products Corporation sold land in Minami Aoyama near
Tokyo, Japan and related rights for the construction of a building on such land
(the "Aoyama Property") for approximately $28. In connection with such
disposition, the Company recognized a pre-tax and after-tax loss of $0.8 during
the second quarter of 2001.
Provision for income taxes
The provision for income taxes was $4.0 for 2001 compared with $8.6 for
2000. The decrease in the provision for income taxes for 2001, as compared 2000,
was attributable to adjustments to certain deferred tax assets and higher taxes
associated with the worldwide professional products line in the first quarter of
2000 and lower taxable income in 2001 in certain markets outside the United
States.
Extraordinary item
The extraordinary loss of $3.6 (net of taxes) in 2001 resulted
primarily from the write-off of financing costs in connection with the 2001
Refinancing Transactions.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
Net sales
Net sales were $1,447.8 and $1,709.9 for 2000 and 1999, respectively, a
decrease of $262.1, or 15.3% on a reported basis (a decrease of 12.8% on a
constant U.S. dollar basis). The decline in consolidated net sales for the year
2000 as compared with 1999 is primarily due to the sale of the worldwide
professional products line and the Plusbelle brand in Argentina.
Net sales of the Ongoing Operations were $1,303.7 and $1,268.8 for 2000
and 1999, respectively, an increase of $34.9, or 2.8% on a reported basis (an
increase of 4.9% on a constant U.S. dollar basis).
United States and Canada. Net sales in the United States and Canada
were $895.8 for 2000 compared with $954.8 for 1999, a decrease of $59.0, or
6.2%. Net sales of the Company's Ongoing Operations in the United States and
Canada were $860.1 for 2000 compared with $796.2 for 1999, an increase of $63.9,
or 8.0%. The increase in net sales is primarily due to a decline in sales
returns and allowances for 2000 of $174.2. This decline was partially offset by
$110.3 of lower shipments due to (i) a reduction of overall U.S. customer
inventories, and (ii) reduced consumer demand for the Company's cosmetics due in
part to fewer new product introductions in 2000 compared to 1999.
International. Net sales in the Company's international operations were
$552.0 for 2000, compared with $755.1 for 1999, a decrease of $203.1, or 26.9%
on a reported basis (a decrease of 22.1% on a constant U.S. dollar basis). The
decrease was primarily due to the sale of the worldwide professional products
line and the Plusbelle brand in Argentina.
Net sales of the Company's Ongoing International Operations were $443.6
and $472.6 for 2000 and 1999, respectively, a decrease of $29.0, or 6.1%, on a
reported basis (a decrease of 0.9% on a constant U.S. dollar basis).
Ongoing International Operations sales are divided by the Company into
three geographic regions. In Europe and Africa, which comprises Europe, the
Middle East and Africa, net sales decreased by 9.2% on a reported basis to
$175.7 for 2000, as compared with 1999 (an increase of 0.2% on a constant U.S.
dollar basis). In Latin America, which comprises Mexico, Central America, South
America and Puerto Rico, net sales increased by 3.4% on a reported basis to
$142.4 for 2000, as compared with 1999 (a increase of 3.8% on a constant U.S.
dollar basis). In the Far East, net sales decreased by 11.2% on a reported basis
to $125.5 for 2000, as compared with 1999 (a
17
decrease of 7.2% on a constant U.S. dollar basis). Net sales in the Company's
international operations may be adversely affected by weak economic conditions,
political and economic uncertainties, adverse currency fluctuations, and
competitive activities.
The decrease in net sales for 2000, as compared to 1999 for Ongoing
International Operations on a comparable currency basis, was primarily due to a
reduction in sales volume in Japan, Hong Kong and France due to the exit of
certain product lines (which factor the Company estimates contributed to
approximately 2.9% of the decrease in net sales on a constant U.S. dollar
basis), offset by increased new product and promotional activity in South
Africa, Mexico, Brazil, Argentina and Italy.
Gross profit
Gross profit was $873.5 for 2000, compared with $983.6 for 1999. As a
percentage of net sales, gross profit margins were 60.3% for 2000 compared with
57.5% for 1999. Gross profit and gross profit margin for the Ongoing Operations,
which excludes $4.9 of additional costs associated with the consolidation of
worldwide operations, were $800.6 and 61.4%, respectively, in 2000 compared with
gross profit and gross profit margin of $722.3 and 56.9%, respectively, in 1999.
