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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, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- -- EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________________ TO __________________
COMMISSION FILE NUMBER 1-11178
REVLON, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3662955
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Madison Avenue, New York, New York 10022
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 527-4000
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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CLASS A COMMON STOCK NEW YORK STOCK EXCHANGE, INC.
- ---------------------------------------------------------------- --------------------------------------------------------------
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]
AS OF FEBRUARY 2, 1998, 19,887,350 SHARES OF CLASS A COMMON STOCK AND
31,250,000 SHARES OF CLASS B COMMON STOCK WERE OUTSTANDING. 11,250,000 SHARES
OF CLASS A COMMON STOCK AND ALL OF THE SHARES OF CLASS B COMMON STOCK WERE HELD
BY REV HOLDINGS INC., AN INDIRECTLY WHOLLY OWNED SUBSIDIARY OF MAFCO HOLDINGS
INC. THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S CLASS A COMMON STOCK HELD
BY NON-AFFILIATES (USING NEW YORK STOCK EXCHANGE, INC. CLOSING PRICE AS OF
FEBRUARY 2, 1998) WAS APPROXIMATELY $378,424,000.
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
Revlon, Inc. (and together with its subsidiaries, the "Company")
operates in a single business segment with many different products, which
include an extensive array of glamorous, exciting and innovative cosmetics and
skin care, fragrance, personal care and professional products. REVLON is one of
the world's best known names in cosmetics and is a leading mass market
cosmetics brand. The Company's vision is to provide glamour, excitement and
innovation through quality products at affordable prices. To pursue this
vision, the Company's management team combines the creativity of a cosmetics
and fashion company with the marketing, sales and operating discipline of a
consumer packaged goods company. 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, with
products sold in approximately 175 countries and territories. The Company's
products are marketed under such well-known brand names as REVLON, COLORSTAY,
REVLON AGE DEFYING, ALMAY and ULTIMA II in cosmetics; MOON DROPS, ETERNA 27,
ALMAY TIME-OFF, ULTIMA II, JEANNE GATINEAU and NATURAL HONEY in skin care;
CHARLIE and FIRE & ICE, in fragrances; FLEX, OUTRAGEOUS, AQUAMARINE, MITCHUM,
COLORSTAY, COLORSILK, JEAN NATE, PLUSBELLE, BOZZANO and COLORAMA in personal
care products; and ROUX FANCI-FULL, REALISTIC, CREME OF NATURE, CREATIVE NAIL
and AMERICAN CREW in professional products. To further strengthen its consumer
brand franchises, the Company markets each core brand with a distinct and
uniform global image, including packaging and advertising, while retaining the
flexibility to tailor products to local and regional preferences.
The Company was founded by Charles Revson, who revolutionized the
cosmetics industry by introducing nail enamels matched to lipsticks in fashion
colors over 65 years ago. Today, the Company has leading market positions in
many of its principal product categories in the United States self-select
distribution channel. The Company's leading market positions for its REVLON
brand products include the number one positions in the United States
self-select distribution channel in lip makeup and nail enamel (which the
Company has occupied for the past 21 years) for 1997. The Company has the
number two position in face makeup in the United States self-select
distribution channel for 1997. Propelled by the success of its new product
launches and market share gains in its existing product lines, the Company
captured in 1996 and continued to hold in 1997 the number one position overall
in color cosmetics (consisting of lip, eye and face makeup and nail enamel) in
the United States self-select distribution channel, where its market share was
21.6% for 1997. The Company also has leading market positions in several
product categories in certain markets outside of the United States, including
in Argentina, Australia, Brazil, Canada, Mexico and South Africa.
In the United States, the self-select distribution channel, in which
consumers select their own purchases without the assistance of an in-store
demonstrator, includes independent drug stores and chain drug stores (such as
Walgreens, CVS, Eckerds and Rite Aid), mass volume retailers (such as Wal-Mart,
Target Stores and Kmart) and supermarkets and combination supermarket/drug
stores (such as Pathmark, Albertson's, Kroger's and Smith's). Internationally,
the self-select distribution channel includes retailers such as Boots in the
United Kingdom and Western Europe, Shoppers Drug Mart in Canada and Wal-Mart
worldwide. The foregoing retailers, among others, sell the Company's products.
The Company operates in a single business segment with many different
products, which include cosmetics and skin care, fragrance and personal care
products ("consumer products"), and hair and nail care products principally for
use in and resale by professional salons ("professional products"). The Company
presents its business geographically as its United States operation, which
comprises the Company's business in the United States, and its International
operation, which comprises its business outside of the United States.
