REVLON CONSUMER PRODUCTS CORP - 10-K Annual Report

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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, 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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OR 12(g) OF THE ACT:

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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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]

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 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, 2002, WAS 1,000.

PART I

ITEM 1. DESCRIPTION OF BUSINESS

BACKGROUND

Revlon Consumer Products Corporation ("Products Corporation" and
together with its subsidiaries, the "Company"), which is a direct wholly owned
subsidiary of Revlon, Inc., 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
sold worldwide and marketed under such well-known brand names as REVLON,
COLORSTAY, REVLON AGE DEFYING, SKINLIGHTS and ULTIMA II, as well as ALMAY, in
cosmetics; ALMAY Kinetin, VITAMIN C ABSOLUTES, ETERNA 27, ULTIMA II and JEANNE
GATINEAU in skin care; CHARLIE in fragrances; and HIGH DIMENSION, FLEX, MITCHUM,
COLORSILK, JEAN NATE and BOZZANO in personal care products.

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 leading market positions in a
number of its principal product categories in the U.S. mass-market distribution
channel, including the lip, face makeup and nail enamel categories. The Company
also has leading market positions in several product categories in certain
markets outside of the U.S., including in Australia, Canada, Mexico and South
Africa. The Company's products are sold in more than 100 countries across five
continents.

All U.S. 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 U.S.
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,
ACNielsen's data does not reflect sales volume from Wal-Mart, Inc.

THE COMPANY'S PLAN

The Company's plan consists of three main components: (1) the cost
rationalization phase; (2) the stabilization and growth phase; and (3) the
accelerated growth phase.

Phase 1 -- Cost Rationalization

In 1999 and 2000, the Company faced a number of strategic challenges.
Accordingly, through 2001 the Company focused its plan on lowering costs and
improving operating efficiency.

During 2001, the Company implemented several key elements of this phase
of its plan. For example, the Company:

o reduced departmental general and administrative expenses in the
Company's operations;

o reduced manufacturing and warehousing square footage by
approximately 55% during the period from November 2000 to December
31, 2001;

o closed the Company's in-house advertising division and
consolidated all advertising for the Company's Revlon and Almay
brands with two prominent advertising agencies (and further
consolidated into a single agency in 2002); and

o implemented revised trade terms with the Company's U.S. customers
intended to increase sell-through of the Company's products,
reduce merchandise returns and claims for damages and drive market
growth.

The Company believes that the actions taken during 2000 and 2001
lowered the Company's cost structure overall and improved the Company's
manufacturing and operating efficiency, creating a platform for the
stabilization and growth stage of the Company's plan.

Phase 2 -- Stabilization and Growth

In February 2002, the Company announced the appointment of Jack L.
Stahl, former president and chief operating officer of The Coca-Cola Company, as
the Company's new President and Chief Executive Officer.

Following the appointment of Mr. Stahl, the Company undertook an
extensive review and evaluation of the Company's business to establish specific
integrated objectives and actions to advance the next stage in the Company's
plan. As a result of this review, the Company established three principal
objectives:

o creating and developing the most consumer-preferred brands;

o becoming the most valuable partner to the Company's retailers; and

o becoming a top company where people choose to work.

The Company also conducted detailed evaluations and research of the
strengths of the Revlon brand (and the Company is continuing to conduct similar
evaluations and research for the Company's other major brands); the Company's
advertising and promotional efforts; the Company's relationships with the
Company's retailers and consumers; its retail in-store presence; and the
strength and skills of the Company's organization. As a result, the Company
developed the following key actions and investments to support the stabilization
and growth phase of its plan:

o Increase advertising and media spending and effectiveness. The
Company expects to increase its media spending and advertising
support. The Company will also seek to improve the effectiveness
of its marketing, including its advertising, by, among other
things, ensuring consistent messaging and imagery in its
advertising, in the graphics included in the Company's wall
displays and in other marketing materials.

o Increase the marketing effectiveness of the Company's wall
displays. Beginning in the first quarter of 2003, the Company
intends to make significant improvements to its retail wall
displays by streamlining its product assortment and reconfiguring
product placement, which the Company believes will optimize
cross-selling among the Company's various product categories on
the wall displays and make the wall displays easier to merchandise
and stock. The Company also intends to continue to roll out its
new wall displays, which the Company began in 2002. In addition,
the Company intends to enhance merchandiser coverage to improve
customer's stock levels and continue to develop the Company's
tamper evident program to reduce damages. The Company also intends
to work with its retail customers to improve replenishment of the
Company's products on the wall displays and to minimize
out-of-stocks at its customers.

o Adopt revised pricing strategies. The Company believes that it can
increase sales by selectively adjusting prices on certain SKUs to
better align the Company's pricing with product benefits and
competitive benchmarks.

o Further strengthen the Company's new product development process.
The Company is developing a new cross-functional new product
development process intended to optimize the Company's ability to
bring to market its new product offerings to ensure that the
Company has products in key trend categories.

o Implement a comprehensive program to develop and train the
Company's employees. The Company is implementing a comprehensive
program to further develop the management, leadership and
communication skills of its employees, which the Company will
regularly assess as part of its goal to become a top company where
people choose to work.

2

In December 2002, Revlon, Inc. announced that it would accelerate the
implementation of the stabilization and growth phase of its plan. The Company
recorded charges of approximately $100 million in the fourth quarter of 2002 and
currently expects to record additional charges not to exceed $60 million during
2003 and 2004. These charges relate to various aspects of the stabilization and
growth phase of the Company's plan, primarily stemming from higher sales returns
and inventory writedowns from a selective reduction of SKUs, reduced
distribution of the Ultima II brand, higher allowances stemming from selective
price adjustments on certain products, higher professional expenses associated
with the development of, research in relation to, and execution of the
stabilization and growth phase of the Company's plan, and writedowns associated
with reconfiguring existing wall displays at the Company's retail customers.

Phase 3 -- Accelerated Growth

The Company intends to capitalize on the actions taken during the
stabilization and growth phase of the Company's plan, with the objective of
increasing revenues and profitability over the long term.

RECENT DEVELOPMENTS

In December 2002, Revlon, Inc.'s principal stockholder, MacAndrews &
Forbes Holdings Inc. ("MacAndrews Holdings"), a corporation wholly owned
indirectly through Mafco Holdings Inc. ("Mafco Holdings" and, collectively with
MacAndrews Holdings, "MacAndrews & Forbes"), by Ronald O. Perelman, proposed
providing the Company with up to $150 million in cash in order to help fund a
portion of the costs and expenses associated with implementing the stabilization
and growth phase of the Company's plan and for general corporate purposes.
Revlon, Inc.'s Board of Directors appointed a special committee of independent
directors to evaluate the proposal made by MacAndrews & Forbes. The special
committee reviewed and considered the proposal and negotiated enhancements to
the terms of the proposal. In February 2003, the enhanced proposal was
recommended to Revlon, Inc.'s Board of Directors by the special committee of
Revlon, Inc.'s Board of Directors and approved by Revlon, Inc.'s full board.

