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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2002
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
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes No X
--- ---
The number of shares outstanding of the registrant's common stock was 1,000
shares as of September 30, 2002, all of which were held by an affiliate,
Revlon, Inc., an indirect majority owned subsidiary of Mafco Holdings Inc.
Total Pages - 34
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2002 2001
ASSETS --------------- ---------------
Current assets: (Unaudited)
Cash and cash equivalents............................................. $ 59.2 $ 103.3
Marketable securities................................................. - 2.2
Trade receivables, less allowances of $18.2
and $15.4, respectively......................................... 218.6 203.9
Inventories........................................................... 165.8 157.9
Prepaid expenses and other............................................ 52.6 50.6
--------------- ---------------
Total current assets............................................ 496.2 517.9
Property, plant and equipment, net.......................................... 131.8 142.8
Other assets................................................................ 131.4 132.2
Intangible assets, net...................................................... 198.1 198.5
--------------- ---------------
Total assets.................................................... $ 957.5 $ 991.4
=============== ===============
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current liabilities:
Short-term borrowings - third parties................................. $ 24.4 $ 17.5
Accounts payable...................................................... 97.0 87.0
Accrued expenses and other............................................ 266.7 281.2
--------------- ---------------
Total current liabilities....................................... 388.1 385.7
Long-term debt - third parties ............................................. 1,693.6 1,619.5
Long-term debt - affiliates................................................. 24.1 24.1
Other long-term liabilities................................................. 255.9 250.9
Stockholder's deficiency:
Preferred stock, par value $1.00 per share; 1,000
shares authorized, 546 shares of Series A Preferred Stock
issued and outstanding.......................................... 54.6 54.6
Common stock, par value $1.00 per share; 1,000
shares authorized, issued and outstanding....................... - -
Capital deficiency.................................................... (214.8) (214.8)
Accumulated deficit since June 24, 1992............................... (1,172.5) (1,067.5)
Accumulated other comprehensive loss.................................. (71.5) (61.1)
--------------- ---------------
Total stockholder's deficiency.................................. (1,404.2) (1,288.8)
--------------- ---------------
Total liabilities and stockholder's deficiency.................. $ 957.5 $ 991.4
=============== ===============
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
2
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net sales......................................... $ 323.2 $ 320.2 $ 906.8 $ 955.9
Cost of sales..................................... 121.6 129.8 350.4 404.4
------------- ------------- ------------- -------------
Gross profit................................. 201.6 190.4 556.4 551.5
Selling, general and administrative expenses...... 176.7 162.0 522.1 520.8
Restructuring costs............................... 2.1 3.0 9.3 25.5
------------- ------------- ------------- -------------
Operating income............................. 22.8 25.4 25.0 5.2
------------- ------------- ------------- -------------
Other expenses (income):
Interest expense............................. 40.1 34.1 118.4 104.8
Interest income.............................. (0.4) (0.5) (1.6) (2.0)
Amortization of debt issuance costs.......... 2.0 1.6 5.8 4.6
Foreign currency losses, net................. 1.2 2.7 3.0 2.5
Loss on sale of assets and brand, net........ - 7.9 1.0 15.0
Miscellaneous, net........................... 0.4 0.1 1.3 0.9
------------- ------------- ------------- -------------
Other expenses, net..................... 43.3 45.9 127.9 125.8
------------- ------------- ------------- -------------
Loss before income taxes.......................... (20.5) (20.5) (102.9) (120.6)
Provision for income taxes........................ 1.0 1.5 2.1 3.3
------------- ------------- ------------- -------------
Net loss.......................................... $ (21.5) $ (22.0) $ (105.0) $ (123.9)
============= ============= ============= =============
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
3
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDER'S DEFICIENCY
AND COMPREHENSIVE LOSS
(DOLLARS IN MILLIONS)
ACCUMULATED
OTHER TOTAL
PREFERRED CAPITAL ACCUMULATED COMPREHENSIVE STOCKHOLDER'S
STOCK DEFICIENCY DEFICIT LOSS (a) DEFICIENCY
----------- ------------ ------------ -------------- --------------
Balance, January 1, 2001.............................. $ 54.6 $ (213.8) $ (915.3) $ (29.8) $ (1,104.3)
Net distribution from affiliate.................. (1.0)(b) (1.0)
Comprehensive loss:
Net loss................................. (123.9) (123.9)
Currency translation adjustment.......... 16.8(c) 16.8
Revaluation of foreign currency forward
exchange contracts.................. 0.4 0.4
----------
Total comprehensive loss......................... (106.7)
----------- ----------- ------------ --------------- ------------
Balance, September 30, 2001........................... $ 54.6 $ (214.8) $ (1,039.2) $ (12.6) $ (1,212.0)
=========== =========== ============ =============== ============
Balance, January 1, 2002.............................. $ 54.6 $ (214.8) $ (1,067.5) $ (61.1) $ (1,288.8)
Comprehensive loss:
Net loss................................. (105.0) (105.0)
Currency translation adjustment.......... (10.4) (10.4)
-----------
Total comprehensive loss......................... (115.4)
----------- ----------- ------------ --------------- ------------
Balance, September 30, 2002........................... $ 54.6 $ (214.8) $ (1,172.5) $ (71.5) $ (1,404.2)
=========== =========== ============ =============== ============
____________________
(a) Accumulated other comprehensive loss includes unrealized losses (gains) on revaluations of foreign currency forward
exchange contracts of nil and $(0.4) as of September 30, 2002 and 2001, respectively, cumulative net translation
losses of $25.4 and $9.4 as of September 30, 2002 and 2001, respectively, and adjustments for the minimum pension
liability of $46.1 and $3.6 as of September 30, 2002 and 2001, respectively.
(b) Represents net distributions in capital from the Charles of the Ritz business.
(c) The change in the currency translation adjustment during the nine months ended September 30, 2001 includes a
reclassification adjustment of $7.1 for realized losses on foreign currency adjustments associated primarily with the
sale of the Colorama brand in Brazil.
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
4
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 2002 2001
------------- -------------
Net loss...................................................................... $ (105.0) $ (123.9)
Adjustments to reconcile net loss to net cash
(used for) provided by operating activities:
Depreciation and amortization............................................ 89.9 86.9
Loss on sale of brand and assets, net.................................... 1.0 15.0
Change in assets and liabilities, net of acquisitions and dispositions:
(Increase) decrease in trade receivables............................ (20.0) 7.1
Increase in inventories............................................. (10.6) (15.0)
Increase in prepaid expenses and
other current assets................................... (6.8) (7.7)
Increase in accounts payable........................................ 10.7 14.9
Decrease in accrued expenses and other
current liabilities.................................... (9.6) (32.9)
Purchase of permanent displays...................................... (53.5) (35.6)
Other, net.......................................................... (7.0) 2.2
------------- -------------
Net cash used for operating activities........................................ (110.9) (89.0)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................................................... (9.4) (10.4)
Sale of marketable securities................................................. 1.8 -
Net proceeds from the sale of brand and certain assets........................ - 97.5
------------- -------------
Net cash (used for) provided by investing activities.......................... (7.6) 87.1
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings - third parties......................... 7.7 0.5
Proceeds from the issuance of long-term debt - third parties.................. 94.6 196.1
Repayment of long-term debt - third parties................................... (23.5) (208.8)
Net distribution from affiliate............................................... - (1.0)
Payment of debt issuance costs................................................ (0.3) (2.4)
------------- -------------
Net cash provided by (used for) financing activities.......................... 78.5 (15.6)
------------- -------------
Effect of exchange rate changes on cash and cash equivalents.................. (4.1) (1.6)
------------- -------------
Net decrease in cash and cash equivalents................................ (44.1) (19.1)
Cash and cash equivalents at beginning of period......................... 103.3 56.3
------------- -------------
Cash and cash equivalents at end of period............................... $ 59.2 $ 37.2
============= =============
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest ........................................................... $ 118.6 $ 113.4
Income taxes, net of refunds........................................ 2.4 2.4
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements.