On February 2, 1998, Revlon Escrow Corp. ("Revlon Escrow"), an
affiliate of Revlon Consumer Products Corporation (together with its
subsidiaries, "Products Corporation"), issued and sold in a private placement
$650 million aggregate principal amount of 8 5/8% Senior Subordinated Notes due
2008 (the "8 5/8% Notes") and $250 million aggregate principal amount of 8 1/8%
Senior Notes due 2006 (the "8 1/8% Notes" and, together with the 8 5/8% Notes,
the "Notes"), with the net proceeds deposited into escrow. The proceeds from
the sale of the Notes will be used to finance the redemption of Products
Corporation's $555 million aggregate principal amount of 10 1/2% Senior
Subordinated Notes due 2003 (the "Senior Subordinated Notes") and $260 million
aggregate principal
2
amount of 9 3/8% Senior Notes due 2001 (the "Senior Notes" and, together with
the Senior Subordinated Notes, the "Old Notes"). Products Corporation delivered
a redemption notice to the holders of the Senior Subordinated Notes for the
redemption of the Senior Subordinated Notes on March 4, 1998, at which time
Products Corporation assumed the obligations under the 8 5/8% Notes and the
related indenture (the "8 5/8% Notes Assumption"), and to the holders of the
Senior Notes for the redemption of the Senior Notes on April 1, 1998, at which
time Products Corporation will assume the obligations under the 8 1/8% Notes
and the related indenture (the "8 1/8% Notes Assumption" and, together with the
8 5/8% Notes Assumption, the "Assumption"). On or before March 19, 1998 either
Revlon Escrow or Products Corporation is required to file a registration
statement with the Securities and Exchange Commission (the "Commission") with
respect to an offer to exchange the Notes for registered notes with
substantially identical terms (the "Exchange Offer"). The Exchange Offer is
expected to occur on or before July 2, 1998.
On April 25, 1997, Prestige Fragrance & Cosmetics, Inc. ("PFC"), a
wholly owned subsidiary of Products Corporation, and The Cosmetic Center, Inc.
("CCI") completed the merger of PFC with and into CCI (the "Cosmetic Center
Merger") with CCI (subsequent to the Cosmetic Center Merger, "Cosmetic Center")
surviving the Cosmetic Center Merger. In the Cosmetic Center Merger, Products
Corporation received in exchange for all of the capital stock of PFC newly
issued Class C Common Stock of Cosmetic Center constituting approximately 85.0%
of Cosmetic Center's outstanding common stock. Accordingly, the Cosmetic Center
Merger was accounted for as a reverse acquisition using the purchase method of
accounting, so that PFC is considered the acquiring entity for accounting
purposes even though Cosmetic Center is the surviving legal entity. The results
of the Company for 1997 include the results of operations of Cosmetic Center
from and after the effective date of the Cosmetic Center Merger.
In May 1997, Products Corporation entered into a credit agreement (the
"Credit Agreement") with a syndicate of lenders, whose individual members
change from time to time. The proceeds of loans made under the Credit Agreement
were used for the purpose of repaying the loans outstanding under the credit
agreement in effect at that time (the "1996 Credit Agreement") and to redeem
Products Corporation's 10 7/8% Sinking Fund Debentures due 2010 (the "Sinking
Fund Debentures") and were and will be used for general corporate purposes or,
in the case of the Acquisition Facility (as defined herein), the financing of
acquisitions. The Credit Agreement provides up to $750.0 million and is
comprised of five senior secured facilities: $200.0 million in two term loan
facilities (the "Term Loan Facilities"), a $300.0 million multi-currency
facility (the "Multi-Currency Facility"), a $200.0 million revolving
acquisition facility, which may be increased to $400.0 million under certain
circumstances with the consent of a majority of the lenders (the "Acquisition
Facility"), and a $50.0 million special standby letter of credit facility (the
"Special LC Facility").
On March 5, 1996, the Company completed an initial public equity
offering (the "Revlon IPO") in which it issued and sold 8,625,000 shares of its
Class A Common Stock for $24.00 per share. The proceeds, net of underwriters'
discount and related fees and expenses, of $187.8 million were contributed to
Products Corporation and used to repay borrowings outstanding under the credit
agreement in effect at that time (the "1995 Credit Agreement") and to pay fees
and expenses related to entering into the 1996 Credit Agreement.
On June 24, 1992, the Company succeeded to assets and liabilities of
the cosmetics and skin care, fragrance and personal care products business of
Revlon Holdings Inc. ("Holdings"). Holdings retained certain small brands that
historically had not been profitable (the "Retained Brands") and certain other
assets and liabilities. Unless the context otherwise requires, references to
the Company or Revlon relating to dates or periods prior to the formation of
the Company mean the cosmetics and skin care, fragrance and personal care
products business of Holdings to which the Company has succeeded. The Company's
business is conducted exclusively through its wholly owned subsidiary, Products
Corporation. Unless the context otherwise requires, all references in this Form
10-K to the Company or Revlon mean Revlon, Inc. and its subsidiaries.