The increase in gross profit margin for 2000 is primarily related to the
improvement in sales returns and allowances versus 1999. This improvement was
partially offset by a 4.4% increase in manufacturing costs as a percentage of
net shipments due to lower shipments in the U.S. as discussed above.
SG&A expenses
SG&A expenses were $801.8 for 2000, compared with $1,154.2 for 1999. As
a percentage of net sales, SG&A expenses were 55.4% for 2000 compared with 67.5%
for 1999. SG&A expenses for the Ongoing Operations, which excludes $22 of
separation costs of various executives terminated in 1999, were $729.6 in 2000,
or 56.0% percent of net sales, compared with $900.4 or 71.0% of net sales in
1999. The decrease in SG&A expenses as a percentage of net sales during 2000
primarily reflects reduced brand support as a percentage of net sales from 33.8%
in 1999 to 25.5% in 2000 and a decline in departmental and other SG&A expenses
of $67.6 or 17.1 % primarily due to the favorable impact of the Company's
restructuring efforts.
Restructuring costs and other, net
In late 1998, the Company developed a strategy to reduce overall costs
and streamline operations. To execute against this strategy, the Company began
to develop a restructuring plan and executed the plan in several phases, which
has resulted in several restructuring charges being recorded.
In the fourth quarter of 1998, the Company began to execute the 1998
restructuring program which was designed to realign and reduce personnel, exit
excess leased real estate, realign and consolidate regional activities,
reconfigure certain manufacturing operations and exit certain product lines.
During the nine-month period ended September 30, 1999, the Company continued to
execute the 1998 restructuring program and recorded an additional net charge of
$20.5 principally for employee severance and other personnel benefits and
obligations for excess leased real estate primarily in the United States.
Additionally, in 1999, the Company exited a non-core business for which it
recorded a charge of $1.6, which was included in restructuring costs and other,
net.
In the fourth quarter of 1999, the Company continued to restructure its
organization and began a new program in line with its original restructuring
plan developed in late 1998, principally for additional employee severance and
other personnel benefits and to restructure certain operations outside the
United States, including certain operations in Japan, resulting in a charge of
$18.1. Additionally, during the fourth quarter of 1999 the Company recorded a
charge of $22.0 for executive separation costs to SG&A related to this new
program. In the first quarter of 2000, the Company recorded a charge of $9.5
relating to the 1999 restructuring program that began in the fourth quarter of
1999. The Company continued to implement the 1999 restructuring program during
the second quarter of 2000 during which it recorded a charge of $5.1.
18
During the third quarter of 2000, the Company continued to re-evaluate
its organizational structure. As part of this re-evaluation, the Company
initiated a new restructuring program in line with the original restructuring
plan developed in late 1998, designed to improve profitability by reducing
personnel and consolidating manufacturing facilities. The Company recorded a
charge of $13.7 in the third quarter of 2000 for programs begun in such quarter,
as well as the expanded scope of programs previously commenced. The 2000
restructuring program focused on the Company's plans to close its manufacturing
operations in Phoenix, Arizona and Mississauga, Canada and to consolidate its
cosmetics production into its plant in Oxford, North Carolina. The 2000
restructuring program also includes the remaining obligation for excess leased
real estate in the Company's headquarters, consolidation costs associated with
the Company closing its facility in New Zealand, and the elimination of several
domestic and international executive and operational positions, each of which
were effected to reduce and streamline corporate overhead costs. In the fourth
quarter of 2000, the Company recorded a charge of $25.8 related to the 2000
restructuring program, principally for additional employee severance and other
personnel benefits and to consolidate worldwide operations.
Other expenses (income)
Interest expense was $144.5 for 2000 compared with $147.9 for 1999. The
decrease in interest expense for 2000 as compared with 1999 is primarily due to
the repayment of borrowings under the 1997 Credit Agreement with the net
proceeds from the disposition of the worldwide professional product line and the
Plusbelle brand in Argentina, partially offset by higher interest rates under
the 1997 Credit Agreement.
Foreign currency losses (gains), net, were $1.6 for 2000 compared with
$(0.5) for 1999. Foreign currency losses, net for 2000, consisted primarily of
losses in certain markets in Latin America.