5
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(1) BASIS OF PRESENTATION
Revlon Consumer Products Corporation ("Products Corporation" and,
together with its subsidiaries, the "Company") is a direct wholly owned
subsidiary of Revlon, Inc., which is an indirect majority owned subsidiary of
MacAndrews & Forbes Holdings Inc. ("MacAndrews Holdings"), a corporation
wholly owned indirectly through Mafco Holdings Inc. ("Mafco Holdings" and,
together with MacAndrews Holdings, "MacAndrews & Forbes") by Ronald O.
Perelman.
The accompanying Consolidated Condensed Financial Statements are
unaudited. In management's opinion, all adjustments (consisting of only
normal recurring accruals) necessary for a fair presentation have been made.
The Unaudited Consolidated Condensed Financial Statements include
the accounts of the Company after elimination of all material intercompany
balances and transactions. The Company has made a number of estimates and
assumptions relating to the assets and liabilities, the disclosure of
contingent assets and liabilities and the reporting of revenues and expenses
to prepare these financial statements in conformity with accounting
principles generally accepted in the United States. Actual results could
differ from those estimates. The Unaudited Consolidated Condensed Financial
Statements should be read in conjunction with the consolidated financial
statements and related notes contained in the Company's Annual Report on Form
10-K for the year ended December 31, 2001.
The results of operations and financial position, including working
capital, for interim periods are not necessarily indicative of those to be
expected for a full year.
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. The second portion of the Guidelines (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 were classified in selling, general and administrative
("SG&A") expenses are now classified as a reduction of net sales. The impact of
the adoption of the second portion of the Guidelines on the consolidated
financial statements reduced both net sales and SG&A expenses by equal and
offsetting amounts. Such adoption did not have any impact on the Company's
reported operating loss or net loss. The Company adopted the second portion of
the Guidelines effective January 1, 2002, and accordingly, all prior period
financial statements reflect the implementation of the second portion of the
Guidelines.
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 requires 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 requires that intangible assets
with finite 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
6
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
Assets. The Company adopted the provisions of Statement 141 in July 2001 and
Statement 142 effective January 1, 2002. In connection with the adoption of
Statement 142, the Company performed a transitional goodwill impairment test
as required and has determined that no goodwill impairment existed at January
1, 2002. The Company has also evaluated the lives of all of its intangible
assets. As a result of this evaluation, the Company has determined that none
of its intangible assets, other than goodwill, have indefinite lives and that
the existing useful lives are appropriate. (See Note 4).
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 adopted the provisions of
Statement 144 effective January 1, 2002 and such adoption had no effect on its
financial statements.
Certain amounts in the prior year's financial statements have been
reclassified to conform to the current year's presentation.
(2) INVENTORIES
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------------- --------------
Raw materials and supplies ........ $ 50.0 $ 44.9
Work-in-process ................... 16.0 10.1
Finished goods .................... 99.8 102.9
-------------- --------------
$ 165.8 $ 157.9
============== ==============
(3) OTHER ASSETS
The Company capitalizes the cost of permanent display fixtures and
amortizes such cost over the estimated useful life of the assets of three to
five years. Beginning in the first quarter of 2002, the Company decided to
roll-out new permanent display units in the U.S., replacing existing
permanent display fixtures at an accelerated rate. As a result, the useful
lives of those permanent display fixtures to be replaced were shortened to
their new estimated useful lives, resulting in accelerated amortization of
$1.4 and $11.1 during the three months and nine months ended September 30,
2002, respectively. The cost of the new displays will be amortized over its
3-year life.
(4) INTANGIBLE ASSETS, NET
Intangible assets, net of $198.1 and $198.5 at September 30, 2002
and December 31, 2001, respectively, consists of trademarks, net, patents,
net and goodwill, net. The amounts outstanding for these intangible assets at
September 30, 2002 and December 31, 2001 were as follows: for trademarks,
net, $7.0 and $6.8, respectively; for patents, net, $5.2 and $5.8,
respectively; and for goodwill, net, $185.9 at both September 30, 2002 and
December 31, 2001. Amortization expense for the three months and nine months
ended September 30, 2002 and 2001 was $0.4 and $1.2, respectively, and $2.3
and $6.9, respectively. Amortization of goodwill ceased on January 1, 2002
upon adoption of Statement 142. Excluding amortization expense related to
goodwill of $1.9 and $5.7 recognized during the three months and nine months
ended September 30, 2001, respectively, net loss would have been $20.1 and
$118.2, respectively. The Company's intangible assets other than goodwill
continue to be subject to amortization, which is anticipated to be
approximately $1.6 annually through December 31, 2007.
7
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(5) RESTRUCTURING AND OTHER COSTS, NET
During the third quarter of 2000, 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 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. During the
third quarter of 2001 and the nine months ended September 30, 2001, the
Company continued to implement the 2000 restructuring program and recorded a
charge of $3.0 and $25.5, respectively, principally for additional employee
severance and other personnel benefits and relocation.
During the third quarter of 2002 and the nine months ended September
30, 2002, the Company continued to implement the 2000 restructuring program,
as well as other restructuring actions, and recorded a charge of $2.1 and
$9.3, respectively, principally for additional employee severance and other
personnel benefits, primarily resulting from reductions in the Company's
worldwide sales force, relocation and other costs related to the
consolidation of worldwide operations.
In connection with the 2000 restructuring program, termination
benefits for 2,446 employees were included in the Company's restructuring
charges, substantially all of whom have been terminated as of September 30,
2002. The remaining employees from the 2000 restructuring program, as well as
other restructuring actions, are expected to be terminated within one year
from the date of their notification.
Details of the activity described above during the nine-month period
ended September 30, 2002 are as follows:
BALANCE UTILIZED, NET BALANCE
AS OF ----------------------- AS OF
1/1/02 EXPENSES, NET CASH NONCASH 9/30/02
----------- --------------- ---------- --------- -----------
Employee severance and other
personnel benefits .................. $ 15.1 $ 6.6 $ (15.1) $ - $ 6.6
Relocation ................................ - 0.4 (0.4) - -
Leases and equipment write-offs ........... 7.4 1.5 (2.9) - 6.0
Other obligations ......................... 0.3 0.8 (0.4) - 0.7
----------- --------------- ---------- --------- -----------
$ 22.8 $ 9.3 $ (18.8) $ - $ 13.3
=========== =============== ========== ========= ===========
In connection with the 2000 restructuring program, in the beginning
of the fourth quarter of 2000, the Company decided to consolidate its
manufacturing facility in Phoenix, Arizona into its manufacturing facility in
Oxford, North Carolina. The plan was to relocate substantially all of the
Phoenix equipment to the Oxford facility and commence production there over a
period of approximately nine months which would allow the Company to fully
staff the Oxford facility and to produce enough inventory through a
combination of production in the Phoenix and Oxford facilities to meet supply
chain demand as the Phoenix facility production lines were dismantled, moved
across the country, and placed into service at the Oxford facility.