In connection with MacAndrews & Forbes' enhanced proposal, in February
2003 Revlon, Inc. entered into an investment agreement with MacAndrews & Forbes
(the "Investment Agreement") pursuant to which Revlon, Inc. will undertake a $50
million equity rights offering (the "Rights Offering") that will allow its
stockholders to purchase additional shares of Revlon, Inc.'s Class A common
stock, with a par value of $0.01 per share ("Class A Common Stock"). Pursuant to
the Rights Offering, Revlon, Inc. will distribute to each stockholder of record
of its Class A Common Stock and its Class B common stock, with a par value of
$0.01 per share ("Class B Common Stock," together with the Class A Common Stock,
the "Common Stock"), as of the close of business on a record date to be set by
the Board of Directors of Revlon, Inc., at no charge, a pro rata number of
transferable subscription rights for each share of Common Stock owned. The
subscription rights will enable the holders to purchase their pro rata portion
of such number of shares of Class A Common Stock equal to (a) $50 million
divided by (b) the subscription price, which will be equal to the greater of (1)
$2.30, representing 80% of the closing price per share of Revlon, Inc.'s Class A
Common Stock on the New York Stock Exchange ("NYSE") on January 30, 2003, and
(2) 80% of the closing price per share of its Class A Common Stock on the NYSE
on the record date of the Rights Offering. Such number may be adjusted in an
equitable manner to avoid fractional rights and/or shares of Class A Common
Stock and to ensure that the gross proceeds from the Rights Offering equals $50
million.

Pursuant to the over-subscription privilege, each rights holder that
exercises its basic subscription privilege in full may also subscribe for
additional shares of Class A Common Stock at the same subscription price per
share, to the extent that other stockholders do not exercise their subscription
rights in full. If an insufficient number of shares is available to fully
satisfy the over-subscription privilege requests, the available shares will be
sold pro rata among subscription rights holders who exercised their
over-subscription privilege based on the number of shares each subscription
rights holder subscribed for under the basic subscription privilege.

As a Revlon, Inc. stockholder, MacAndrews & Forbes will receive its pro
rata subscription rights and would also be entitled to exercise an
over-subscription privilege. However, MacAndrews & Forbes has agreed not to
exercise either its basic or its over-subscription privileges. Instead,
MacAndrews & Forbes has agreed to purchase the shares of Revlon, Inc.'s Class A
Common Stock that it would otherwise have been entitled to receive

3

pursuant to its basic subscription privilege (equal to approximately 83% of the
rights distributed in the Rights Offering, or $41.5 million) in a private
placement direct from Revlon, Inc. In addition, if any shares remain following
the exercise of the basic subscription privileges and the over-subscription
privileges by other right holders, MacAndrews & Forbes will back-stop the Rights
Offering by purchasing the remaining shares of Class A Common Stock offered but
not purchased by other stockholders (approximately 17%, or an additional $8.5
million), also in a private placement.

In addition, in accordance with the enhanced proposal, MacAndrews &
Forbes has also provided a $100 million term loan to the Company (the
"MacAndrews & Forbes $100 million term loan"). If, prior to the consummation of
the Rights Offering, the Company has fully drawn the MacAndrews & Forbes $100
million term loan and the implementation of the stabilization and growth phase
of the Company's plan causes the Company to require some or all of the $50
million of funds that Revlon, Inc. would raise from the Rights Offering,
MacAndrews & Forbes has agreed to advance Revlon, Inc. these funds prior to
closing the Rights Offering by purchasing up to $50 million of newly-issued
shares of Revlon, Inc.'s Series C preferred stock which would be redeemed with
the proceeds Revlon, Inc. receives from the Rights Offering (this investment in
Revlon, Inc.'s Series C preferred stock (which is non-voting, non-dividend
paying and non-convertible) is referred to as the "$50 million Series C
preferred stock investment"). The MacAndrews & Forbes $100 million term loan has
a final maturity date of December 1, 2005 and interest on such loan of 12.0% is
not payable in cash, but will accrue and be added to the principal amount each
quarter and be paid in full at final maturity. Revlon, Inc. expects that it will
issue the subscription rights and consummate the Rights Offering in the second
quarter of 2003, subject to the effectiveness of the registration statement
(which Revlon, Inc. filed with the Securities and Exchange Commission (the
"Commission") on February 5, 2003). Based on this expectation, the Company
anticipates that it will be required to draw on the MacAndrews & Forbes $100
million term loan before the Rights Offering is consummated in order to continue
the implementation of the stabilization and growth phase of the Company's plan
and for general corporate purposes. However, Revlon, Inc. does not currently
anticipate that it will require that MacAndrews & Forbes make the $50 million
Series C preferred stock investment.

Additionally, MacAndrews & Forbes has also agreed to provide Products
Corporation with an additional $40 million line of credit during 2003, which
amount will increase to $65 million on January 1, 2004 (the "MacAndrews & Forbes
$40-65 million line of credit") (the MacAndrews & Forbes $100 million term loan
and the MacAndrews & Forbes $40-65 million line of credit are referred to as the
"Mafco Loans" and the Rights Offering and the Mafco Loans are referred to as the
"M&F Investments") and which will be available to Products Corporation through
December 31, 2004, provided that the MacAndrews & Forbes $100 million term loan
is fully drawn and MacAndrews & Forbes has purchased an aggregate of $50 million
of Revlon, Inc.'s Series C preferred stock (or if Revlon, Inc. has consummated
the Rights Offering and redeemed any outstanding shares of Series C preferred
stock). The MacAndrews & Forbes $40-65 million line of credit will bear interest
payable in cash at a rate of the lesser of (i) 12.0% and (ii) 0.25% less than
the rate payable from time to time on Eurodollar loans under Products
Corporation's Credit Agreement discussed below (and as hereinafter defined)
(which rate, after giving effect to the amendment in February 2003 to Products
Corporation's Credit Agreement, is 8.25% as of March 1, 2003). The Company does
not expect that it will draw on the MacAndrews & Forbes $40-65 million line of
credit during 2003.

In connection with the transactions with MacAndrews & Forbes described
above, and as a result of the Company's operating results for the fourth quarter
of 2002 and the effect of the acceleration of the Company's implementation of
the stabilization and growth phase of its plan, as discussed above, Products
Corporation entered into an amendment in February 2003 of its Credit Agreement
with its bank lenders and secured waivers of compliance with certain covenants
under the Credit Agreement. In particular, EBITDA (as defined in the Credit
Agreement) was $35.2 million for the four consecutive fiscal quarters ended
December 31, 2002, which was less than the minimum of $210 million required
under the EBITDA covenant of the Credit Agreement for that period and the
Company's leverage ratio was 5.09:1.00, which was in excess of the maximum ratio
of 1.4:1.00 permitted under the leverage ratio covenant of the Credit Agreement
for that period. Accordingly, the Company sought and secured waivers of
compliance with these covenants for the fourth quarter of 2002 and, in light of
the Company's expectation that the continued implementation of the stabilization
and growth phase of the Company's plan would affect its ability to comply with
these covenants during 2003, the Company also secured an amendment to eliminate
the EBITDA and leverage ratio covenants for the first three quarters of 2003 and
a waiver of compliance with such covenants for the fourth quarter of 2003
expiring on January 31, 2004.

4

The amendment to the Credit Agreement also included the substitution of
a minimum liquidity covenant requiring the Company to maintain a minimum of $20
million of liquidity from all available sources at all times through January 31,
2004 and certain other amendments to allow for the M&F Investments and the
implementation of the stabilization and growth phase of the Company's plan,
including specific exceptions from the limitations under the indebtedness
covenant to permit the MacAndrews & Forbes $100 million term loan and the
MacAndrews & Forbes $40-65 million line of credit and to exclude the proceeds
from the M&F Investments from the mandatory prepayment provisions of the Credit
Agreement, and to increase the maximum limit on capital expenditures (as defined
in the Credit Agreement) from $100 million to $115 million for 2003. The
amendment also increased the applicable margin on loans under the existing
credit agreement by 0.5%, the incremental cost of which to the Company, assuming
the Credit Agreement is fully drawn, would be $1.1 million from February 5, 2003
through the end of 2003.