All United States market share and market position data herein for the
Company's brands are based upon retail dollar sales, which are derived from
A.C. Nielsen data. A.C. Nielsen measures retail sales volume of products sold
in the United States self-select distribution channel. Such data represent A.C.
Nielsen's estimates based upon data gathered by A.C. Nielsen from market
samples. Such data are therefore subject to some degree of variance.
3
BUSINESS STRATEGY
The Company's business strategy, which implements its vision and is
intended to continue to improve operating performance, is to:
o Strengthen and broaden its core brands through globalization of marketing
and advertising, product development and manufacturing and through
increasing its emphasis on advertising and promotion.
o Lead the industry in the development and introduction of technologically
advanced innovative products that set new trends.
o Expand the Company's presence in all markets in which the Company competes
and enter new and emerging markets.
o Continue to reduce costs and improve operating efficiencies, customer
service and product quality by reducing overhead, rationalizing factory
operations, upgrading management information systems, globally sourcing
raw materials and components and carefully managing working capital.
o Continue to expand market share and product lines through possible
strategic acquisitions or joint ventures.
4
PRODUCTS
The Company manufactures and markets a variety of products worldwide.
The following table sets forth the Company's principal brands.
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BRAND COSMETICS SKIN CARE FRAGRANCES PERSONAL CARE PROFESSIONAL
PRODUCTS PRODUCTS
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Revlon Revlon, ColorStay, Moon Drops, Charlie, Charlie Red, Flex, Outrageous, Revlon
Revlon Age Defying, Revlon Results, Charlie White, Aquamarine, Professional, Roux
StreetWear, Super Eterna 27, Charlie Sunshine, Mitchum, Lady Fanci-full,
Lustrous, Moon Revlon Age Fire & Ice, Fire & Mitchum, Hi & Dri, Realistic, Creme of
Drops, Velvet Touch, Defying Ice Cool, Jontue, ColorStay, Nature, Sensor
Line & Shine, New Ciara, Body Kisses Colorsilk, Frost & Perm, Perfect Perm,
Complexion, Overtime Glow, Revlon Fermodyl, Perfect
Eyes, Touch & Glow, Shadings, Jean Touch, Salon
Top Speed, Lashful, Nate, Roux Perfection,
Lengthwise, Fanci-full, Revlonissimo,
Naturally Glamorous, Realistic, Creme Voila, Young Color,
Custom Eyes, of Nature, Herba Creative Nail,
Timeliner, Revlon Rich, Fabu-laxer Contours, American
Implements Crew, R PRO, True
Cystem
Almay Almay, Time-Off, Sensitive Care, Almay
Almay Clear Oil Control,
Complexion Makeup, Time-Off,
Amazing, One Coat Moisture
Balance,
Moisture Renew,
Almay Clear
Complexion Skin
Care
Ultima II Ultima II, Beautiful Ultima II, Vital
Nutrient, Radiance,
Wonderwear, The Interactives, CHR
Nakeds
Significant Colorama(b), Jeanne Floid(b), Versace(a), Plusbelle(b), Colomer(b),
Regional Juvena(b), Gatineau(b), Charlie Gold Bozzano(b), Intercosmo(b),
Brands Jeanne Gatineau(b) Natural Honey Juvena(b), Personal Bio Point,
Geniol(b), Natural Wonder,
Colorama(b), Llongueras(b)
Llongueras(b),
Bain de Soleil(b),
ZP-11
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(a) License held for distribution in certain countries outside the
United States.
(b) Trademark owned in certain markets outside the United States.
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 self-select 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 includes lipstick, lip gloss and liner). The Company's breakthrough
COLORSTAY lipcolor, which uses patented transfer-resistant technology that
provides long wear, is produced in 40 shades. SUPER LUSTROUS lipstick is
produced in 60 shades. MOON DROPS, a moisturizing lipstick, is produced in 57
shades. LINE & SHINE, which was introduced in 1997, is a product that utilizes
an innovative product form, combining lipliner and lip gloss in one package,
and is produced in 8 shades.
The Company's nail color and nail care lines include enamels, cuticle
preparations and enamel removers. The Company's flagship REVLON nail enamel is
produced in 85 shades and uses a patented formula that provides consumers with
improved wear, application, shine and gloss in a toluene-free and
formaldehyde-free formula. TOP SPEED nail enamel, launched in 1997, is produced
in 52 shades and contains a patented speed drying polymer formula which sets in
90 seconds. STRONG WEAR, a patented strengthening nail enamel formula produced
in 27 shades, contains ingredients that provide protection against splitting,
chipping and breaking. Revlon has the number one position in nail enamel in the
United States self-select distribution channel. The Company also sells NAIL
BUILDERS, which includes nail strengtheners, hardeners and fortifiers.
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 foundation, which uses
patent-pending transfer-resistant technology that provides long wear; and NEW
COMPLEXION, for consumers in the 25 to 49 age bracket.