Substantially all production at the Phoenix facility ceased by June 30, 2001,
and the facility was sold. At the time the decision was made the useful lives
of the facility and production assets which would not be relocated to the
Oxford facility were shortened to the nine-month period in which the Phoenix
facility would continue production. The Company began depreciating the net
book value of the Phoenix facility and production equipment in excess of
their estimated salvage value over the estimated nine-month useful life.
8
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
This resulted in the recognition of increased depreciation through September
30, 2001 of $6.1, which is included in cost of sales.
(6) GEOGRAPHIC INFORMATION
The Company manages its business on the basis of one reportable
operating segment. The Company is exposed to the risk of changes in social,
political and economic conditions inherent in foreign operations and the
Company's results of operations and the value of its foreign assets and
liabilities are affected by fluctuations in foreign currency exchange rates.
During the first quarter of 2002, to reflect the integration of
management reporting responsibilities, the Company reclassified Puerto Rico's
results from its international operations to its United States operations.
The geographic information reflects this change for both the 2002 and 2001
periods.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
GEOGRAPHIC AREAS: ------------------------------ ------------------------------
Net sales: 2002 2001 2002 2001
------------ ------------ ------------ ------------
United States............................. $ 221.1 $ 216.6 $ 614.2 $ 624.6
Canada.................................... 10.9 11.9 31.2 32.6
------------ ------------ ------------ ------------
United States and Canada.................. 232.0 228.5 645.4 657.2
International............................. 91.2 91.7 261.4 298.7
------------ ------------ ------------ ------------
$ 323.2 $ 320.2 $ 906.8 $ 955.9
============ ============ ============ ============
SEPTEMBER 30, DECEMBER 31,
2002 2001
Long-lived assets: ------------ ------------
United States............................. $ 387.7 $ 399.4
Canada.................................... 2.5 2.5
------------ ------------
United States and Canada.................. 390.2 401.9
International............................. 71.1 71.6
------------ ------------
$ 461.3 $ 473.5
============ ============
THREE MONTHS ENDED NINE MONTHS ENDED
CLASSES OF SIMILAR PRODUCTS: SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales:
Cosmetics, skin care and fragrances....... $ 212.4 $ 210.5 $ 581.3 $ 614.7
Personal care............................. 110.8 109.7 325.5 341.2
------------ ------------ ------------ ------------
$ 323.2 $ 320.2 $ 906.8 $ 955.9
============ ============ ============ ============
(7) DISPOSITION
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 a deferred purchase price contingent upon future
results of up to approximately $4.7, which could be received over
approximately a seven-year period. In connection with the disposition, the
Company recognized a pre-tax and after-tax loss of $1.0 in the first quarter
of 2002.
9
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(8) DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, primarily foreign
currency forward exchange contracts, to reduce the exposure of adverse
effects of fluctuations in foreign currency exchange rates. These contracts,
which have been designated as cash flow hedges, were entered into primarily
to hedge anticipated inventory purchases and certain intercompany payments
denominated in foreign currencies, which have maturities of less than one
year. Any unrecognized income (loss) related to these contracts are recorded
in the Statement of Operations when the underlying transactions hedged are
realized (e.g., when inventory is sold or intercompany transactions are
settled). During 2002, the Company entered into these contracts with a
counterparty that is a major financial institution, and accordingly the
Company believes that the risk of counterparty nonperformance is remote. The
notional amount of the foreign currency forward exchange contracts
outstanding at September 30, 2002 was $17.1. The fair value of the foreign
currency forward exchange contracts outstanding at September 30, 2002 was
nil.
(9) GUARANTOR FINANCIAL INFORMATION
On June 21, 2002, the 12% Senior Secured Notes due 2005 (the
"Original 12% Notes"), which were issued by Products Corporation in November
2001, were exchanged for new 12% Senior Secured Notes due 2005 which have
substantially identical terms as the Original 12% Notes (the "12% Notes"),
except that the 12% Notes are registered with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended
(the "Securities Act"), and the transfer restrictions and registration rights
applicable to the Original 12% Notes do not apply to the 12% Notes. The 12%
Notes are jointly and severally, fully and unconditionally guaranteed by the
domestic subsidiaries of Products Corporation that guarantee Products
Corporation's 2001 Credit Agreement (as hereinafter defined) (the "Guarantor
Subsidiaries") (Subsidiaries of Products Corporation that do not guarantee
the 12% Notes are referred to as the "Non-Guarantor Subsidiaries"). The
Supplemental Guarantor Condensed Consolidating Financial Data presented below
presents the balance sheets, statements of operations and statements of cash
flow data (i) for Products Corporation and the Guarantor Subsidiaries and the
Non-Guarantor Subsidiaries on a consolidated basis (which is derived from
Products Corporation's historical reported financial information); (ii) for
Products Corporation as the "Parent Company", alone (accounting for its
Guarantor Subsidiaries and the Non-Guarantor Subsidiaries on an equity basis
under which the investments are recorded by each entity owning a portion of
another entity at cost, adjusted for the applicable share of the subsidiary's
cumulative results of operations, capital contributions and distributions,
and other equity changes); (iii) for the Guarantor Subsidiaries alone; and
(iv) for the Non-Guarantor Subsidiaries alone. Additionally, Products
Corporation's 12% Notes are fully and unconditionally guaranteed by Revlon,
Inc. The unaudited and audited consolidating condensed balance sheets,
unaudited consolidating condensed statements of operations and unaudited
consolidating condensed statements of cash flow for Revlon, Inc. have not
been included in the accompanying Supplemental Guarantor Condensed
Consolidating Financial Data as such information is not materially different
from those of Products Corporation.