Sale of product line, brands and facilities, net
On May 8, 2000, Products Corporation completed the disposition of the
Plusbelle brand in Argentina. In connection with the disposition, the Company
recognized a pre-tax and after-tax loss of $4.8 (See Note 3 to the Consolidated
Financial Statements).
On March 30, 2000, Products Corporation completed the disposition of
its worldwide professional products line, including professional hair care for
use in and resale by professional salons, ethnic hair and personal care
products, Natural Honey skin care and certain regional toiletries brands. In
connection with the disposition, the Company recognized a pre-tax and after-tax
gain of $14.8 (See Note 3 to the Consolidated Financial Statements).
Provision for income taxes
The provision for income taxes was $8.6 for 2000 compared with $9.1 for
1999. The decrease for 2000 compared with 1999 was primarily attributable to
lower taxable income in 2000 in certain markets outside the United States.
Financial Condition, Liquidity and Capital Resources
Net cash used for operating activities was $86.5, $84.0 and $81.7 for
2001, 2000 and 1999, respectively. The slight increase in net cash used for
operating activities for 2001 compared to 2000 resulted primarily from a higher
net loss and changes in working capital, partially offset by lower purchases of
permanent displays. The slight increase in net cash used for operating
activities for 2000 compared with 1999 resulted primarily from changes in
working capital, partially offset by a lower net loss and lower purchases of
permanent displays.
Net cash provided by (used for) investing activities was $87.2, $322.1
and $(40.7) for 2001, 2000 and 1999, respectively. Net cash provided by
investing activities for 2001 consisted of net proceeds from the sale of the
Company's Colorama brand in Brazil, the Company's subsidiary in Maesteg, Wales
(UK), the Aoyama Property in Japan, the Phoenix facility and a facility in
Puerto Rico, partially offset by capital expenditures. Net cash provided by
investing activities for 2000 consisted of proceeds from the sale of the
Company's worldwide professional products line and the Plusbelle brand in
Argentina, partially offset by cash used for capital expenditures. Net cash used
for investing activities in 1999 related principally to capital expenditures.
Net cash used for investing activities for
19
2001, 2000 and 1999 included capital expenditures of $15.1, $19.0 and $42.3,
respectively. Investing activities in 1999 included substantial upgrades to the
Company's management information systems.
Net cash provided by (used for) financing activities was $46.3,
$(203.7) and $117.4 for 2001, 2000 and 1999, respectively. Net cash provided by
financing activities for 2001 included cash drawn under the 2001 and 1997 Credit
Agreements and proceeds from the issuance of the 12% Notes, partially offset by
the repayment of borrowings under the 1997 Credit Agreement (as hereinafter
defined) with the net proceeds from the disposition of the Colorama brand in
Brazil, and subsequently with proceeds from the issuance of the 12% Notes and
proceeds from the 2001 Credit Agreement and payment of debt issuance costs in
connection with the issuance of the 12% Notes and the 2001 Credit Agreement (as
hereinafter defined). Net cash used for financing activities for 2000 included
repayments of borrowings under the Credit Agreement with the net proceeds from
the disposition of the worldwide professional products line and the Plusbelle
brand in Argentina and the repayment of Products Corporation's Japanese yen-
denominated credit agreement (the "Yen Credit Agreement"), partially offset by
cash drawn under the 1997 Credit Agreement. Net cash provided by financing
activities for 1999 included cash drawn under the 1997 Credit Agreement,
partially offset by repayments of borrowings under the Credit Agreement,
redemption of the Products Corporation's 9 1/2% Senior Notes due 1999 and
repayments under the Yen Credit Agreement.
On November 26, 2001, Products Corporation issued and sold $363 in
aggregate principal amount of 12% Notes in a private placement, receiving gross
proceeds of $350.5. Products Corporation used the proceeds from the 12% Notes
and borrowings under the 2001 Credit Agreement to repay outstanding indebtedness
under Products Corporation's 1997 Credit Agreement and to pay fees and expenses
incurred in connection with the 2001 Refinancing Transactions, and the balance
is available for general corporate purposes. On or before February 25, 2002,
Products Corporation expects to file a registration statement with the
Commission with respect to the Exchange Offer.