The Company's eye makeup products include mascaras, eye shadows, brow
color and liners. COLORSTAY eyecolor, mascara and brow color, LASHFUL and
LENGTHWISE mascaras, SOFTSTROKE eyeliners and REVLON CUSTOM EYES and OVERTIME
SHADOW eye shadows are targeted for women in the 18 to 49 age bracket, and
REVLON AGE DEFYING eye color is targeted for women over 35.
The Company's ALMAY brand consists of a complete line of
hypo-allergenic, dermatologist-tested, fragrance-free cosmetics and skin care
products targeted for consumers who want "healthy looking skin." The Company
positions the ALMAY brand as the clean, natural-looking and healthy choice.
ALMAY products include lip makeup, nail color and nail care products, eye and
face makeup, skin care products, and sunscreen lotions and creams, including
TIME-OFF makeup and skin care and the ALMAY AMAZING collection, which includes
ALMAY AMAZING LASTING lip makeup, which includes the Company's proprietary
transfer-resistant technology developed for COLORSTAY, ALMAY AMAZING LASH
mascara, ALMAY AMAZING eye makeup, ALMAY AMAZING LASTING makeup, and ALMAY
CLEAR COMPLEXION SKIN CARE and MAKEUP and ALMAY EASY-TO-WEAR eyecolor and ALMAY
ONE COAT mascara. The Company targets ALMAY for value conscious consumers by
offering benefits comparable to higher priced products, such as Clinique, at
affordable prices. ALMAY is the leading brand in the hypo-allergenic market in
the United States self-select distribution channel.
The Company's STREETWEAR brand consists of a line of nail enamels,
mascaras, lip and eye liners and lip glosses which are targeted for the trend
conscious consumer. STREETWEAR was developed in response to the recent trend in
color and fashion coming from the street.
The Company sells implements, which include nail and eye grooming
tools such as clippers, scissors, files, tweezers and eye lash curlers. The
Company's implements are sold individually and in sets under the REVLON brand
name.
The Company also sells cosmetics in international markets under
regional brand names including COLORAMA in Brazil and JUVENA.
The Company's skin care products, including moisturizers, are sold
under brand names, including ETERNA 27, MOON DROPS, REVLON RESULTS, ALMAY
TIME-OFF REVITALIZER, CLEAR COMPLEXION and ULTIMA II VITAL RADIANCE, a skin
care collection introduced in 1997. In addition, the Company sells skin care
products in international markets under internationally recognized brand names
and under regional brands, including NATURAL HONEY.
6
The Company's premium priced cosmetics and skin care products are sold
under the ULTIMA II brand name, which is the Company's flagship premium priced
brand sold throughout the world, and the JEANNE GATINEAU brand name, which is
sold outside the United States. The ULTIMA II line includes the WONDERWEAR
collection, which includes a long-wearing foundation that uses patent-pending
technology, cheek and eyecolor products that use proprietary technology that
provides long wear, and WONDERWEAR LIPSEXXXY lipstick, which uses patented
transfer-resistant technology that provides long wear, the BEAUTIFUL NUTRIENT
collection, a complete line of nourishing makeup that provides advanced
nutrient protection against dryness and THE NAKEDS makeup, a trend-setting line
of makeup emphasizing neutral colors.
Fragrances. The Company sells a selection of moderately priced and
premium priced fragrances, including perfumes, eau de toilettes and colognes.
The Company's portfolio includes fragrances such as CHARLIE and FIRE & ICE and
line extensions such as CHARLIE RED, CHARLIE WHITE, CHARLIE SUNSHINE and FIRE &
ICE COOL. The Company's CHARLIE fragrance has been a market leader since the
mid-1970's and, the Company believes, one of the top selling fragrances
worldwide. In international markets, the Company distributes under license
certain brands, including VERSACE and VAN GILS.
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
self-select distribution channel, the Company sells haircare, anti-perspirant
and other personal care products, including the FLEX, OUTRAGEOUS and AQUAMARINE
haircare lines throughout the world and the COLORAMA, PLUSBELLE, JUVENA,
LLONGUERAS and NATURAL HONEY brands outside the United States; the
breakthrough, patent-pending COLORSTAY and the COLORSILK, REVLON SHADINGS,
FROST & GLOW and ROUX FANCI-FULL hair coloring lines throughout most of the
world; and the MITCHUM, LADY MITCHUM and HI & DRI anti-perspirant brands
throughout the world. Certain hair care products, including ROUX FANCI-FULL
hair coloring and PERFECT TOUCH and SALON PERFECTION home permanents, were
originally developed for professional use. The Company also markets
hypo-allergenic personal care products, including sunscreens, moisturizers and
anti-perspirants, under the ALMAY brand.