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
ColorStay Overtime Revlon Absolutes Frost & Glow
Stay Natural Flex
Always On Outrageous
Revlon Age Defying Aquamarine
Super Lustrous Mitchum
New Complexion Hi & Dri
Skinlights Jean Nate
High Dimension Revlon Beauty
Illuminance Tools
Lipglide
Moisturous

ALMAY Almay Almay Kinetin Almay
Time-Off Almay Milk Plus
Amazing Lasting
One Coat
Skin Stays Clean
Organic Fluoride Plus
Lip Vitality
Clear Complexion
Skin Smoothing
Foundation Pure Tints

OTHER BRANDS Ultima II Ultima II Bozzano
Jeanne Gatineau Jeanne Gatineau Juvena
Cutex
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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.

5

The Company markets several different lines of REVLON lip makeup (which
address different segments of the lip makeup category). The Company's COLORSTAY
lipcolor uses patented transfer-resistant technology that provides long wear.
COLORSTAY OVERTIME LIPCOLOR is a patented lip technology introduced in 2002 that
builds on the strengths of the COLORSTAY franchise by offering long-wearing
benefits in a new product form, which enhances comfort and shine. SUPER LUSTROUS
lipstick is the Company's flagship wax-based lipcolor. MOON DROPS, a
moisturizing lipstick, is produced in approximately 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 uses
a patented formula that provides consumers with improved wear, application,
shine and gloss in a toluene-free and formaldehyde-free formula. The Company's
SUPER TOP SPEED nail enamel contains a patented speed drying polymer formula,
which sets in 60 seconds. The Company also sells CUTEX nail polish remover and
nail care products in certain countries outside the U.S.

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; NEW COMPLEXION, for consumers in the 18-to-34 age bracket; and
SKINLIGHTS skin brighteners that brighten skin with sheer washes of color.

The Company's eye makeup products include mascaras, eyeliners, eye
shadows and brow color. COLORSTAY eyecolor, mascara and brow color, SOFTSTROKE
eyeliners and REVLON WET/DRY eye shadows are targeted for women in the 18-to-49
age bracket. The Company's eye products also include ILLUMINANCE, an eye shadow
that gives a luminous finish, and HIGH DIMENSION mascara and eyeliners. In 2002,
the Company launched COLORSTAY OVERTIME lash tint, a patented product that wears
for up to three days.

The Company's ALMAY brand consists of a line of hypo-allergenic,
dermatologist-tested, fragrance-free cosmetics and skin care products. ALMAY
products include lip makeup, nail care, 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. The Company also sells Skin Stays Clean
liquid foundation makeup with its patented "clean pore complex." The ALMAY
AMAZING LASTING Collection features long-wearing mascaras and foundations. The
ALMAY Kinetin Skincare Advanced Anti-Aging Series features a patented
technology. In 2002, the Company launched ALMAY Kinetin SKIN SMOOTHING
foundation and ALMAY LIP VITALITY lipstick with a patented 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 U.S. mass-market distribution
channel.

The Company's skin care products, including moisturizers, are sold
under brand names including ETERNA 27, REVLON VITAMIN C ABSOLUTES, REVLON
ABSOLUTES, ALMAY Kinetin, ALMAY MILK PLUS and ULTIMA II. 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 brand.

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 a portion of the world and the BOZZANO and JUVENA brands in Brazil;
as well as COLORSILK and FROST & GLOW hair coloring lines throughout most of the
world; and the MITCHUM and HI & DRI antiperspirant brands. The Company also
markets hypo-allergenic personal care products, including moisturizers and
antiperspirants, under the ALMAY brand. The Company's HIGH DIMENSION hair color
is a revolutionary 10-minute home permanent hair color.

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 AND
CIARA.

6

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.

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
consolidated all of its advertising for the REVLON and ALMAY brands into a
single advertising agency intended to increase the effectiveness 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, 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 distributes unique marketing materials such as the "Revlon
Report," which highlights seasonal and other fashion and color trends, describes
the Company's products that address those trends and can include 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 wall displays 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, the Company maintains separate websites,
www.revlon.com and www.almay.com devoted to the REVLON and ALMAY brands,
respectively. Each of these websites 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. In connection with the stabilization and
growth phase of the Company's plan, the Company is developing a new
cross-functional new product development process intended to optimize the
Company's ability to bring to market its new product offerings to ensure that
the Company has products in key trend categories.

The Company operates an extensive cosmetics research and development
facility in Edison, New Jersey. 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.

7

As of December 31, 2002, 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 2002, 2001 and 2000, the Company spent
approximately $23.3 million, $24.4 million and $27.3 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 the sale of the Company's facilities in Phoenix,
Arizona; Maesteg, South Wales; and Sao Paulo, Brazil; and the closure of the
Company's manufacturing operations in Canada and New Zealand.

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 2002, cosmetics and personal care products also were produced at
the Company's facilities in Venezuela, France, South Africa and China and
personal care products in Mexico and at third-party owned facilities in Maesteg,
South Wales, Sao Paulo, Brazil, Buenos Aires, Argentina and Samutprakarn,
Thailand. 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 400 people as
of December 31, 2002, 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 U.S. and Canada accounted
for approximately 68% of the Company's 2002 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 U.S. 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, 2002, 13 licenses were in effect
relating to 17 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 wall displays intended to
ensure that high-selling SKUs are in stock and to ensure the optimal
presentation of the Company's products in retail outlets. Additionally, the
Company continues to upgrade the technology available to its sales force to
provide real-time information regarding inventory levels and other relevant
information.

8

International. Net sales outside the U.S. and Canada accounted for
approximately 32% of the Company's 2002 net sales. The ten largest countries in
terms of these sales, which include the United Kingdom, Australia, South Africa,
Mexico, Brazil, Hong Kong, Japan, Italy, France and China, accounted for
approximately 25% of the Company's net sales in 2002. The Company distributes
its products through drug stores/chemists, hypermarkets/mass volume retailers
and variety stores. The Company also distributes outside the U.S. through
department stores and specialty stores such as perfumeries. At December 31,
2002, the Company actively sold its products through wholly-owned subsidiaries
established in 17 countries outside of the U.S. and through a large number of
distributors and licensees elsewhere around the world.

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 U.S.,
Boots in the United Kingdom, Watsons in the Far East and Wal-Mart
internationally. Wal-Mart and its affiliates worldwide accounted for
approximately 22.5% of the Company's 2002 consolidated net sales. The Company
expects that Wal-Mart and a small number of other customers will, in the
aggregate, continue to account for a large portion of the Company's net sales.
Although the loss of Wal-Mart or one or more of the Company's other customers
that may account for a significant portion of the Company's sales, or any
significant decrease in sales to these customers or any significant decrease in
retail display space in any of these customers' stores, 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 customers
or decrease in sales will occur. In January 2002, Kmart Corporation filed a
petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. On
January 24, 2003, Kmart announced that it had filed its proposed plan of
reorganization with the U.S. Bankruptcy Court and that it was positioned to
emerge from bankruptcy on or about April 30, 2003. Throughout 2002 and
continuing into 2003 Kmart continued to close underperforming stores. Kmart
accounted for less than 5% of the Company's net sales in 2002. Although the
Company plans to continue doing business with Kmart for the foreseeable future
and, based upon the information currently available, believes that Kmart's
bankruptcy proceedings and store closings will not have a material adverse
effect on the Company's business, financial condition or results of operations,
there can be no assurances that further deterioration, if any, in Kmart's
financial condition will not have such an effect on the Company. In January
2003, J.C. Penney Corp. announced that it will be discontinuing color cosmetics
in most of its stores. J.C. Penney carries the Company's Ultima II brand,
however the Company's sales to J.C. Penney accounted for less than 1% of the
Company's total sales during 2002. Accordingly, the Company does not believe
that this discontinuance will have a material adverse effect on the Company's
future business, financial condition or results of operations.