On November 30, 2001, Products Corporation entered into the 2001 Credit
Agreement with a syndicate of lenders, whose individual members change from time
to time, which agreement amended and restated the credit agreement entered into
by Products Corporation in May 1997 (as amended, the "1997 Credit Agreement";
the 2001 Credit Agreement and the 1997 Credit Agreement are sometimes referred
to as the "Credit Agreement"), and which matures on May 30, 2005. As of December
31, 2001, the 2001 Credit Agreement provided up to $250.0, which is comprised of
a $117.9 term loan facility (the "Term Loan Facility") and a $132.1
multi-currency revolving credit facility (the "Multi-Currency Facility"). At
December 31, 2001, the Term Loan Facility was fully drawn and $103.5 was
available under the Multi-Currency Facility, including the letters of credit.
The 2001 Credit Agreement contains minimum EBITDA levels for the four
consecutive quarters ending March 31, 2002 of $180, June 30, 2002 through
September 30, 2002 of $185, December 31, 2002 through September 30, 2003 of
$210, December 31, 2003 through September 30, 2004 of $230 and December 31, 2004
and thereafter of $250, as well as leverage ratio and capital expenditure
covenants and, negative covenants consistent with the 1997 Credit Agreement with
certain exceptions. The Credit Facilities (other than loans in foreign
currencies) bear interest as of December 31, 2001 at a rate equal to, at
Products Corporation's option, either (A) the Alternate Base Rate plus 3.75%
(which was 4.75% at December 31, 2001); or (B) the Eurodollar Rate plus 4.75%
(which was 3.00% at December 31, 2001), which margins are higher than those
under the 1997 Credit Agreement. Loans in foreign currencies bear interest in
certain limited circumstances or if mutually acceptable to Products Corporation
and the relevant foreign lenders at the Local Rate and otherwise at the
Eurocurrency Rate, in each case plus 4.75% (which was 3.49% at December 31,
2001). Products Corporation pays a commitment fee of 0.75% of the average daily
unused portion of the Multi-Currency Facility. Under the Multi-Currency
Facility, the Company pays (i) to foreign lenders a fronting fee of 0.25% per
annum on the aggregate principal amount of specified Local Loans (which fee is
retained by the foreign lenders out of the portion of the Applicable Margin
payable to such foreign lender), (ii) to foreign lenders an administrative fee
of 0.25% per annum on the aggregate principal amount of specified Local Loans,
(iii) to the multi-currency lenders a letter of credit commission equal to (a)
the Applicable Margin for Eurodollar Rate loans (adjusted for the term that the
letter of credit is outstanding) times (b) the aggregate undrawn face amount of
letters of credit and (c) to the issuing lender a letter of credit fronting fee
of 0.25% per annum of the aggregate undrawn face amount of letters of credit
(which fee is a portion of the Applicable Margin).
The Company's principal sources of funds are expected to be cash flow
generated from operations (before interest), cash on hand and available
borrowings under the Multi-Currency Facility of the 2001 Credit Agreement. The
Credit Agreement, Products Corporation's 12% Notes, Products Corporation's
8 5/8% Notes due 2008 (the "8 5/8% Notes"), Products Corporation's 8 1/8% Notes
due 2006 (the "8 1/8% Notes") and Products Corporation's 9%
20
Notes due 2006 (the "9% Notes") contain certain provisions that by their terms
limit Products Corporation's and/or its subsidiaries' ability to, among other
things, incur additional debt. The Company's principal uses of funds are
expected to be the payment of operating expenses, working capital, purchases of
permanent displays and capital expenditure requirements, expenses in connection
with the Company's restructuring programs referred to above and debt service
payments.
The Company estimates that cash payments related to the restructuring
programs referred to in Note 2 to the Consolidated Financial Statements and
executive separation costs will be $20 to $25 in 2002. 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) 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 federal taxes pursuant to the tax sharing agreement will be
required for 2002.
Products Corporation enters into forward foreign exchange contracts and
option contracts from time to time to hedge certain cash flows denominated in
foreign currencies. There were no forward foreign exchange or option contracts
outstanding at December 31, 2001.