Professional Products. The Company sells a comprehensive line of salon
products, including permanent wave preparations, hair relaxers, temporary and
permanent hair coloring products, shampoos, conditioners, styling products and
hair conditioners, to professional salons and beauty supply stores under the
REVLON brand as well as other brand names such as ROUX FANCI-FULL, REALISTIC,
REVLONISSIMO, CREME OF NATURE, FABU-LAXER, LOTTABODY, NATURAL WONDER, SENSOR
and INTERCOSMO. Most of the Company's salon products in the United States
currently are distributed in the non-exclusive distribution channels, in
contrast to those products that are distributed exclusively to professional
salons. Two recent acquisitions, Creative Nail Design, Inc. ("Creative Nail"),
acquired in November 1995, and American Crew, Inc., acquired in April 1996,
increase the Company's strength in the exclusive distribution channel. Through
Creative Nail, the Company sells nail enhancement systems and nail color and
treatment products and services for use by the professional salon industry
under the CREATIVE NAIL brand name. Through American Crew, Inc. the Company
sells men's shampoos, conditioners, gels, and other hair care products for use
by professional salons under the AMERICAN CREW brand name. The Company also
sells retail hair care products under the LLONGUERAS, PERSONAL BIO POINT,
GENIOL, FIXPRAY and LANOFIL brands outside the United States. The Company
markets in salons, beauty supply stores and the self-select distribution
channel several lines of hair relaxers, styling products, hair conditioners and
other hair care products under such names as FABU-LAXER and CREME OF NATURE
designed for the particular needs of ethnic consumers. The Company also
developed a new exclusive line of ethnic products, AROSCI, which was launched
in 1996. The Company also sells wigs and hair pieces to retail outlets and
certain professional salons under the REVLON brand and, pursuant to a license,
under the ADOLFO brand.
7
MARKETING
The Company's vision is to provide glamour, excitement and innovation
through quality products at affordable prices. The Company's marketing efforts
are designed to implement this vision. The Company has formed Global Marketing
Committees, consisting of managers from the Company's marketing, research and
development, operations, advertising and finance departments from the United
States and abroad, which develop strategies for the Company's current and new
brands and products. The Global Marketing Committees coordinate the Company's
globalization efforts while allowing sufficient flexibility to tailor products
to local and regional preferences.
Consumer Products. The Company markets extensive consumer product
lines at a range of retail prices primarily through the self-select
distribution channel and markets select premium lines through
demonstrator-assisted channels. Each line is distinctively positioned and is
marketed globally with consistently recognizable logos, packaging and
advertising designed to differentiate it from other brands. The Company's
existing consumer product lines are carefully segmented, and new product lines
are developed, to target specific consumer needs as measured by focus groups
and other market research techniques.
The Company uses print and television advertising and point-of-sale
merchandising, including displays and samples. The Company has shifted a
significant portion of its marketing to appeal to a broader audience and has
increased media advertising, particularly national television advertising.
Advertising and consumer-directed promotion expenditures increased by 11.8% in
1997 over 1996 levels and by 17.4% in 1996 over 1995 levels. The Company's
marketing emphasizes a uniform global image and product for its portfolio of
core brands, including REVLON, COLORSTAY, REVLON AGE DEFYING, ALMAY, ULTIMA II,
FLEX, CHARLIE, OUTRAGEOUS 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. In the self-select
distribution channel, 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. In the demonstrator-assisted distribution
channel, the Company principally uses cooperative advertising programs with
retailers, supported by Company-paid or Company-subsidized demonstrators, and
coordinated in-store promotions and displays.
The Company also has developed unique marketing materials such as the
"Revlon Report," a glossy, color pamphlet distributed in magazines and on
merchandising units, available in 34 countries and 18 languages, which
highlights seasonal and other fashion and color trends, describes the Company's
products that address those trends and contains coupons, rebate offers and
other promotional material to encourage consumers to try the Company's
products. The Company has created on-the-road beauty sampling and information
vehicles that travel to major retailers throughout the United States, at which
Company trainers educate consumers on the latest product and shade offerings.
These vehicles create consumer and retail excitement about the Company's new
and existing products and encourage trial and purchase by consumers. Other
marketing materials designed to introduce the Company's newest products to
consumers and encourage trial and purchase include point-of-sale testers on the
Company's display units that provide information about, and permit consumers to
test, the Company's products, thereby achieving the benefits of an in-store
demonstrator without the corresponding cost; magazine inserts containing
samples of the Company's newest products; trial size products and "shade
samplers," which are collections of trial size products in different shades.
Additionally, the Company's website at http://www.revlon.com features current
product and promotional information and was recently recognized by a major
national business magazine as one of the top corporate sites on the World Wide
Web. Revlon was the only cosmetics company to receive this recognition.
Professional Products. Professional products are marketed through
educational seminars on their application and benefits and through advertising,
displays and samples to communicate to professionals and consumers the quality
and performance characteristics of such products. The Company's shift to
exclusive line distributors is intended to significantly reinforce the
Company's marketing and educational efforts with salon professionals. The
Company believes that its presence in the professional markets benefits its
consumer products business since the Company is able to anticipate consumer
trends in hair, nail and skin care, which often appear first in salons.