10
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
UNAUDITED CONSOLIDATING CONDENSED BALANCE SHEETS
AS OF SEPTEMBER 30, 2002
(DOLLARS IN MILLIONS)
NON-
PARENT GUARANTOR GUARANTOR
ASSETS CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
-------------- ------------ ----------- -------------- --------------
Current assets .................................. $ 496.2 $ - $ 286.9 $ 33.7 $ 175.6
Intercompany receivables ........................ - (1,456.7) 793.4 466.9 196.4
Investment in subsidiaries ...................... - 222.1 (176.0) (95.1) 49.0
Property, plant and equipment, net .............. 131.8 - 120.3 2.9 8.6
Other assets .................................... 131.4 - 114.0 6.5 10.9
Intangible assets, net .......................... 198.1 - 161.3 3.3 33.5
-------------- ------------ --------- -------------- -------------
Total assets .............................. $ 957.5 $ (1,234.6) $ 1,299.9 $ 418.2 $ 474.0
============== ============ ========= ============== =============
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current liabilities ............................. $ 388.1 $ - $ 272.6 $ 23.6 $ 91.9
Intercompany payables ........................... - (1,456.7) 480.5 612.6 363.6
Long-term debt .................................. 1,717.7 - 1,704.3 8.5 4.9
Other long-term liabilities ..................... 255.9 - 246.7 9.2 -
-------------- ------------ --------- -------------- -------------
Total liabilities ............................... 2,361.7 (1,456.7) 2,704.1 653.9 460.4
Stockholder's deficiency ........................ (1,404.2) 222.1 (1,404.2) (235.7) 13.6
-------------- ------------ --------- -------------- -------------
Total liabilities and stockholder's deficiency .. $ 957.5 $ (1,234.6) $ 1,299.9 $ 418.2 $ 474.0
============== ============ ========= ============== =============
UNAUDITED CONSOLIDATING CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 2001
(DOLLARS IN MILLIONS)
NON-
PARENT GUARANTOR GUARANTOR
ASSETS CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
-------------- ------------ ----------- -------------- --------------
Current assets ............................. $ 517.9 $ - $ 294.9 $ 28.2 $ 194.8
Intercompany receivables ................... - (1,361.4) 726.0 387.1 248.3
Investment in subsidiaries ................. - 177.5 (150.2) (61.3) 34.0
Property, plant and equipment, net ......... 142.8 - 131.1 3.3 8.4
Other assets ............................... 132.2 - 115.6 6.7 9.9
Intangible assets, net ..................... 198.5 - 161.9 3.4 33.2
-------------- ------------ ----------- -------------- --------------
Total assets ......................... $ 991.4 $ (1,183.9) $ 1,279.3 $ 367.4 $ 528.6
============== ============ =========== ============== ==============
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current liabilities ........................ $ 385.7 $ - $ 258.6 $ 21.2 $ 105.9
Intercompany payables ...................... - (1,361.4) 425.5 517.6 418.3
Long-term debt ............................. 1,643.6 - 1,642.2 - 1.4
Other long-term liabilities ................ 250.9 - 241.8 9.1 -
-------------- ------------ ----------- -------------- --------------
Total liabilities .......................... 2,280.2 (1,361.4) 2,568.1 547.9 525.6
Stockholder's deficiency ................... (1,288.8) 177.5 (1,288.8) (180.5) 3.0
-------------- ------------ ----------- -------------- --------------
Total liabilities and stockholder's
deficiency .............................. $ 991.4 $ (1,183.9) $ 1,279.3 $ 367.4 $ 528.6
============== ============ =========== ============== ==============
11
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
(DOLLARS IN MILLIONS)
NON-
PARENT GUARANTOR GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
-------------- ------------ ----------- -------------- --------------
Net sales ........................................ $ 323.2 $ (38.0) $ 216.8 $ 52.5 $ 91.9
Cost of sales .................................... 121.6 (38.0) 73.7 43.1 42.8
-------------- ------------ ----------- -------------- --------------
Gross profit ............................... 201.6 - 143.1 9.4 49.1
Selling, general and administrative expenses ..... 176.7 - 125.4 8.6 42.7
Restructuring costs .............................. 2.1 - 1.5 - 0.6
-------------- ------------ ----------- -------------- --------------
Operating income ........................... 22.8 - 16.2 0.8 5.8
-------------- ------------ ----------- -------------- --------------
Other expenses (income):
Interest expense, net ...................... 39.7 - 39.3 0.1 0.3
Miscellaneous, net ......................... 3.6 - (3.6) (16.0) 23.2
Equity in earnings of subsidiaries ......... - (13.6) 1.9 11.7 -
-------------- ------------ ----------- -------------- --------------
Other expenses (income), net ......... 43.3 (13.6) 37.6 (4.2) 23.5
-------------- ------------ ----------- -------------- --------------
(Loss) income before income taxes ................ (20.5) 13.6 (21.4) 5.0 (17.7)
Provision for income taxes ....................... 1.0 - 0.1 0.2 0.7
-------------- ------------ ----------- -------------- --------------
Net (loss) income ................................ $ (21.5) $ 13.6 $ (21.5) $ 4.8 $ (18.4)
============== ============== =========== ============== ==============
UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
(DOLLARS IN MILLIONS)
NON-
PARENT GUARANTOR GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
-------------- ------------ ----------- -------------- --------------
Net sales ........................................ $ 320.2 $ (34.2) $ 211.1 $ 46.1 $ 97.2
Cost of sales .................................... 129.8 (34.2) 81.3 35.5 47.2
-------------- ------------ ----------- -------------- --------------
Gross profit ............................... 190.4 - 129.8 10.6 50.0
Selling, general and administrative expenses ..... 162.0 - 108.2 7.2 46.6
Restructuring costs .............................. 3.0 - 0.2 0.3 2.5
-------------- ------------ ----------- -------------- --------------
Operating income ........................... 25.4 - 21.4 3.1 0.9
-------------- ------------ ----------- -------------- --------------
Other expenses (income):
Interest expense, net ...................... 33.6 - 32.0 0.7 0.9
Loss on sale of assets, net ................ 7.9 - - - 7.9
Miscellaneous, net ......................... 4.4 - (0.1) (10.8) 15.3
Equity in earnings of subsidiaries ......... - (30.8) 0.6 29.8 0.4
-------------- ------------ ----------- -------------- --------------
Other expenses, net .................. 45.9 (30.8) 32.5 19.7 24.5
-------------- ------------ ----------- -------------- --------------
Loss before income taxes ......................... (20.5) 30.8 (11.1) (16.6) (23.6)
Provision (benefit) for income taxes ............. 1.5 - 10.9 (10.5) 1.1
-------------- ------------ ----------- -------------- --------------
Net loss ......................................... $ (22.0) $ 30.8 $ (22.0) $ (6.1) $ (24.7)
============== ============ =========== ============== ==============
12
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(DOLLARS IN MILLIONS)
NON-
PARENT GUARANTOR GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
-------------- ------------ ----------- -------------- --------------
Net sales ....................................... $ 906.8 $ (98.5) $ 601.5 $ 135.8 $ 268.0
Cost of sales ................................... 350.4 (98.5) 213.1 109.5 126.3
-------------- ------------ ----------- -------------- --------------
Gross profit .............................. 556.4 - 388.4 26.3 141.7
Selling, general and administrative expenses .... 522.1 - 362.2 26.5 133.4
Restructuring costs ............................. 9.3 - 5.7 0.2 3.4
-------------- ------------ ----------- -------------- --------------
Operating income (loss) ................... 25.0 - 20.5 (0.4) 4.9
-------------- ------------ ----------- -------------- --------------
Other expenses (income):
Interest expense, net ..................... 116.8 - 116.1 0.2 0.5
Loss on sale of assets, net ............... 1.0 - - - 1.0
Miscellaneous, net ........................ 10.1 - 0.4 (22.5) 32.2
Equity in earnings of subsidiaries - (68.8) 12.4 56.2 0.2
-------------- ------------ ----------- -------------- --------------
Other expenses, net ................. 127.9 (68.8) 128.9 33.9 33.9
-------------- ------------ ----------- -------------- --------------
Loss before income taxes ........................ (102.9) 68.8 (108.4) (34.3) (29.0)
Provision (benefit) for income taxes ............ 2.1 - (3.4) 3.1 2.4
-------------- ------------ ----------- -------------- --------------
Net loss ........................................ $ (105.0) $ 68.8 $ (105.0) $ (37.4) $ (31.4)
============== ============ =========== ============== ==============
UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(DOLLARS IN MILLIONS)
NON-
PARENT GUARANTOR GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
-------------- ------------ ----------- -------------- --------------
Net sales ....................................... $ 955.9 $ (103.0) $ 608.7 $ 114.0 $ 336.2
Cost of sales ................................... 404.4 (103.0) 246.6 87.8 173.0
-------------- ------------ ----------- -------------- --------------