COMPETITION

The consumer products business is highly competitive. The Company
competes on the basis of numerous factors. Brand recognition, product quality,
performance and price, product availability at the retail stores and the extent
to which consumers are educated on product benefits 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, as well as consumer
consumption of the Company's products, affect in-store position, retail display
space and inventory levels in retail outlets. The Company has experienced
declines in its market share in the U.S. mass-market in color cosmetics since
the end of the first half of 1998 through the first half of 2002, including a
decline in its color cosmetics market share from 32.0% in the second quarter of
1998 to 22.3% in the second quarter of 2002. However, for the second half of
2002 and for the full year 2002, the market share for the Company's Revlon
branded color cosmetics in the U.S. mass-market increased over the prior year.
There can be no assurance that declines in market share will not occur in the
future or that the Company's recent share increases will continue. In addition,
the Company competes in selected product categories against a number of
multinational manufacturers, 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 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
advertising and promotional activities in U.S. mass-market cosmetics. In
addition to products sold in the mass-market and demonstrator-assisted channels,
the Company's products also compete with similar products sold door-to-door or
through mail-order or telemarketing by representatives of direct

9

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 U.S. 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, HIGH DIMENSION, FROST & GLOW,
ILLUMINANCE, FLEX, CUTEX (outside the U.S.), MITCHUM, ETERNA 27, ALMAY, ALMAY
Kinetin, ULTIMA II, CHARLIE, JEAN NATE, MOON DROPS, SUPER LUSTROUS and
COLORSILK.

The Company utilizes certain proprietary, patent pending or patented
technologies in the formulation or manufacture of a number of the Company's
products, including COLORSTAY cosmetics, 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, ALMAY Kinetin skin
care, TIME-OFF makeup, AMAZING LASTING cosmetics and ALMAY ONE COAT cosmetics.
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.

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 Company's capital expenditures, earnings or competitive position. State
and local regulations in the U.S. 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, 2002, the Company employed approximately 6,000
people. As of December 31, 2002, approximately 130 of such employees in the U.S.
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.

10

ITEM 2. PROPERTIES

The following table sets forth as of December 31, 2002 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
Mexico City, Mexico ...........................Manufacturing, distribution and office 150,000
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

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 5,000 square feet were sublet to affiliates
of the Company and approximately 174,000 square feet were sublet to unaffiliated
third parties as of December 31, 2002). 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. The Company is exploring plans to relocate its executive offices
to a new location in New York City.

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.

11

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,
which is indirectly wholly owned by Ronald O. Perelman, through REV Holdings LLC
(a Delaware limited liability company which was formerly a Delaware corporation
known as 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 combined outstanding shares of Revlon, Inc. Common
Stock, and (iii) all of the outstanding 4,333 shares of Series B Convertible
Preferred Stock ("Series B 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). Based on the shares referenced in clauses (i), (ii) and (iii)
above, Mr. Perelman through Mafco Holdings (through REV Holdings) had at
December 31, 2002 approximately 97% of the combined voting power of the
outstanding shares of Revlon, Inc.'s Common Stock entitled to vote at its 2003
Annual Meeting of Stockholders. The remaining 8,866,135 shares of Revlon, Inc.'s
Class A Common Stock outstanding at December 31, 2002 are owned by the public
and are listed and traded on the NYSE. No dividends were declared or paid during
2002 or 2001. The terms of the 2001 Credit Agreement, the Mafco Loans, the
8 5/8% Notes, the 8 1/8% Notes, the 9% Notes and the 12% Notes (each as
hereinafter defined) currently restrict the ability of Products Corporation to
pay dividends or make distributions to Revlon, Inc., except in limited
circumstances. 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, 2002 and the Balance Sheet Data as of
December 31, 2002, 2001, 2000, 1999 and 1998 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,
----------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
STATEMENTS OF OPERATIONS DATA (a) (b) (c) (l):

Net sales ..................................... $1,119.4 $1,277.6 $ 1,409.4 $1,629.8 $2,064.1
Operating (loss) income ....................... (109.0)(d)(k) 18.7(e) 17.6 (f) (210.8)(g) 126.2(h)
Loss from continuing operations ............... (281.8) (152.2)(i) (128.0) (369.7) (77.5)(j)

YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
BALANCE SHEET DATA (b) (c):
Total assets .................................. $937.8 $991.4 $ 1,104.2 $1,560.6 $1,831.7
Long-term debt, including current portion ..... 1,750.1 1,643.6 1,563.1 1,772.1 1,660.0
Total stockholder's deficiency ................ (1,642.2) (1,288.8) (1,104.3) (1,013.2) (647.0)

(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 (including 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 first portion of
these new Guidelines effective January 1, 2001. The Company adopted the second
portion of these

12

new Guidelines (formerly EITF Issue 00-25) addressing certain sales incentives
effective January 1, 2002, and accordingly, all prior period financial
statements reflect the implementation of the Guidelines.

(b) 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.

(c) 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.

(d) Includes restructuring costs and other, net and additional consolidation
costs associated with the shutdown of the Company's Phoenix and Canada
facilities of $13.6 million and $1.6 million, respectively, and executive
separation costs of $9.4 million. (See Note 2 to the Consolidated Financial
Statements).

(e) 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).

(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 a loss of $3.6 million from early extinguishments of debt.

(j) Includes a loss of $51.7 million from early extinguishments of debt.

(k) Includes expenses of $104.2 million (of which $99.3 million was recorded in
the fourth quarter of 2002) related to the acceleration of the implementation of
the stabilization and growth phase of the Company's plan.

(l) In July 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets". Statement No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually in accordance with the provisions of
Statement No. 142. Statement No. 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 Assets". The
Company adopted the provisions of Statement No. 142 effective January 1, 2002.
In connection with the adoption of Statement No. 142, the Company performed a
transitional goodwill impairment test as required by such rule and determined
that no goodwill impairment existed at January 1, 2002. Amortization of goodwill
ceased on January 1, 2002, upon adoption of Statement No. 142. Amortization
expense for goodwill was $7.7 million in 2001, $9.0 million in 2000, $12.8
million in 1999 and $12.1 million in 1998.

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.

13

As discussed in further detail under "Recent Developments", the Company
has accelerated the implementation of the stabilization and growth phase of its
three-part plan, which, following detailed evaluations and research, is based on
the following key actions and investments: (i) increasing advertising and media
spending and effectiveness; (ii) increasing the marketing effectiveness of the
Company's wall displays, by among other things, reconfiguring wall displays at
its existing retail customers, streamlining its product assortment and
reconfiguring product placement on its wall displays and rolling out the new
wall displays, which it began in 2002; (iii) selectively adjusting prices on
certain SKUs; (iv) further strengthening the Company's new product development
process; and (v) implementing a comprehensive program to develop and train the
Company's employees. Based upon the responses of its retail customers and the
M&F Investments, the Company determined to accelerate the implementation of the
stabilization and growth phase of its plan.