The Company expects that cash flows from operations before interest,
cash on hand and available borrowings under the Multi-Currency Facility of the
2001 Credit Agreement will be sufficient to enable the Company to meet its
anticipated cash requirements during 2002 on a consolidated basis, including for
debt service and expenses in connection with the Company's restructuring
programs. However, there can be no assurance that the combination of cash flow
from operations, cash on hand and available borrowings under the Multi-Currency
Facility of the 2001 Credit Agreement will be sufficient to meet the Company's
cash requirements on a consolidated basis. Additionally, in the event of a
decrease in demand for its products or reduced sales, such development, if
significant, could reduce the Company's cash flow from operations and could
adversely affect the Company's ability to achieve certain financial covenants
under the 2001 Credit Agreement, including the minimum EBITDA covenant, and in
such event the Company could be required to take measures, including reducing
discretionary spending. 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 purchases of permanent displays, reducing or
delaying capital expenditures, delaying or revising restructuring programs,
restructuring indebtedness, selling assets or operations, or seeking capital
contributions or loans from Revlon, Inc. or other affiliates of the Company.
Products Corporation has received a commitment from an affiliate that is
prepared to provide, if necessary, additional financial support to Products
Corporation of up to $40 on appropriate terms through December 31, 2003. 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 terms of the Credit Agreement, the 12% Notes, the 8 5/8%
Notes, the 8 1/8% Notes and the 9% Notes generally restrict Products Corporation
from paying dividends or making distributions, except that Products Corporation
is permitted to pay dividends and make distributions to Revlon, Inc., among
other things, to enable Revlon, Inc. to pay expenses incidental to being a
public holding company, including, among other things, professional fees such as
legal and accounting, regulatory fees such as Commission filing fees and other
miscellaneous expenses related to being a public holding company and, subject to
certain limitations, 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 (the "Amended Stock
Plan").
The Company is currently developing and testing a new design for its
permanent display units and, subject to a number of factors including results
from tests, the Company currently plans to begin installing them at certain
customers' doors during 2002. If we proceed with such installation, we may need
to accelerate the amortization of our existing display units beginning in 2002.
The scope of any display unit replacements has not yet been determined and,
therefore, the amount of additional amortization cannot be precisely calculated.
However, we estimate if we proceed with the installation of new displays that
additional amortization will be in the range of $12 to $18 during 2002. The
Company estimates that purchases of permanent displays for 2002 will be $45 to
$60.
21
Additionally, the Company is evaluating its management information
systems to determine if the current system should be replaced with an Enterprise
Resource Planning ("ERP") System intended to provide benefits to the Company in
excess of the related purchase and implementation costs. If we determine to
implement the ERP System, certain existing information systems would be
amortized on an accelerated basis. Based upon the estimated time required to
implement an ERP System, the Company currently estimates that it would record
additional amortization of its current information system in the range of $15 to
$25 during 2002 if it proceeds with the implementation of an ERP System. The
Company estimates that capital expenditures for 2002 will be $15 to $25.
In the first quarter of 2002, the Company expects to record a charge
of approximately $6 related to separation costs for certain former senior
executives of the Company.
DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The SEC has encouraged all public companies to aggregate all
contractual commitments and commercial obligations that affect financial
condition and liquidity as of December 31, 2001. To respond to this, the Company
has included the following table:
- ------------------------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
(DOLLARS IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
- ------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT $1,643.6 $1.3 $492.8 $499.6 $649.9
- ------------------------------------------------------------------------------------------------------------------
CAPITAL LEASE OBLIGATIONS Nil Nil Nil Nil Nil
- ------------------------------------------------------------------------------------------------------------------
OPERATING LEASES 67.1 26.1 23.1 7.0 10.9
- ------------------------------------------------------------------------------------------------------------------
UNCONDITIONAL PURCHASE OBLIGATIONS 194.5 (a) 52.8 69.5 41.8 30.4
- ------------------------------------------------------------------------------------------------------------------
OTHER LONG-TERM OBLIGATIONS 33.4 (b) 16.2 11.5 1.5 4.2
- ------------------------------------------------------------------------------------------------------------------
TOTAL CONTRACTUAL CASH OBLIGATIONS $1,938.6 $96.4 $596.9 $549.9 $695.4
- ------------------------------------------------------------------------------------------------------------------
(a) Includes primarily $145.5 relating to fixed annual purchase commitments
over the eight-year term of the supply agreement which the Company entered
into in connection with the sale of its manufacturing facility in Maesteg,
Wales (UK), $13.4 relating to fixed purchase commitments under an agreement
which the Company entered into in connection with the sale of the Company's
manufacturing facility in Sao Paulo, Brazil, and the balance of $35.6
consists of other fixed purchase commitments for finished goods, raw
materials and components.