Gross profit .............................. 551.5 - 362.1 26.2 163.2
Selling, general and administrative expenses .... 520.8 - 337.9 27.3 155.6
Restructuring costs ............................. 25.5 - 14.2 1.2 10.1
-------------- ------------ ----------- -------------- --------------
Operating income (loss) ................... 5.2 - 10.0 (2.3) (2.5)
-------------- ------------ ----------- -------------- --------------
Other expenses (income):
Interest expense, net ..................... 102.8 - 98.2 1.3 3.3
Loss on sale of assets, net ............... 15.0 - - - 15.0
Miscellaneous, net ........................ 8.0 - 4.7 (28.5) 31.8
Equity in earnings of subsidiaries ........ - (74.1) 20.3 52.5 1.3
-------------- ------------ ----------- -------------- --------------
Other expenses, net ................. 125.8 (74.1) 123.2 25.3 51.4
-------------- ------------ ----------- -------------- --------------
Loss before income taxes ........................ (120.6) 74.1 (113.2) (27.6) (53.9)
Provision (benefit) for income taxes ............ 3.3 - 10.7 (9.4) 2.0
-------------- ------------ ----------- -------------- --------------
Net loss ........................................ $ (123.9) $ 74.1 $ (123.9) $ (18.2) $ (55.9)
============== ============ =========== ============== ==============
13
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF CASH FLOW
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(DOLLARS IN MILLIONS)
NON-
PARENT GUARANTOR GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
-------------- ------------ ----------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used for operating activities ............. $ (110.9) $ - $ (90.9) $ (17.8) $ (2.2)
-------------- ------------ ----------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................... (9.4) - (8.0) - (1.4)
Sale of marketable securities ...................... 1.8 - 1.8 - -
-------------- ------------ ----------- -------------- --------------
Net cash used for investing activities ............. (7.6) - (6.2) - (1.4)
-------------- ------------ ----------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings -
third parties .................................. 7.7 - - 2.8 4.9
Proceeds from the issuance of long-term debt -
third parties .................................. 94.6 - 79.5 10.9 4.2
Repayment of long-term debt - third parties ........ (23.5) - (19.5) (2.9) (1.1)
Payment of debt issuance costs ..................... (0.3) - (0.3) - -
-------------- ------------ ----------- -------------- --------------
Net cash provided by financing activities .......... 78.5 - 59.7 10.8 8.0
-------------- ------------ ----------- -------------- --------------
Effect of exchange rate changes on cash and cash
equivalents .................................... (4.1) - (0.1) 0.2 (4.2)
-------------- ------------ ----------- -------------- --------------
Net (decrease) increase in cash and cash
equivalents ............................... (44.1) - (37.5) (6.8) 0.2
Cash and cash equivalents at beginning of
period .................................... 103.3 - 55.0 10.1 38.2
-------------- ------------ ----------- -------------- --------------
Cash and cash equivalents at end of period ... $ 59.2 $ - $ 17.5 $ 3.3 $ 38.4
============== ============ =========== ============== ==============
UNAUDITED CONSOLIDATING CONDENSED STATEMENT OF CASH FLOW
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(DOLLARS IN MILLIONS)
NON-
PARENT GUARANTOR GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
-------------- ------------ ----------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash (used for) provided by operating activities . $ (89.0) $ - $ (120.9) $ (15.8) $ 47.7
-------------- ------------ ----------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................. (10.4) - (8.8) (1.5) (0.1)
Net proceeds from the sale of brand and certain
assets ............................................. 97.5 - 97.5 - -
-------------- ------------ ----------- --------------- --------------
Net cash provided by (used for) investing activities . 87.1 - 88.7 (1.5) (0.1)
-------------- ------------ ----------- --------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings -
third parties ..................................... 0.5 - 0.1 - 0.4
Proceeds from the issuance of long-term debt -
third parties ..................................... 196.1 - 161.7 27.1 7.3
Repayment of long-term debt - third parties .......... (208.8) - (149.1) (9.9) (49.8)
Net distribution from affiliate ...................... (1.0) - - (1.0) -
Payment of debt issuance costs ....................... (2.4) - (2.4) - -
-------------- ------------ ----------- -------------- --------------
Net cash (used for) provided by financing activities . (15.6) - 10.3 16.2 (42.1)
-------------- ------------ ----------- -------------- --------------
Effect of exchange rate changes on cash and cash
equivalents ....................................... (1.6) - 0.3 (0.3) (1.6)
-------------- ------------ ----------- -------------- --------------
Net (decrease) increase in cash and cash
equivalents .................................. (19.1) - (21.6) (1.4) 3.9
Cash and cash equivalents at beginning of
period ....................................... 56.3 - 10.7 2.9 42.7
-------------- ------------ ----------- -------------- --------------
Cash and cash equivalents at end of period ..... $ 37.2 $ - $ (10.9) $ 1.5 $ 46.6
============== ============ =========== ============== ==============
14
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
(10) SUBSEQUENT EVENT
In October 2002, the Company and its principal third party
manufacturer for Europe and certain other international markets terminated
the long-term supply agreement they had entered into in connection with the
Company's disposition of its Maesteg facility in July 2001, and they entered
into a new, more flexible arrangement with significantly reduced volume
commitments. Under the new arrangement, the Company will loan such supplier
approximately $2.0 and the supplier can earn performance-based payments of
approximately $6.3 (less the unpaid balance of such loan) over a 4-year
period, contingent upon the supplier achieving specific production service
level goals. As part of terminating the long-term supply agreement the supplier
released the Company from the Company's minimum purchase commitments under the
old supply agreement, which were approximately $145.5 over the 8-year term of
such agreement. In exchange, the Company waived approximately $10.0 of deferred
purchase price which otherwise would have been payable by the supplier to the
Company in connection with the July 2001 sale of the Maesteg facility (a portion
of which was contingent on future events). Such deferred purchase price, absent
such waiver, would have been payable by the supplier to the Company over a
6-year period.
15
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
OVERVIEW
The Company operates in a single 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 July 16, 2001 Products Corporation completed the disposition of
the Colorama brand in Brazil. Accordingly, the Unaudited Consolidated
Condensed Financial Statements include the results of operations of the
Colorama brand through the date of its disposition.
During the first quarter of 2002, to reflect the integration of
management reporting responsibilities, the Company reclassified Puerto Rico's
results from its international operations to its United States operations.
Management's discussion and analysis data reflects this change for both the
2002 and 2001 periods. During the third quarter of 2002, the Company
reclassified its South African operations from the European region to the Far
East region to reflect the management organization responsibility for that
country, and accordingly, management's discussion and analysis data reflects
this change for both the 2002 and 2001 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. Actual results could differ significantly from those estimates and
assumptions. 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 the amount that the
Company expects to realize upon their subsequent disposition. 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 the Company's estimates if factors such
as product discontinuances, customer inventory levels or competitive
conditions differ from the Company's estimates and expectations and, in the
case of actual returns, if economic conditions differ significantly from the
Company's estimates and expectations.
16
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
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 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 the Company's estimates
and 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 the amounts that the Company may ultimately realize upon
the disposition of inventories if future economic conditions, customer
inventory levels, product discontinuances or competitive conditions differ
from the Company's estimates and 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, changes in the planned use of fixtures or software
or closing of facilities or changes in the Company's capital strategy can
result in the actual useful lives differing from the Company's estimates.