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 (the
"Product Line and Brands Sold"). 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.

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 second portion of these new Guidelines
(formerly EITF Issue 00-25) addressing certain sales incentives effective
January 1, 2002, and accordingly, all prior period financial statements reflect
the implementation of the second portion of the Guidelines.

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 U.S. operations. 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. Accordingly, management's
discussion and analysis data reflect these changes for all periods presented.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES:

In the ordinary course of its 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 U.S. 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 and cost of sales, and an increase in accrued
liabilities and inventories. 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. Cost of sales includes the cost of refurbishment of returned
products. 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.

14

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, as well as
retailer participation levels, 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, return levels 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 wall displays, 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 wall displays 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 undiscounted cash flows (excluding
interest) from the use and eventual disposition of the asset 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. Additionally,
goodwill is reviewed for impairment at least annually. The Company recognizes an
impairment loss to the extent that 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 estimate 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

15

withdrawal rates or longer or shorter life spans of participants, among other
things. Differences from these assumptions 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 2003 will be approximately $10 higher than in 2002.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001

Net sales

Net sales were $1,119.4 and $1,277.6 for 2002 and 2001, respectively, a
decrease of $158.2, or 12.4%, and a decrease of 10.4% after excluding the impact
of currency fluctuations.

United States and Canada. Net sales in the U.S. and Canada were $760.1
for 2002, compared with $870.3 for 2001, a decrease of $110.2, or 12.7%. Of this
decrease, $100.6 was due to increased sales returns and allowances related to
the Company's plan to selectively reduce SKUs and reduced distribution of the
Ultima II brand, sales allowances for selective price adjustments on certain
SKUs related to the stabilization and growth phase of the Company's plan, and
higher sales returns and allowances not directly related to the stabilization
and growth phase of the Company's plan. In addition, brand support increased by
$37.0. These factors were partially offset by an increase in sales volume of
$21.6 and an increase in licensing revenues of $5.8, primarily stemming from the
prepayment by a licensee of certain minimum royalties.

International. Net sales in the Company's international operations were
$359.3 for 2002, compared with $407.3 for 2001, a decrease of $48.0, or 11.8%,
and a decrease of 5.2% after excluding the impact of currency fluctuations. Net
sales in 2001 include $16.4 of net sales related to the Colorama brand.

Sales in the Company's international operations are divided by the
Company into three geographic regions. In Europe, which is comprised of Europe
and the Middle East, net sales decreased by $11.3, or 9.5%, to $107.8 for 2002,
as compared with 2001. The decrease in the European region is primarily due to
the conversion of the Company's Benelux and Israeli businesses to distributors
(which factor the Company estimates contributed to an approximate 8.5% reduction
in net sales for the region), production disruption at the Company's third party
manufacturer in Maesteg, Wales (which factor the Company estimates contributed
to an approximate 5.6% reduction in net sales for the region) and increased
competitive activity in Italy (which factor the Company estimates contributed to
an approximate 2.3% reduction in net sales for the region). Such factors were
partially offset by increased sales volume in the U.K. (which factor the Company
estimates contributed to an approximate 6.7% increase in net sales for the
region) and impact from favorable currency fluctuations (which factor the
Company estimates contributed to an approximate 2.7% increase in net sales for
the region).

In Latin America, which is comprised of Mexico, Central America and
South America, net sales decreased by $46.9, or 33.3%, to $94.1 for 2002, as
compared with 2001. The decrease in the Latin American region is primarily due
to the impact of adverse currency fluctuations (which factor the Company
estimates contributed to an approximate 19.0% reduction in net sales for the
region), the sale of the Colorama brand (which factor the Company estimates
contributed to an approximate 10.6% reduction in net sales for the region), the
effect of political and economic difficulties in Venezuela (which factor the
Company estimates contributed to an approximate 6.4% reduction in net sales for
the region), and increased competitive activity in Mexico (which factor the
Company estimates contributed to an approximate 5.4% reduction in net sales for
the region). Such factors were partially offset by sales tax increases and
increased sales volume in Brazil (which factor the Company estimates contributed
to an approximate 6.3% increase in net sales for the region) and increased sales
volume in distributor markets in Latin America (which factor the Company
estimates contributed to an approximate 2.6% increase in net sales for the
region).

In the Far East and Africa, net sales increased by $10.2, or 6.9%, to
$157.4 for 2002, as compared with 2001. The increase in the Far East region is
primarily due to increased sales volume in South Africa, China, Hong Kong and
distributor markets in the Far East (which factor the Company estimates
contributed to an approximate

16

9.6% increase in net sales for the region). Such factors were partially offset
by the impact of adverse currency fluctuations (which factor the Company
estimates contributed to an approximate 2.8% reduction in net sales for the
region) and increased competitive activity in Australia and New Zealand (which
factor the Company estimates contributed to an approximate 0.9% reduction in net
sales for the region).

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 2002, the Company experienced
significant adverse currency fluctuations in Argentina, Brazil, Venezuela and
South Africa. During 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 Products Corporation and such manufacturer
terminated the long-term supply agreement and entered into a new, more flexible
agreement. This new agreement has significantly reduced volume commitments and,
among other things, Products Corporation agreed to loan such supplier
approximately $2.0. To address the past production difficulties, under the new
arrangement, the supplier can earn performance-based payments of approximately
$6.3 over a 4-year period contingent upon the supplier achieving specific
production service level objectives. During 2002, the Company accrued $1.6 as a
result of such supplier meeting the required production service level
objectives. Under the new arrangement, Products Corporation 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.

Gross profit

Gross profit was $615.7 for 2002, compared with $733.4 for 2001. As a
percentage of net sales, gross profit margins were 55.0% for 2002, compared with
57.4% for 2001. The decrease in gross profit margin in 2002 compared to the
comparable 2001 period is due to the implementation of various aspects of the
stabilization and growth phase of the Company's plan, referred to above in the
discussion of the Company's net sales and higher sales returns and allowances
not directly related to such plan, which combined equal $127.1, and higher brand
support of $30.8 in 2002. These factors were partially offset by lower
additional consolidation costs of $36.7 associated with the 2001 shutdown of the
Company's Phoenix and Canada facilities, an increase in licensing revenue of
$5.8 in 2002 due to the prepayment of certain minimum royalties, and $1.7 in
respect of an insurance claim for certain losses in Latin America.

SG&A expenses

SG&A expenses were $711.1 for 2002, compared with $676.6 for 2001. The
increase in SG&A expenses for 2002, as compared to 2001, is due primarily to
higher personnel-related expenses (including executive separation costs) and
higher professional fees (including expenses related to the stabilization and
growth phase of the Company's plan and costs related to litigation) of $42.0,
higher wall display amortization of $8.9 due to the accelerated amortization
associated with the roll out of the Company's new wall displays which the
Company began in 2002 and accelerated amortization charges of $4.0 and a
write-off of $2.2, both of which relate to certain information systems as a
result of the Company's decision to, among other things, upgrade its information
systems. These factors were partially offset by the elimination of goodwill
amortization of $7.7, lower distribution costs of $7.3, the elimination of SG&A
expenses of $9.1 related to the Colorama brand and $5.3 of additional
consolidation costs in 2001 associated with the shutdown of the Company's
Phoenix and Canada facilities, 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

17

positions, each of which were effected to reduce and streamline corporate
overhead costs. During 2001, the Company continued to implement the 2000
restructuring program and recorded a charge of $38.1, principally for additional
employee severance and other personnel benefits and relocation and other costs
related to the consolidation of the Company's worldwide operations.