8
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 and professional products.
The Company's marketing and research and development groups identify consumer
needs and shifts in consumer preferences in order to develop new product
introductions, tailor line extensions and promotions and redesign or
reformulate existing products to satisfy such needs or preferences. The
Company's Advanced Concept Group consists of a select cross-functional group
that conducts research on a wide range of areas to develop new and innovative
technology. The Company independently develops substantially all of its new
products. The Company also has entered into joint research projects with major
universities and commercial laboratories to develop advanced technologies.
The Company believes that its Edison, New Jersey facility is one of
the most extensive cosmetics research and development facilities in the United
States. The researchers 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 Company also has research facilities in
Brazil and California.
The research and development group at the Edison facility also
performs extensive safety and quality tests on the Company's products,
including toxicology, microbiology and package testing. Additionally, quality
control testing is performed at each manufacturing facility.
As of December 31, 1997, the Company employed approximately 200 people
in its research and development activities, including specialists in
pharmacology, toxicology, chemistry, microbiology, engineering, biology,
dermatology and quality control. In 1997, 1996 and 1995 the Company spent
approximately $29.7 million, $26.3 million and $22.3 million, respectively, on
research and development activities.
In certain instances, proprietary technology developed by the Company
for use in products and packaging is available for licensing to third parties
through the Company's Revlon Technologies division. In 1995, the Company
received the Innovation Award from the Coalition of NorthEast Governors
("CONEG") for its patented and patent-pending ENVIROGLUV glass decorating
technology (which resulted in significant cost reductions in decorating REVLON
AGE DEFYING and COLORSTAY makeup bottles and REVLON nail enamel bottles and
which is being offered for licensing to qualified glass decorators). The CONEG
challenge awards program is a nationwide competition to recognize companies
that make significant contributions to packaging and source reduction.
MANUFACTURING AND RELATED OPERATIONS AND RAW MATERIALS
The Company is continuing to rationalize its worldwide manufacturing
operations, which is intended to lower costs and improve customer service and
product quality. The globalization of the Company's core brands allows the
Company to centralize production of some product categories for sale throughout
the world within designated facilities and shift production of certain other
product categories to more cost effective manufacturing sites to reduce
production costs. Shifts of production may result in the closing of certain of
the Company's less significant manufacturing facilities, and the Company
continually reviews its needs in this regard. In addition, as part of its
continuing efforts to improve operating efficiencies, the Company attempts to
ensure that a significant portion of its capital expenditures is devoted to
improving operating efficiencies.
The Company manufactures REVLON brand color cosmetics, personal care
products and fragrances for sale in the United States, Japan and most of the
countries in Latin America and Southeast Asia at its Phoenix, Arizona facility
and its Canadian facility. The Company manufactures ULTIMA II cosmetics and
skin treatment products for sale in the United States and most of the countries
in Latin America and Southeast Asia, personal care products for sale in the
United States and ALMAY brand products for sale throughout the world at its
Oxford, North Carolina facility. Nail care products for sale through salons
worldwide are manufactured and distributed through the Vista, California
facility. Personal care implements for sale throughout the world are
manufactured at the Company's Irvington, New Jersey facility. The Company
manufactures salon and retail professional products and personal care consumer
products for sale in the United States and Canada at the Company's
Jacksonville, Florida facility. The Phoenix and Oxford facilities have been
ISO-9002 certified. An ISO-9002 certification is an internationally recognized
standard for manufacturing
9
facilities, which signifies that the manufacturing facility has achieved and
maintains certain performance and quality commitment standards.
The Company manufactures its entire line of consumer products (except
implements) for sale in most of Europe at its Maesteg, South Wales facility.
Local production of cosmetics and personal care products takes place at the
Company's facilities in Spain, Canada, Venezuela, Mexico, New Zealand, Brazil,
Italy, Argentina, France and South Africa. The manufacture of professional
products for sale by retailers outside the United States has been centralized
principally at the Company's facilities in Ireland, Spain, Italy and Mexico.
Production of color cosmetics for Japan and Mexico has been shifted primarily
to the United States while production of REVLON brand personal care products
for Argentina has been centralized in Brazil. The Maesteg and Irish facilities
have been certified by the British equivalent of ISO-9002.
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.
The Company's improvements in manufacturing, sourcing and related
operations have contributed to improved customer service, including an
improvement in the percentage of timely order fulfillment from most of the
Company's principal manufacturing facilities and the timeliness and accuracy of
new product and promotion deliveries. To promote the Company's understanding
of, and responsiveness to the needs of its retail customers, the Company
assigns members of senior operations management to lead inter-departmental
teams that visit significant accounts, and has provided retail accounts with a
designated customer service representative.