Included in other assets are permanent display units, which are
recorded at cost and amortized on a straight-line basis over the estimated
useful lives of such assets. Intangibles other than goodwill are recorded at
cost and amortized on a straight-line basis over the estimated useful lives
of such assets.
Long-lived assets, including fixed assets, permanent display units
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. 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. The estimate of
undiscounted 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. In those cases where the
Company determines that the useful life of other long-lived assets should be
shortened, the Company would depreciate the net book value in excess of the
salvage value (after testing for impairment as described above), over the
revised remaining useful life of such asset thereby increasing amortization
expense.
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
17
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
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, among other things. 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 and 2003 will be significantly higher than in recent
years.
RESULTS OF OPERATIONS
In order to provide a comparison of results from its ongoing
operations, the Company's discussion includes presentation on an "ongoing
operations" basis. The following table sets forth certain summary unaudited data
for the Company for the three months and nine months ended September 30, 2002
and September 30, 2001, respectively, reconciling the Company's actual "as
reported results" to the ongoing operations, after giving effect to the
following: (i) the disposition of the Colorama brand, assuming such transaction
occurred on January 1, 2001; (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 SG&A expenses and executive severance costs that were included in SG&A
expenses in the period incurred (after giving effect thereto, the "Ongoing
Operations"). The adjustments are based upon available information and certain
assumptions that the Company's 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 the Company's financial position that actually
would have occurred had the foregoing transactions referred to in (i) above been
consummated on January 1, 2001.
THREE MONTHS ENDED SEPTEMBER 30, 2002:
- -------------------------------------------------
BRANDS AND RESTRUCTURING
AS FACILITIES COSTS AND ONGOING
REPORTED SOLD OTHER, NET OPERATIONS
---------------- ---------------- ---------------- -----------------
Net sales ............................................ $ 323.2 $ - $ - $ 323.2
Gross profit ......................................... 201.6 - 0.3 201.9
SG&A expenses ........................................ 176.7 - (1.8) 174.9
Restructuring costs and other, net ................... 2.1 - (2.1) -
NINE MONTHS ENDED SEPTEMBER 30, 2002:
- -------------------------------------------------
BRANDS AND RESTRUCTURING
AS FACILITIES COSTS AND ONGOING
REPORTED SOLD OTHER, NET OPERATIONS
---------------- ---------------- ---------------- -----------------
Net sales ............................................ $ 906.8 $ - $ - $ 906.8
Gross profit ......................................... 556.4 - 1.3 557.7
SG&A expenses ........................................ 522.1 - (8.4) 513.7
Restructuring costs and other, net ................... 9.3 - (9.3) -
18
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED SEPTEMBER 30, 2001:
- -------------------------------------------------
BRANDS AND RESTRUCTURING
AS FACILITIES COSTS AND ONGOING
REPORTED SOLD OTHER, NET OPERATIONS
---------------- ---------------- ---------------- -----------------
Net sales ........................................... $ 320.2 $ (0.3) $ - $ 319.9
Gross profit ........................................ 190.4 0.5 5.8 196.7
SG&A expenses ....................................... 162.0 (2.3) (1.2) 158.5
Restructuring costs and other, net .................. 3.0 - (3.0) -
NINE MONTHS ENDED SEPTEMBER 30, 2001:
- -------------------------------------------------
BRANDS AND RESTRUCTURING
AS FACILITIES COSTS AND ONGOING
REPORTED SOLD OTHER, NET OPERATIONS
---------------- ---------------- ---------------- -----------------
Net sales ........................................... $ 955.9 $ (16.4) $ - $ 939.5
Gross profit ........................................ 551.5 (6.5) 30.6 575.6
SG&A expenses ....................................... 520.8 (9.1) (6.9) 504.8
Restructuring costs and other, net .................. 25.5 - (25.5) -
Net sales
Net sales were $323.2 and $320.2 for the third quarters of 2002 and
2001, respectively, an increase of $3.0, or 0.9% (an increase of 3.1% on a
constant U.S. dollar basis), and were $906.8 and $955.9 for the nine months
ended September 30, 2002 and 2001, respectively, a decrease of $49.1, or 5.1%
(a decrease of 2.6% on a constant U.S. dollar basis).
Net sales from Ongoing Operations were $323.2 and $319.9 for the
third quarters of 2002 and 2001, respectively, an increase of $3.3, or 1.0%
(an increase of 3.1% on a constant U.S. dollar basis), and were $906.8 and
$939.5 for the nine months ended September 30, 2002 and 2001, respectively, a
decrease of $32.7, or 3.5% (a decrease of 1.0% on a constant U.S. dollar
basis).
United States and Canada. Net sales in the United States and Canada
on both an as reported and Ongoing Operations basis were $232.0 for the third
quarter of 2002 compared with $228.5 for the third quarter of 2001, an
increase of $3.5, or 1.5%, and were $645.4 and $657.2 for the nine months
ended September 30, 2002 and 2001, respectively, a decrease of $11.8, or
1.8%. The increase for the third quarter of 2002 of 1.5% was driven primarily
by an incremental $10.4 in licensing revenues stemming from the prepayment by
a licensee of certain minimum royalties through 2005 and lower sales returns,
partially offset by higher promotional spending activity and increased sales
allowances. The decrease for the nine months ended September 30, 2002 of 1.8%
was driven primarily by lower shipments to the Company's retail customers as
a result of the decision by two major U.S. retailers to shift the timing of
plan-o-gram resets for certain 2002 new products (this resulted in shipments
of approximately $14.0 of 2002 new products in the fourth quarter of 2001)
and higher promotional spending activity and to a lesser extent increased
sales allowances. These reductions were offset in part by the increase of
$10.4 in incremental licensing revenues referred to above.
International. Net sales in the Company's international operations
were $91.2 for the third quarter of 2002, compared with $91.7 for the third
quarter of 2001, a decrease of $0.5, or 0.5% (an increase of 7.0% on a
19
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
constant U.S. dollar basis) and were $261.4 and $298.7 for the nine months
ended September 30, 2002 and 2001, respectively, a decrease of $37.3 or 12.5%
(a decrease of 4.7% on a constant U.S. dollar basis).
Net sales in the Company's international Ongoing Operations
("Ongoing International Operations") were $91.2 and $91.4 for the third
quarters of 2002 and 2001, respectively, a decrease of $0.2, or 0.2%, (an
increase of 7.3% on a constant U.S. dollar basis) and were $261.4 and $282.3
for the nine months ended September 30, 2002 and 2001, respectively, a
decrease of $20.9, or 7.4% (an increase of 0.7% on a constant U.S. dollar
basis). During the third quarter of 2002, the Company reclassified its South
African operations from the European region to the Far East region to reflect
the management organization responsibility for that country and accordingly,
management's discussion and analysis data reflects this change for both the
2002 and 2001 periods.