(b) Such amounts exclude severance and other contractual commitments related to
restructuring, which are discussed under "Restructuring Costs".
EURO CONVERSION
As part of the European Economic and Monetary Union, a single currency
(the "Euro") has replaced the national currencies of the principal European
countries (other than the United Kingdom) in which the Company conducts business
and manufacturing. The conversion rates between the Euro and the participating
nations' currencies were fixed as of January 1, 1999, with the participating
national currencies being removed from circulation between January 1, 2002 and
June 30, 2002 and replaced by Euro notes and coinage. Under the regulations
governing the transition to a single currency, there is a "no compulsion, no
prohibition" rule, which states that no one can be prevented from using the Euro
after January 1, 2002 and no one is obliged to use the Euro before July 2002. In
keeping with this rule, the Company expects to begin using the Euro for
invoicing and payments by the end of the second quarter of 2002. Based upon the
information currently available, the Company does not expect that the transition
to the Euro will have a material adverse effect on the business or consolidated
financial condition of the Company.
22
EFFECT OF NEW ACCOUNTING STANDARDS
In November of 2001, the EITF reached consensus on the Guidelines, the
second portion of which (formerly EITF Issue 00-25) addresses vendor income
statement characterization of consideration to a purchaser of the vendor's
products or services, including the classification of slotting fees, cooperative
advertising arrangements and buy-downs. Certain promotional payments that are
currently classified in SG&A expenses will be classified as a reduction of net
sales. The impact of the adoption of the second portion of the Guidelines on the
consolidated financial statements will reduce both net sales and SG&A expenses
by equal and offsetting amounts of $43.9 in 2001, $38.4 in 2000 and $80.1 in
1999, respectively. The adoption will not have any impact on the Company's
reported operating income or net loss. The Company has adopted the second
portion of the Guidelines effective January 1, 2002.
In July 2001, the FASB issued Statement No. 141, Business Combinations,
and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria that must be met in order for intangible assets acquired in a
purchase method business combination to be recognized and reported apart from
goodwill. Statement 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The
Company adopted the provisions of Statement 141 immediately and Statement 142
effective January 1, 2002.
As of January 1, 2002, the Company expects to have unamortized goodwill
in the amount of approximately $186, and unamortized identifiable intangible
assets in the amount of approximately $13. Amortization expense related to
goodwill was $7.1 for the year ended December 31, 2001. Any transitional
impairment losses will be required to be recognized as the cumulative effect of
a change in accounting principle. The Company has made a preliminary estimate of
the impact of these Statements and has determined that these Statements will not
have a significant effect from impairment on its financial statements.
In August 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations. Statement 143 requires recording the fair market value
of an asset retirement obligation as a liability in the period in which a legal
obligation associated with the retirement of tangible long-lived assets is
incurred. The Statement also requires recording the contra asset to the initial
obligation as an increase to the carrying amount of the related long-lived asset
and depreciation of that cost over the life of the asset. The liability is then
increased at the end of each period to reflect the passage of time and changes
in the initial fair value measurement. The Company is required to adopt the
provisions of Statement 143 effective January 1, 2003 and has not yet determined
the extent of its impact, if any.