The Company emphasizes safety and increased training of employees
resulting in an improved safety record. The Company anticipates that the
globalization of, and continued improvement in, the quality of its
manufacturing operations will result in lower manufacturing costs.
BUSINESS PROCESS ENHANCEMENTS
The Company's management information systems have been substantially
upgraded to provide comprehensive order processing, production and accounting
support for the Company's business. The Company's expenditures on improvements
to its management information systems were approximately $12 million for 1997,
and the Company anticipates a similar level of expenditure in 1998. Systems
improvements have been and the Company anticipates that they will continue to
be instrumental in contributing to the reduction of the time from order entry
to shipment, improved forecasting of demand and improved operating
efficiencies.
The Company has made an evaluation of steps necessary to address
issues related to required changes in computer systems for the Year 2000. While
the Company has determined that it currently has computer systems that require
modification to be Year 2000 compliant, many of the modifications are being
accomplished as part of the systems improvements referred to above. As to its
systems which are not impacted by the improvements referred to above, the
Company is identifying those which require modification or replacement to
address the Year 2000 issue. Management believes that there is no material risk
that the Company will fail to address the Year 2000 issues in a timely manner.
Additionally, the Company believes that the Year 2000 issue will not have a
material effect on its financial condition.
10
DISTRIBUTION
As a result of its improved customer service and consumer traffic
generated by its products and innovative marketing programs, the Company
believes that its relationships with self-select distribution cosmetic
retailers are the best in the cosmetics industry.
The Company's products are sold in approximately 175 countries and
territories. The Company's worldwide sales force had approximately 2,900 people
as of December 31, 1997, including a dedicated sales force for cosmetics, skin
care and fragrance products in the self-select distribution channel, for the
demonstrator-assisted distribution channel, for personal care products
distribution, for salon distribution, and for retail stores. In addition, the
Company utilizes sales representatives and independent distributors to serve
specialized markets and related distribution channels.
United States. The United States operation's net sales accounted for
approximately 60.8% of the Company's 1997 net sales, a majority of which were
made in the self-select distribution channel. The Company also sells a broad
range of consumer and retail professional products to United States Government
military exchanges and commissaries. The Company licenses its trademarks to
select manufacturers for products that the Company believes have the potential
to extend the Company's brand names and image. As of December 31, 1997, 19
licenses were in effect relating to 21 product categories to be marketed in the
self-select distribution channel. Pursuant to the 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 earned
royalties, royalty advances and, in some cases, up-front licensing fees.
Products designed for professional use or resale by beauty salons are sold
through wholesale beauty supply distributors and directly to professional
salons. Various hair care products, such as ethnic hair relaxers, scalp
conditioners, shampoos and hair coloring products and wigs and hairpieces are
sold directly and through wholesalers to chain drug stores and mass volume
retailers. Wigs and hairpieces are also sold through mail order direct
marketing, retail outlet malls, salons and certain department stores.
The Company also operates retail stores through Cosmetic Center. As of
December 31, 1997, Cosmetic Center's retail (or Cosmetic Center) division
operated 66 specialty retail stores in the middle Atlantic region and in
Chicago and its outlet (or Prestige Fragrance & Cosmetics) division operated
201 retail outlet stores throughout the United States. The stores in the
Cosmetic Center division offer a broad range of brand name prestige and mass
merchandised cosmetics products at value prices. The stores in the Prestige
Fragrance & Cosmetics division operate in factory outlet malls, rural areas and
other similar locations that are not disruptive to the Company's principal
distribution channels. In these stores, Cosmetic Center sells the Company's
first quality, first quality excess, returned and refurbished, and discontinued
consumer products and retail professional products, as well as similar products
of other cosmetics companies.
International. The International operation's net sales accounted for
approximately 39.2% of the Company's 1997 net sales. The International
operation's ten largest countries in terms of these sales, which include, among
others, Brazil, Spain, the United Kingdom, Australia, South Africa, Canada and
Japan, accounted for approximately 28% of the Company's net sales in 1997, with
Brazil accounting for approximately 5.5% of the Company's net sales. The
International operation is increasing distribution through the expanding
self-select distribution channels outside the United States, such as drug
stores/chemists, hypermarkets/mass volume retailers and variety stores, as
these channels gain importance. The International operation also distributes
through department stores and specialty stores such as perfumeries. The
International operation's professional products are sold directly to beauty
salons by the Company's direct sales force in Spain, France, Germany, Portugal,
Italy, Mexico and Ireland and through distributors in other countries. As of
December 31, 1997, the Company actively sold its products through wholly owned
subsidiaries established in 26 countries outside of the United States, through
joint ventures in India and Indonesia, and through a large number of
distributors and licensees elsewhere around the world. The Company continues to
pursue strategies to establish its presence in new emerging markets. Such new
and emerging markets include Eastern Europe; Russia; and China, where in 1996
the Company established a subsidiary with a local minority partner. In
addition, the Company is building a franchise through local distributorships in
northern and central Africa, where the Company intends to expand the
distribution of its products by capitalizing on its market strengths in South
Africa.