During 2002, the Company continued to implement the 2000 restructuring
program, as well as other restructuring actions, and recorded charges of $13.6,
principally for additional employee severance and other personnel benefits,
primarily resulting from reductions in the Company's worldwide sales force and
relocation and other costs related to the consolidation of the Company's
worldwide operations.

The Company anticipates annualized savings of approximately $10 to $12
relating to the restructuring charges recorded during 2002.

Other expenses (income)

Interest expense was $159.0 for 2002, compared with $140.5 for 2001.
The increase in interest expense for 2002, as compared to 2001, is primarily due
to the repayment of a portion of the Credit Agreement with the 12% Notes (which
were issued in late November 2001 and which have a higher interest rate than the
Credit Agreement) and higher overall outstanding borrowings.

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 net 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 net 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 manufactured and supplied 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
net loss of $8.6 in 2001. The supply agreement was subsequently terminated and
certain aspects of the purchase agreement were revised. (See Note 3 to the
Consolidated Financial Statements).

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 net gain on the sale of $3.1 in the fourth quarter of
2001.

Loss on early extinguishment of debt

The loss on early extinguishment of debt of $3.6 in 2001 resulted
primarily from the write-off of financing costs in connection with Products
Corporation entering into the 2001 Credit Agreement (as hereinafter defined).

18

Provision for income taxes

The provision for income taxes was $4.6 for 2002, compared with $4.0
for 2001. The increase in the provision for income taxes for 2002, as compared
to 2001, was attributable to higher taxable income in certain markets outside
the U.S., which was partially offset by 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.

YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000

Net sales

Net sales were $1,277.6 and $1,409.4 for 2001 and 2000, respectively, a
decrease of $131.8, or 9.4%, and a decrease of 5.9% after excluding the impact
of currency fluctuations.

United States and Canada. Net sales in the U.S. and Canada were $870.3
for 2001, compared with $874.0 for 2000, a decrease of $3.7, or 0.4%. Net sales
in 2000 include net sales of $35.8 related to the Product Line and Brands Sold.
The decline for 2001, as compared with the comparable 2000 period, was primarily
due to net sales of $35.8 related to the Product Line and Brands Sold, higher
sales allowances of $13.7 and reduced sales volume of $16.5. This volume decline
is net of $14.0 of increased sales in the fourth quarter of 2001 resulting from
the decision by the Company's major U.S. retail customers to shift planned
plan-o-gram timing for 2002 new products into the fourth quarter of 2001, mostly
offset by lower sales returns of $60.2 as a result of the Company's revised
trade terms.

International. Net sales in the Company's international operations were
$407.3 for the 2001, compared with $535.4 for 2000, a decrease of $128.1, or
23.9%, and a decrease of 16.8% after excluding the impact of currency
fluctuations. Net sales in 2001 and 2000 include net sales of $16.4 and $108.3,
respectively, related to the Product Line and Brands Sold.

Sales in the Company's international operations are divided by the
Company into three geographic regions. In Europe, which is comprised of Europe
and the Middle East, net sales decreased by $49.3 to $119.1 for 2001, or by
29.3%, as compared with 2000. The decrease in the European region is primarily
due to the Product Line and Brands Sold (which factor the Company estimates
contributed to an approximate 20.8% reduction in net sales for the region), the
conversion of the Company's Israeli business to a distributor (which factor the
Company estimates contributed to an approximate 2.8% reduction in net sales for
the region) and the unfavorable impact of adverse currency fluctuations (which
factor the Company estimates contributed to an approximate 3.7% reduction in net
sales for the region).

In Latin America, which comprises Mexico, Central America and South
America, net sales decreased by $54.5, or 27.9%, to $141.0 for 2001, as compared
with 2000. The decrease in the Latin American region is primarily due to the
Product Line and Brands Sold (which factor the Company estimates contributed to
an approximate 15.1% reduction in net sales for the region) and the impact of
adverse currency fluctuations (which factor the Company estimates contributed to
an approximate 9.2% reduction in net sales for the region).

In the Far East and Africa, net sales decreased by $24.3, or 14.1%, to
$147.2 for 2001, as compared with 2000. The decrease in the Far East region is
primarily due to the impact of adverse currency fluctuations (which factor the
Company estimates contributed to an approximate 9.1% reduction in net sales for
the region) and the Product Line and Brands Sold (which factor the Company
estimates contributed to an approximate 3.1% reduction in net sales for the
region).

Net sales in the Company's international operations may be adversely
affected by weak economic conditions, political uncertainties, adverse currency
fluctuations, and competitive activities.

19

Gross profit

Gross profit was $733.4 for 2001, compared with $835.1 for 2000. As a
percentage of net sales, gross profit margins were 57.4% for 2001, compared with
59.3% for 2000. The decline in gross profit and gross profit margin in 2001
compared to 2000 is primarily due to the incremental gross profit of $71.3 in
2000 which was related to the Product Line and Brands Sold and higher additional
consolidation costs of $33.3 in 2001 associated with the 2001 shutdown of the
Company's Phoenix and Canada facilities ($6.1 of which represents increased
depreciation recorded for the Phoenix facility - See Note 2 to the Consolidated
Financial Statements). These factors were partially offset by the improvement in
sales returns and allowances in 2001 and the dispositions of lower margin
businesses in 2001.

SG&A expenses

SG&A expenses were $676.6 for 2001, compared with $763.4 for 2000. The
decrease in SG&A expenses for 2001, as compared to the comparable 2000 period,
is due primarily to incremental SG&A expenses of $63.1 in 2000 related to the
Product Line and Brands Sold and the Company's restructuring efforts to reduce
personnel and related costs in 2001. These factors were partially offset by an
increase in brand support expenses of $12.4 in 2001 and $5.4 of additional
consolidation costs associated with the shutdown of the Company's Phoenix and
Canada facilities in 2001.

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.

During 2001, the Company recorded a charge of $38.1 related to the 2000
restructuring program, principally for additional employee severance and other
personnel benefits and relocation and other costs related to the consolidation
of the Company's worldwide operations. Included in the $38.1 charge for 2001 was
an adjustment in the fourth quarter of 2001 to previous estimates of
approximately $6.6.

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).

20

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 net 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 (as hereinafter defined). In connection with
such disposition, the Company recognized a pre-tax and after-tax net 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 discussed above, in October 2002,
after experiencing production difficulties with this supplier, Products
Corporation and such supplier terminated their long-term supply agreement,
revised certain aspects of the purchase agreement and entered into a new, more
flexible supply agreement with significantly reduced volume commitments. In
connection with such disposition, the Company recognized a pre-tax and after-tax
net loss of $8.6 in 2001. (See Note 3 to the Consolidated Financial Statements).

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 pre-tax and after-tax net 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 the Aoyama Property in Japan
for approximately $28. In connection with such disposition, the Company
recognized a pre-tax and after-tax net loss of $0.8 during the second quarter of
2001.

Loss on early extinguishment of debt

The loss on early extinguishment of $3.6 in 2001 resulted primarily
from the write-off of financing costs in connection with Products Corporation
entering into the 2001 Credit Agreement.