Ongoing International Operations sales are divided by the Company
into three geographic regions. In Europe, which is comprised of Europe and
the Middle East, net sales increased by $0.1, or 0.4% to $27.9 for the third
quarter of 2002, as compared with the third quarter of 2001 (a decrease of
6.1% on a constant U.S. dollar basis), and decreased by $6.7, or 7.7% to
$80.3 for the nine months ended September 30, 2002, as compared with the nine
months ended September 30, 2001 (a decrease of 9.1% on a constant U.S. dollar
basis). In Latin America, which is comprised of Mexico, Central America and
South America, net sales decreased by $4.6, or 17.0% to $22.5 for the third
quarter of 2002, as compared with the third quarter of 2001 (an increase of
13.8% on a constant U.S. dollar basis) and decreased by $18.1, or 20.3% to
$71.1 for the nine months ended September 30, 2002, as compared with the nine
months ended September 30, 2001 (an increase of 1.4% on a constant U.S.
dollar basis). In the Far East and Africa, net sales increased by $4.3, or
11.8% to $40.8 for the third quarter of 2002, as compared with the third
quarter of 2001 (an increase of 13.7% on a constant U.S. dollar basis) and
increased by $3.9, or 3.7% to $110.0 for the nine months ended September 30,
2002, as compared with the nine months ended September 30, 2001 (an increase
of 9.1% 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. During the three months and nine months ended
September 30, 2002, the Company experienced significant adverse currency
fluctuations in Argentina, Venezuela and Brazil. During the third quarter of
2002, the Company continued to experience production difficulties with its
principal third party manufacturer for Europe and certain other international
markets which operates the Maesteg facility. To rectify this situation, on
October 31, 2002 the Company and such manufacturer terminated the long-term
supply agreement and they entered into a new, more flexible agreement with
significantly reduced volume commitments and the Company will loan such
supplier approximately $2.0. To address the production difficulties, under
the new arrangement, the supplier can earn performance-based payments of
approximately $6.3 (less the unpaid balance of such loan) over a 4-year
period contingent upon the supplier achieving specific production service
level goals. Under the new arrangement, the Company also intends to source
certain products from its Oxford facility and other suppliers. The Company
expects that under the new supply arrangement, the production difficulties at
the Maesteg facility will be resolved during the first half of 2003.
The increase in net sales for the third quarter, as compared to the
comparable 2001 period, for Ongoing International Operations on a comparable
currency basis, was primarily due to increased new product sales and
distribution in the U.K., South Africa, Japan, China, Hong Kong, Taiwan and
distributor markets in Latin America, the Far East and Europe (which factor
the Company estimates contributed to an approximately 10.7% increase in net
sales on a constant U.S. dollar basis) and sales tax increases in Brazil (which
factor the Company estimates contributed to an approximately 3.3% increase in
net sales on a constant U.S. dollar basis), partially offset by the effect of
political and economic difficulties in Argentina and Venezuela (which factor
the Company estimates contributed to an approximately 1.7% reduction in net
20
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
sales on a constant U.S. dollar basis), increased competitive activity in
Australia and Italy (which factor the Company estimates contributed to an
approximately 2.3% reduction in net sales on a constant U.S. dollar basis), and
disruption in production at the Company's third party manufacturer in Maesteg,
Wales, (which factor the Company estimates contributed to an approximately 3.7%
reduction in net sales on a constant U.S. dollar basis).
The increase in net sales for the nine months ended September 30, 2002,
as compared to the comparable 2001 period, for Ongoing International Operations
on a comparable currency basis, was primarily due to new product sales and
distribution in the U.K., South Africa, China, Hong Kong, and distributor
markets in Latin America, the Far East and Europe (which factor the Company
estimates contributed to an approximately 7.2% increase in net sales on a
constant U.S. dollar basis), and sales tax increases in Brazil (which factor the
Company estimates contributed to an approximately 2.8% increase in net sales on
a constant U.S. dollar basis), partially offset by the effect of political and
economic difficulties in Argentina and Venezuela (which factor the Company
estimates contributed to an approximately 2.8% reduction in net sales on a
constant U.S. dollar basis), increased competitive activity in Mexico, Italy,
Australia and New Zealand (which factor the Company estimates contributed to an
approximately 2.3% reduction in net sales on a constant U.S. dollar basis),
conversion of the Company's Benelux and Israeli businesses to a distributor
(which factor the Company estimates contributed to an approximately 2.4%
reduction in net sales on a constant U.S. dollar basis), and disruption in
production at the Company's third party manufacturer in Maesteg, Wales, (which
the Company estimates contributed to an approximately 1.7% reduction in net
sales on a constant U.S. dollar basis).
Gross profit
Gross profit was $201.6 for the third quarter of 2002, compared with
$190.4 for the third quarter of 2001 and was $556.4 for the nine months ended
September 30, 2002, compared to $551.5 for the nine months ended September
30, 2001. As a percentage of net sales, gross profit margins were 62.4% for
the third quarter of 2002, compared with 59.5% for the third quarter of 2001
and were 61.4% for the nine months ended September 30, 2002, compared with
57.7% for the nine months ended September 30, 2001. Gross profit and gross
profit margin for Ongoing Operations were $201.9 and 62.5%, respectively, in
the third quarter of 2002, compared with gross profit and gross profit margin
of $196.7 and 61.5% in the third quarter of 2001 and were $557.7 and 61.5%,
respectively, in the nine months ended September 30, 2002, compared with
gross profit and gross profit margin of $575.6 and 61.3% in the nine months
ended September 30, 2001. The increase in gross profit margin on an ongoing
basis in the third quarter and nine months ended September 30, 2002 compared
to the comparable 2001 periods is due to $10.4 in licensing revenues stemming
from the prepayment by a licensee of certain minimum royalties, reduced
overhead costs primarily as a result of the shutdown of the Phoenix and
Canada facilities in 2001, lower returns and $1.7 in respect of an insurance
claim for certain losses in Latin America, partially offset by higher
promotional spending activity, unfavorable product mix, as well as higher
costs for certain products produced in Europe. Gross profit from Ongoing
Operations for the three months and nine months ended September 30, 2002 and
2001 excludes $0.3 and $1.3, respectively, and $5.8 and $30.6, respectively
($6.1 of which represents increased depreciation recorded for the Phoenix
facility - See Note 5) of additional consolidation costs associated with the
shutdown of the Phoenix and Canada facilities in 2001 and $(0.5) and $6.5,
respectively, of gross profit (loss) from the Colorama brand in Brazil.
21
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
SG&A expenses
SG&A expenses were $176.7 for the third quarter of 2002, compared
with $162.0 for the third quarter of 2001 and $522.1 for the nine months
ended September 30, 2002 compared with $520.8 for the nine months ended
September 30, 2001. SG&A expenses for Ongoing Operations were $174.9 for the
third quarter of 2002, which excludes $1.8 of executive separation costs,
compared with $158.5 for the third quarter of 2001, which excludes $1.2 of
additional consolidation costs associated with the shutdown of the Phoenix
and Canada facilities in 2001 and $2.3 of SG&A expenses of the Colorama brand
in Brazil in 2001. SG&A expenses for Ongoing Operations were $513.7 for the
nine months ended September 30, 2002, which excludes $8.4 ($8.3 of which are
executive separation costs), compared with $504.8 for the nine months ended
September 30, 2001, which excludes $6.9 of additional consolidation costs
associated with the shutdown of the Phoenix and Canada facilities in 2001 and
$9.1 of SG&A expenses of the Colorama brand in Brazil in 2001. The increase
in SG&A expenses for Ongoing Operations for the third quarter of 2002, as
compared to the third quarter of 2001, is due primarily to higher
departmental and other general and administrative expenses of $10.3, which
was primarily due to higher professional fees, increased brand support
expenses of $7.4, higher permanent display amortization of $2.2, which
includes $1.4 of accelerated amortization associated with the roll-out of the
Company's new permanent display units in the U.S. (See Financial Condition,
Liquidity and Capital Resources) and accelerated amortization charges of $1.3
for certain information systems related to the Company's decision to upgrade
its information systems (See Financial Condition, Liquidity and Capital
Resources). These increases were partially offset by the elimination of
goodwill amortization of $1.9, as well as lower distribution costs of $2.2
and $0.7 in respect of an insurance claim for certain losses in Latin
America. The increase in SG&A expenses for Ongoing Operations for the nine
months ended September 30, 2002, as compared to the nine months ended
September 30, 2001 is primarily due to higher departmental and other general
and administrative expenses of $10.1, which was primarily due to higher
professional fees and compensation, higher permanent display amortization of
$9.7, due to the accelerated amortization associated with the roll-out of the
Company's new permanent display units in the U.S., accelerated amortization
charges of $2.7 and a write-off of $2.2 in connection with the Company's
decision to upgrade certain of its information systems, partially offset by
the elimination of goodwill amortization of $5.7, as well as lower
distribution costs of $6.2, a reduction of $3.2 for certain brand support
expenses and $0.7 in respect of an insurance claim for certain losses in
Latin America.