In October 2001, the FASB issued Statement No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets. Statement 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The Statement also extends the reporting requirements to report separately as
discontinued operations, components of an entity that have either been disposed
of or classified as held for sale. The Company has adopted the provisions of
Statement 144 effective January 1, 2002 and such adoption did not have a
significant effect on its financial statements.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the year ended December 31, 2001,
as well as other public documents and statements of the Company, contain
forward-looking statements that 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 (whether qualitative or quantitative) as
to: the introduction of new products; the Company's plans to update its retail
presence, evaluate, test and install new display walls (and the Company's
estimates of the costs of such new displays, the effects of such plans on the
accelerated amortization of existing displays and the estimated amount of such
amortization) and the
23
Company's plans to update the image of the Revlon brand through the
introduction of new graphics and package designs; its future financial
performance; the effect on sales of political and/or economic conditions,
adverse currency fluctuations and competitive activities; the possible
implementation of a new ERP System, the costs and benefits of such system and
the effects of the adoption of such system on the accelerated amortization of
existing information systems if the Company proceeds with such system;
restructuring activities, restructuring costs, the timing of such payments and
annual savings and other benefits from such activities; the charges, the cash
cost and the savings resulting from plant shutdowns, dispositions and
outsourcing; the effects of revised trade terms for its U.S. customers,
including reduced returns; cash flow from operations, cash on hand and
availability of borrowings under the 2001 Credit Agreement, the sufficiency of
such funds to satisfy the Company's cash requirements in 2002, and the
availability of funds from capital contributions or loans from Revlon, Inc. or
other affiliates of the Company; uses of funds, including for the purchases of
permanent displays, capital expenditures (and the Company's estimates of the
amounts of such expenses) and restructuring costs (and the Company's estimates
of the amounts of such costs); the availability of raw materials and components
and, with respect to Europe, products, including that the Company's facilities
and third party contractual supplier arrangements will provide sufficient
capacity for the Company's current and expected production requirements; matters
concerning market-risk sensitive instruments; the effects of transition to the
Euro; the effects of the adoption of certain accounting principles, including
the Company's estimates of the amounts of unamortized goodwill and identifiable
intangible assets; and the effects of the loss of one or more customers,
including, without limitation, Wal-Mart, and the status of the Company's
relationship with its customers. Statements that are not historical facts,
including statements about the Company's beliefs and expectations, are
forward-looking statements. Forward-looking statements can be identified by,
among other things, the use of forward-looking language, such as "believes,"
"expects," "estimates," "projects," "forecast," "may," "will," "should,"
"seeks," "plans," "scheduled to," "anticipates" or "intends" or the negative of
those terms, or other variations of those terms or comparable language, or by
discussions of strategy or intentions. Forward-looking statements speak only as
of the date they are made, and except for the Company's ongoing obligations to
disclose material information under the U.S. federal securities laws, the
Company undertakes no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
Investors are advised, however, to consult any additional disclosures the
Company makes in its Quarterly Reports on Form 10-Q, Annual Report on Form 10-K
and Current Reports on Form 8-K to the Commission (which, among other places,
can be found on the Commission's website at http://www.sec.gov), as well as on
the Company's website at www.revloninc.com. The information available from time
to time on such website shall not be deemed incorporated by reference into this
Annual Report on Form 10-K. A number of important factors could cause actual
results to differ materially from those contained in any forward-looking
statement. In addition to factors that may be described in the Company's filings
with the Commission, including this filing, the following factors, among others,
could cause the Company's actual results to differ materially from those
expressed in any forward-looking statements made by the Company: (i)
difficulties or delays in developing and introducing new products or failure of
customers to accept new product offerings; (ii) difficulties or delays or
unanticipated costs associated with the Company's test and possible
implementation of new display walls and new graphics and package designs; (iii)
changes in consumer preferences, including reduced consumer demand for the
Company's color cosmetics and other current products; (iv) effects of and
changes in political and/or economic conditions, including inflation and
monetary conditions, and in trade, monetary, fiscal and tax policies in
international markets; (v) actions by competitors, including business
combinations, technological breakthroughs, new product offerings, promotional
spending and marketing and promotional successes, including increases in market
share; (vi) unanticipated costs or difficulties or delays in completing projects
associated with the Company's strategic plan, including in connection with the
implementation of a new ERP System; (vii) difficulties, delays or unanticipated
costs or less than expected savings and other benefits resulting from the
Company's restructuring activities; (viii) difficulties or delays in
implementing, higher than expected charges and cash costs or lower than expected
savings from the shutdown, disposition, outsourcing and consolidation of
manufacturing operations; (ix) difficulties or delays in achieving the intended
results of the revised trade terms, including, without limitation, lower returns
or unexpected consequences from the revised trade terms including the possible
effect on sales; (x) lower than expected cash flow from operations, the
inability to secure capital contributions or loans from Revlon, Inc. or other
affiliates of the Company or the unavailability of funds under the 2001 Credit
Agreement; (xi) higher than expected operating expenses, working capital
expenses, permanent display costs, capital expenditures, restructuring costs or
debt service payments; (xii) difficulties or delays in sourcing raw materials or
components, and with respect to Europe, products; (xiii) interest rate or
foreign exchange rate changes affecting the Company and its market sensitive
financial instruments; (xiv) difficulties, delays or unanticipated costs
associated with the transition to the Euro; (xv) unanticipated effects of the
Company's adoption of certain new accounting
24
standards; and (xvi) combinations among significant customers or the loss,
insolvency or failure to pay debts by a significant customer or customers.