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
U.S.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Net cash used for operating activities was $112.3, $86.5 and $84.0 for
2002, 2001 and 2000, respectively. The increase in net cash used for operating
activities for 2002 compared to 2001 resulted primarily from a higher net loss,
partially offset by lower inventories and an increase in accrued expenses and
other, mainly associated with the Company's implementation of various aspects of
the stabilization and growth phase of its plan. In addition, purchases of
permanent wall displays increased in 2002 due to the roll out of the Company's
newly-reconfigured wall displays. 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
wall displays.

21

Net cash (used for) provided by investing activities was $(14.2), $87.2
and $322.1 for 2002, 2001 and 2000, respectively. Net cash used for investing
activities for 2002 consisted primarily of capital expenditures. 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 provided by (used for) financing activities was $110.3, $46.3
and $(203.7) for 2002, 2001 and 2000, respectively. Net cash provided by
financing activities for 2002 included cash drawn under the Credit Agreement,
partially offset by the repayment of borrowings under the Credit Agreement and
payment of debt issuance costs. 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 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. 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, partially offset by cash drawn under
the 1997 Credit Agreement.

On November 26, 2001, Products Corporation issued and sold $363 in
aggregate principal amount of 12% Senior Secured Notes due 2005 (the "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 new 12%
Senior Secured Exchange 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 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.

On November 30, 2001, Products Corporation entered into a credit
agreement (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, 2002, the 2001 Credit Agreement
provided up to $248.7, which is comprised of a $116.6 term loan facility (the
"Term Loan Facility") and a $132.1 multi-currency revolving credit facility (the
"Multi-Currency Facility"). At December 31, 2002, the Term Loan Facility was
fully drawn and $0.3 was available under the Multi-Currency Facility, including
the letters of credit.

In connection with the transactions with MacAndrews & Forbes described
in "Recent Developments," and as a result of the Company's operating results for
the fourth quarter of 2002 and the effect of acceleration of the Company's
implementation of the stabilization and growth phase of its plan, the Company
entered into an amendment in February 2003 of its Credit Agreement and secured
waivers of compliance with certain covenants under the Credit Agreement. In
particular, EBITDA (as defined in the Credit Agreement) was $35.2 for the four
consecutive fiscal quarters ended December 31, 2002, which was less than the
minimum of $210 required under the EBITDA covenant of the Credit Agreement for
that period and the Company's leverage ratio was 5.09:1.00, which was in excess
of the maximum ratio of 1.4:1.00 permitted under the leverage ratio covenant of
the Credit Agreement for that period. Accordingly, the Company sought and
secured waivers of compliance with these covenants for the fourth quarter of
2002 and, in light of the Company's expectation that the continued
implementation of the stabilization and growth phase of the Company's plan would
affect its ability to comply with these covenants during 2003, the Company also
secured an amendment to eliminate the EBITDA and leverage ratio covenants for
the first three quarters of 2003 and a waiver of compliance with such covenants
for the fourth quarter of 2003 expiring on January 31, 2004.

22

The amendment to the Credit Agreement also included the substitution of
a minimum liquidity covenant requiring the Company to maintain a minimum of $20
in liquidity from all available sources at all times through January 31, 2004
and certain other amendments to allow for the M&F Investments and the
implementation of the stabilization and growth phase of the Company's plan,
including specific exceptions from the limitations under the indebtedness
covenant to permit the MacAndrews & Forbes $100 million term loan and the
MacAndrews & Forbes $40-65 million line of credit and to exclude the proceeds
from the M&F Investments from the mandatory prepayment provisions of the Credit
Agreement, and to increase the maximum limit on capital expenditures and
permanent display purchases from $100 to $115 for 2003. The amendment also
increased the applicable margin on loans under the Credit Agreement by 0.5%, the
incremental cost of which to the Company, assuming the Credit Agreement is fully
drawn, would be $1.1 from February 5, 2003 through the end of 2003. As of March
7, 2003, the Company had approximately $213 of available liquidity from all
available sources.

As discussed under "Recent Developments", pursuant to the Investment
Agreement MacAndrews & Forbes agreed, among other things, (i) to purchase such
shares of Revlon, Inc.'s Class A Common Stock represented by its pro rata share
of the rights distributed in the Rights Offering (approximately 83%, or $41.5)
and to back-stop the Rights Offering by purchasing the remaining shares of Class
A Common Stock offered to, but not purchased by, other stockholders
(approximately 17%, or an additional $8.5), (ii) to provide the Company with the
MacAndrews & Forbes $100 million term loan (the terms and conditions of which
the parties agreed to on February 5, 2003), (iii) if, prior to the consummation
of the Rights Offering, the Company has fully drawn the MacAndrews & Forbes $100
million term loan and the implementation of the stabilization and growth phase
of the Company's plan causes the Company to require some or all of the $50 of
funds that Revlon, Inc. would raise from the Rights Offering, MacAndrews &
Forbes would advance Revlon, Inc. these funds prior to closing the Rights
Offering by making the $50 million Series C preferred stock investment, which
would be redeemed with the proceeds Revlon, Inc. receives from the Rights
Offering, and (iv) to provide the Company with the MacAndrews & Forbes $40-65
million line of credit (the terms and conditions of which the parties agreed to
on February 5, 2003), provided that the MacAndrews & Forbes $100 million term
loan is fully drawn and MacAndrews & Forbes had made the $50 million Series C
preferred stock investment (or if Revlon, Inc. has consummated the Rights
Offering and redeemed any outstanding shares of Series C preferred stock).

The Company's principal sources of funds are expected to be operating
revenues, cash on hand, the proceeds from the Rights Offering (which may be
advanced to Revlon, Inc. and contributed to the Company as a result of the $50
million Series C preferred stock investment prior to the consummation of the
Rights Offering if the Company has fully drawn the MacAndrews & Forbes $100
million term loan) and funds available for borrowing under the Credit Agreement
and the Mafco Loans. Revlon, Inc. expects that the Rights Offering will be
consummated in the second quarter of 2003, subject to the effectiveness of the
registration statement, which Revlon, Inc. filed with the Commission on February
5, 2003. Based on this expectation, the Company anticipates that it will draw on
the MacAndrews & Forbes $100 million term loan before the Rights Offering is
consummated in order to continue the implementation of the stabilization and
growth phase of the Company's plan and for general corporate purposes. However,
Revlon, Inc. currently does not anticipate that, based upon a second quarter
2003 closing of the Rights Offering, it will require that MacAndrews & Forbes
make the $50 million Series C preferred stock investment. The Credit Agreement,
the Mafco Loans, 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, including expenses in connection with the stabilization and
growth phase of the Company's plan, purchases of permanent wall displays,
capital expenditure requirements, including costs in connection with the ERP
System (as hereinafter defined), payments in connection with the Company's
restructuring programs referred to below and debt service payments.

The Company currently estimates that charges related to the
implementation of the stabilization and growth phase of the Company's plan will
not exceed $60 during 2003 and 2004. In addition, the Company currently
estimates that the cash payments related to this phase of the plan for charges
recorded in 2002 will be approximately $75 during 2003 and 2004.

23

The Company developed a new design for its wall displays (which the
Company refined as part of the stabilization and growth phase of its plan) and
began installing them at certain customers' retail stores during 2002. The
Company is also reconfiguring existing wall displays at its retail customers on
an accelerated basis. Accordingly, the Company has accelerated the amortization
of its existing wall displays. The installation of these newly-reconfigured wall
displays resulted in accelerated amortization in 2002 of approximately $11. The
Company estimates that purchases of wall displays for 2003 will be approximately
$75 to $85.