Restructuring costs
During the third quarter of 2000, 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 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. During the
third quarter of 2001 and the nine months ended September 30, 2001, the
Company continued to implement the 2000 restructuring program and recorded a
charge of $3.0 and $25.5, respectively, principally for additional employee
severance and other personnel benefits and relocation.
22
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
During the third quarter of 2002 and the nine months ended September
30, 2002, the Company continued to implement the 2000 restructuring program,
as well as other restructuring actions, and recorded a charge of $2.1 and
$9.3, respectively, principally for additional employee severance and other
personnel benefits, primarily resulting from reductions in the Company's
worldwide sales force, relocation and other costs related to the
consolidation of worldwide operations.
The Company anticipates annualized savings of approximately $9 to
$11 relating to the restructuring charges recorded during the nine months
ended September 30, 2002.
Other expenses (income)
Interest expense was $40.1 for the third quarter of 2002 compared
with $34.1 for the third quarter of 2001, and $118.4 for the nine months
ended September 30, 2002, compared to $104.8 for the nine months ended
September 30, 2001. The increase in interest expense for the third quarter
and nine months ended September 30, 2002, as compared to the third quarter
and nine months ended September 30, 2001, is primarily due to the interest on
the 12% Notes (which were issued in late November 2001), partially offset by
lower average outstanding borrowings and lower interest rates under the
Credit Agreement.
Sale of assets and brand, net
In February 2002, Products Corporation completed the disposition of
its Benelux business. 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 a deferred
purchase price contingent upon future results of up to approximately $4.7,
which could be received over approximately a seven-year period. In connection
with the disposition, the Company recognized a pre-tax and after-tax loss of
$1.0 in the first quarter of 2002.
In July 2001, Products Corporation completed the disposition of the
Colorama brand in Brazil. In connection with the disposition the Company
recognized a pre-tax and after-tax loss of $6.5, $6.3 of which was recorded
in the second quarter of 2001. Additionally, the Company recognized a pre-tax
and after-tax loss on the disposition of land in Minami Aoyama near Tokyo,
Japan (the "Aoyama Property") and related rights for the construction of a
building on such land of $0.8 during the second quarter of 2001.
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. In connection with such disposition, the Company recognized a pre-tax
and after-tax loss of $7.7 during the third quarter of 2001. The supply
agreement was subsequently terminated and certain aspects of the purchase
agreement were revised. (See Note 10).
Provision for income taxes
The provision for income taxes was $1.0 for the third quarter of
2002, compared with $1.5 for the third quarter of 2001, and $2.1 for the nine
months ended September 30, 2002, compared to $3.3 for the nine months ended
September 30, 2001. The decrease in the provision for income taxes for the
third quarter of 2002, as compared to the third quarter of 2001, was
primarily attributable to lower taxable income in certain international
markets. The decrease in the provision for income taxes for the nine months
ended
23
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
September 30, 2002, as compared to the nine months ended September 30, 2001,
was primarily attributable to the recognition of tax benefits of approximately
$0.9 relating to the carryback of alternative minimum tax losses resulting from
tax legislation enacted in the first quarter of 2002.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities was $110.9 and $89.0 for the
nine months ended September 30, 2002 and 2001, respectively. The increase in
net cash used for operating activities is due to increased purchases of
permanent displays and a net use of working capital, which was partially
offset by a lower net loss.
Net cash (used for) provided by investing activities was $(7.6) and
$87.1 for the nine months ended September 30, 2002 and 2001, respectively.
Net cash used for investing activities for the nine months ended September
30, 2002 consisted of capital expenditures, partially offset by the sale of
marketable securities. Net cash provided by investing activities for the nine
months ended September 30, 2001 consisted of proceeds from the sale of the
Company's Aoyama Property and Phoenix facility, partially offset by capital
expenditures. The reduction in capital expenditures for the nine months ended
September 30, 2002, as compared to the nine months ended September 30, 2001,
is due to the timing of such expenditures.
Net cash provided by (used for) financing activities was $78.5 and
$(15.6) for the nine months ended September 30, 2002 and 2001, respectively.
Net cash provided by financing activities for the nine months ended September
30, 2002 included cash drawn under the 2001 Credit Agreement, partially
offset by the repayment of borrowings under the 2001 Credit Agreement. Net
cash used for financing activities for the nine months ended September 30,
2001 included repayments of borrowings under the 1997 Credit Agreement and
payment of debt issuance costs, partially offset by borrowings under the 1997
Credit Agreement.
On November 26, 2001, Products Corporation issued and sold $363 in
aggregate principal amount of Original 12% Notes in a private placement,
receiving gross proceeds of $350.5. Products Corporation used the proceeds
from the Original 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 entering
into the 2001 Credit Agreement and the issuance of the Original 12% Notes,
and the balance was available for general corporate purposes. On June 21,
2002, the Original 12% Notes were exchanged for the 12% Notes which have
substantially identical terms as the Original 12% Notes, except that the 12%
Notes are registered with the Commission under the Securities Act and the
transfer restrictions and registration rights applicable to the Original 12%
Notes do not apply to the 12% Notes.
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 September 30, 2002, 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 September 30, 2002, the Term Loan Facility was
fully drawn and $32.4 was available under the Multi-Currency Facility,
including the letters of credit.
The Company's principal sources of funds are expected to be cash
flow generated from operations, cash on hand and available borrowings under
the Multi-Currency Facility of the Credit Agreement. The
24
REVLON CONSUMER PRODUCTS CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
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% 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, including the ERP
System (as hereinafter defined), 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 5 to the Unaudited Consolidated
Condensed Financial Statements and executive separation costs will be $35 to
$40 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 foreign currency forward exchange
contracts from time to time to hedge certain cash flows denominated in
foreign currencies. There were foreign currency forward exchange contracts
with a notional amount of $17.1 and a fair value of nil outstanding at
September 30, 2002.
The Company expects that cash flows from operations, cash on hand
and available borrowings under the Multi-Currency Facility of the Credit
Agreement will be sufficient to enable the Company to meet its anticipated
cash requirements during 2002 on a consolidated basis, including the payment
of operating expenses, working capital, purchases of permanent displays and
capital expenditure requirements, including for the ERP System, expenses in
connection with the Company's restructuring programs referred to above and
debt service payments. 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 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 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 from these sources, 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, including with respect to the ERP System, 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