Factors other than those listed above could cause the Company's results to
differ materially from expected results. This discussion is provided as
permitted by the Private Securities Litigation Reform Act of 1995.
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 three years in the United States or foreign
non-hyperinflationary countries. The Company operates in certain countries
around the world, such as Argentina, Brazil, Venezuela and Mexico that have
experienced hyperinflation. 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.
SUBSEQUENT EVENTS
In February 2002, Products Corporation completed the disposition of its
subsidiaries that operated its marketing, sales and distribution business in
Belgium, the Netherlands and Luxembourg ("Benelux"). As part of this sale,
Products Corporation entered into a long-term distribution agreement with the
purchaser pursuant to which the purchaser distributes the Company's products in
Benelux. The purchase price consisted principally of the assumption of certain
liabilities and deferred contingent purchase price of up to approximately $3.3
to be received over approximately a seven-year period. In connection with the
disposition, the Company does not anticipate a significant gain or loss.
Effective February 14, 2002, Jeffrey M. Nugent, the Company's former
President and Chief Executive Officer, resigned from employment with the
Company. On February 19, 2002, the Company announced its appointment of Jack L.
Stahl as its President and Chief Executive Officer.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
The Company has exposure to changing interest rates, primarily in the
United States. The Company's policy is to manage interest rate risk through the
use of a combination of fixed and floating rate debt. The Company from time to
time makes use of derivative financial instruments to adjust its fixed and
floating rate ratio. There were no such derivative financial instruments
outstanding at December 31, 2001. The table below provides information about the
Company's indebtedness that is sensitive to changes in interest rates. The table
presents cash flows with respect to principal on indebtedness and related
weighted average interest rates by expected maturity dates. Weighted average
variable rates are based on implied forward rates in the yield curve at December
31, 2001. The information is presented in U.S. dollar equivalents, which is the
Company's reporting currency.
Exchange Rate Sensitivity
The Company manufactures and sells its products in a number of
countries throughout the world and, as a result, is exposed to movements in
foreign currency exchange rates. In addition, a portion of the Company's
borrowings are denominated in foreign currencies, which are also subject to
market risk associated with exchange rate movement. The Company from time to
time hedges major foreign currency cash exposures generally through foreign
exchange forward and option contracts. The contracts are entered into with major
financial institutions to minimize counterparty risk. These contracts generally
have a duration of less than twelve months and are primarily against the U.S.
dollar. In addition, the Company enters into foreign currency swaps to hedge
intercompany financing transactions.
The Company does not hold or issue financial instruments for trading
purposes. There were no derivative instruments outstanding as of December 31,
2001.
As referred to above, on November 26, 2001 Products Corporation issued
and sold the 12% Notes and on November 30, 2001 refinanced its 1997 Credit
Agreement.
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EXPECTED MATURITY DATE FOR YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------- FAIR VALUE
DEC. 31,
2002 2003 2004 2005 2006 THEREAFTER TOTAL 2001
------- ------ ------ ------ ------ ---------- ------- ----------
DEBT (US dollar equivalent in millions)
Short-term variable rate (various currencies) $17.5 $ 17.5 $ 17.5
Average interest rate (a).............. 5.9%
Long-term fixed rate ($US)................... $ 350.8 $499.6 $ 649.9 1,500.3 976.2
Average interest rate ................. 12.0% 8.6% 8.6%
Long-term variable rate ($US)................ 117.9 117.9 117.9
Average interest rate (a).............. 9.9%
Long-term variable rate (various currencies). 1.3 1.3 1.3
Average interest rate (a).............. 9.4%
------ ----- ------ ------- ------- ------- --------- ---------
Total debt .................................. $ 17.5 $ - $ - $ 470.0 $ 499.6 $ 649.9 $ 1,637.0 $ 1,112.9
====== ===== ====== ======= ======= ======= ========= =========
(a) Weighted average variable rates are based upon implied forward rates from
the yield curves at December 31, 2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index on page F-1 of the Consolidated
Financial Statements of the Company and the Notes thereto contained herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10.