The Company estimates that capital expenditures for 2003 will be
approximately $25 to $30. 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 $10 to $15 in 2003.

The Company has evaluated its management information systems and
determined, among other things, to upgrade to an Enterprise Resource Planning
("ERP") System. As a result of this decision, certain existing information
systems are being amortized on an accelerated basis. Based upon the estimated
time required to implement an ERP System and related IT actions, the Company
expects that it will record additional amortization charges for its current
information system in 2002 through 2005. The additional amortization recorded in
2002 was $4. The Company expects that the additional amortization for 2003 will
be approximately $5.

The Company expects that operating revenues, cash on hand, proceeds
from the Rights Offering (which may be advanced to Revlon, Inc. and contributed
to the Company as a result of the $50 million Series C preferred stock
investment prior to the consummation of the Rights Offering if Products
Corporation has fully drawn the MacAndrews & Forbes $100 million term loan) and
funds available for borrowing under the Credit Agreement and the Mafco Loans
will be sufficient to enable the Company to cover its operating expenses,
including cash requirements in connection with the Company's operations, the
stabilization and growth phase of the Company's plan, cash requirements in
connection with the Company's restructuring programs referred to above and the
Company's debt service requirements for 2003. The Mafco Loans and the proceeds
from the Rights Offering are intended to help fund the stabilization and growth
phase of the Company's plan and to decrease the risk that would otherwise exist
if the Company were to fail to meet its debt and ongoing obligations as they
became due in 2003. However, there can be no assurance that such funds will be
sufficient to meet the Company's cash requirements on a consolidated basis. If
the Company's anticipated level of revenue growth is not achieved because, for
example, of decreased consumer spending in response to weak economic conditions
or weakness in the cosmetics category, increased competition from the Company's
competitors or the Company's marketing plans are not as successful as
anticipated, or if the Company's expenses associated with implementation of the
stabilization and growth phase of the Company's plan exceed the anticipated
level of expenses, the Company's current sources of funds may be insufficient to
meet the Company's cash requirements. Additionally, in the event of a decrease
in demand for the Company's products or reduced sales or lack of increases in
demand and sales as a result of the Company's plan, such development, if
significant, could reduce the Company's operating revenues and could adversely
affect Products Corporation's ability to achieve certain financial covenants
under the Credit Agreement 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 delaying the
implementation of or revising aspects of the stabilization and growth phase of
its plan, reducing or delaying purchases of wall displays or advertising or
promotional expenses, reducing or delaying capital spending, delaying, reducing
or revising restructuring programs, restructuring indebtedness, selling assets
or operations, seeking additional capital contributions or loans from MacAndrews
& Forbes, Revlon, Inc. or other affiliates and/or third parties or reducing
other discretionary spending. The Company has substantial debt maturing in 2005
which will require refinancing, consisting of $246.3 (assuming the maximum
amount is borrowed) under the Credit Agreement and $363.0 of 12% Notes, as well
as amounts, if any, borrowed under the MacAndrews & Forbes $100 million term
loan and the MacAndrews & Forbes $40-65 million line of credit.

The Company expects that it will need to seek a further amendment to
the Credit Agreement or a waiver of the EBITDA and leverage ratio covenants
under the Credit Agreement prior to the expiration of the existing waiver on
January 31, 2004 because the Company does not expect that its operating results,
including after giving effect to various actions under the stabilization and
growth phase of the Company's plan, will allow it to satisfy those covenants for
the four consecutive fiscal quarters ending December 31, 2003. The minimum
EBITDA required to be maintained by Products Corporation under the Credit
Agreement is $230 for each of the four consecutive fiscal quarters ending on
December 31, 2003 (which covenant was waived through January 31, 2004), March
31, 2004,

24

June 30, 2004 and September 30, 2004 and $250 for any four consecutive fiscal
quarters ending December 31, 2004 and thereafter and the leverage ratio covenant
under the Credit Agreement will permit a maximum ratio of 1.10:1.00 for any four
consecutive fiscal quarters ending on or after December 31, 2003 (which limit
was waived through January 31, 2004 for the four fiscal quarters ending December
31, 2003). In addition, after giving effect to the amendment, the Credit
Agreement also contains a $20 minimum liquidity covenant. While the Company
expects that its bank lenders will consent to such amendment or waiver request,
there can be no assurance that they will or that they will do so on terms that
are favorable to the Company. If the Company is unable to secure such amendment
or waiver, it could be required to refinance the Credit Agreement or repay it
with proceeds from the sale of assets or operations, or additional capital
contributions or loans from MacAndrews & Forbes or the Company's other
affiliates or third parties, or the sale of additional equity securities of
Revlon, Inc. In the event that the Company were unable to secure such a waiver
or amendment and were not able to refinance or repay the Credit Agreement, the
Company's inability to meet the financial covenants for the four consecutive
fiscal quarters ending December 31, 2003 would constitute an event of default
under its Credit Agreement, which would permit the bank lenders to accelerate
the Credit Agreement, which in turn would constitute an event of default under
the indentures governing the Company's debt if the amount accelerated exceeds
$25.0 and such default remains uncured within 10 days of notice from the trustee
under the applicable indenture.

There can be no assurance that the Company would be able to take any of
the actions referred to in the preceding two paragraphs because of a variety of
commercial or market factors or constraints in the Company's debt instruments,
including, for example, Products Corporation's inability to reach agreement with
its bank lenders on refinancing terms that are acceptable to the Company before
the waiver of its financial covenants expires on January 31, 2004, market
conditions being unfavorable for an equity or debt offering, or that the
transactions may not be permitted under the terms of the Company's various debt
instruments then in effect, because of restrictions on the incurrence of debt,
incurrence of liens, asset dispositions and related party transactions. In
addition, such actions, if taken, may not enable the Company to satisfy its cash
requirements if the actions do not generate a sufficient amount of additional
capital.

The terms of the Credit Agreement, the Mafco Loans, 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 fees, 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 (as may be
amended and restated from time to time, the "Amended Stock Plan").

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 2003.

As a result of dealing with suppliers and vendors in a number of
foreign countries, the Company enters into foreign currency forward exchange
contracts and option 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 $10.8 outstanding at December 31, 2002. The
fair value of foreign currency forward exchange contracts outstanding at
December 31, 2002 was nil.

25

DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table aggregates all contractual commitments and
commercial obligations that affect the Company's financial condition and
liquidity position as of December 31, 2002:

- -------------------------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
(DOLLARS IN MILLIONS)
- -------------------------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS LESS THAN
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
- -------------------------------------------------------------------------------------------------------------------

LONG-TERM DEBT $1,750.1 Nil $1,100.2 $649.9 Nil
- -------------------------------------------------------------------------------------------------------------------
CAPITAL LEASE OBLIGATIONS 4.1 $1.8 2.3 Nil Nil
- -------------------------------------------------------------------------------------------------------------------
OPERATING LEASES 56.7 21.3 17.5 7.1 $10.8
- -------------------------------------------------------------------------------------------------------------------
UNCONDITIONAL PURCHASE OBLIGATIONS 103.8(a) 48.9 54.9 Nil Nil
- -------------------------------------------------------------------------------------------------------------------
OTHER LONG-TERM OBLIGATIONS 49.0(b) 25.6 23.4 Nil Nil
- -------------------------------------------------------------------------------------------------------------------
TOTAL CONTRACTUAL CASH OBLIGATIONS $1,963.7 $97.6