11
CUSTOMERS
The Company's principal customers include chain drug stores and large
mass volume retailers, including such well known retailers as Wal-Mart,
Walgreens, Kmart, Target, CVS, Drug Emporium, American Drug Stores, Eckerds,
and Rite Aid in the self-select distribution channel, J.C. Penney in the
demonstrator-assisted distribution channel, Sally's Beauty Company for
professional products, Boots in the United Kingdom and Western Europe and
Wal-Mart worldwide. The foregoing principal customers each accounted for 1% or
more of the Company's net sales in 1997 and are representative of the Company's
customers.
COMPETITION
The cosmetics and skin care, fragrance, personal care and professional
products business is characterized by vigorous competition throughout the
world. Brand recognition, together with product quality, performance and price
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 sales force affect
product reception, in-store position, permanent display space and inventory
levels in retail outlets. The Company competes in most of its product
categories against a number of companies, some of which have substantially
greater resources than the Company. In addition to products sold in the
self-select and demonstrator-assisted distribution channels, the Company's
products also compete with similar products sold door-to-door or through mail
order or telemarketing by representatives of direct sales companies. The
Company's principal competitors include L'Oreal S.A., The Procter & Gamble
Company, Helene Curtis Industries, Inc. and Joh A. Benckiser GmbH in the
self-select distribution channel; L'Oreal S.A., Unilever N.V., Estee Lauder,
Inc. and Joh A. Benckiser GmbH in the demonstrator-assisted distribution
channel; and L'Oreal S.A. and Matrix Essentials, Inc., which is owned by
Bristol-Myers Squibb Company, in professional products.
SEASONALITY
The Company's business is subject to certain seasonal fluctuations,
with net sales in the second half of the year generally benefiting from
increased retailer purchases in the United States for the back-to-school and
Christmas selling seasons.
PATENTS, TRADEMARKS AND PROPRIETARY TECHNOLOGY
The Company's major trademarks are registered in the United States and
in many other countries, and the Company considers trademark protection to be
very important to its business. Significant trademarks include REVLON,
COLORSTAY, REVLON AGE DEFYING, STREETWEAR, FLEX, PLUSBELLE, MITCHUM, ETERNA 27,
ULTIMA II, ALMAY, CHARLIE, JEAN NATE, REVLON RESULTS, COLORAMA, FIRE & ICE,
MOON DROPS, SUPER LUSTROUS and WONDERWEAR LIPSEXXXY for consumer products and
REVLON, ROUX FANCI-FULL, REALISTIC, FERMODYL, CREATIVE NAIL, AMERICAN CREW and
INTERCOSMO for professional products.
The Company utilizes certain proprietary or patented technologies in
the formulation or manufacture of a number of the Company's products, including
COLORSTAY lipcolor and cosmetics, COLORSTAY haircolor, FLEX & GO shampoo,
LENGTHWISE mascara, classic REVLON nail enamel, TOP SPEED nail enamel, REVLON
AGE DEFYING foundation and cosmetics, NEW COMPLEXION makeup, WONDERWEAR
foundation, WONDERWEAR LIPSEXXXY lipstick, ALMAY TIME-OFF skin care and makeup,
ALMAY AMAZING cosmetics, ALMAY ONE COAT eye makeup and cosmetics, ULTIMA II
VITAL RADIANCE skin care products, OUTRAGEOUS shampoo, FLEX hairspray and
various professional products, including FERMODYL shampoo and conditioners. 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.
12
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
Phoenix, Arizona and Oxford, North Carolina manufacturing facilities are
registered with the FDA as drug manufacturing establishments, permitting the
manufacture of cosmetics that contain over-the-counter drug ingredients such as
sunscreens. Compliance with federal, state, local and foreign laws and
regulations pertaining to discharge of materials into the environment, or
otherwise relating to the protection of the environment, has not had, and is
not anticipated to have, a material effect upon the capital expenditures,
earnings or competitive position of the Company. State and local regulations in
the United States that are designed to protect consumers or the environment
have an increasing influence on product claims, contents and packaging.
INDUSTRY SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS
The Company operates in a single business 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, 1997, the Company employed the equivalent of
approximately 16,000 full-time persons. Approximately 2,100 of such employees
in the United States are covered by collective bargaining agreements. The
Company will be negotiating collective bargaining agreements or portions
thereof covering employees in eleven countries outside the United States during
1998 (namely, Australia, Brazil, England, France, Ireland, Israel, Italy,
Japan, Mexico, South Africa and Spain). Although there can be no assurance, the
Company expects that such agreements will be renewed in the ordinary course,
and further 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.
13
ITEM 2. PROPERTIES
The following table sets forth as of December 31, 1997 the Company's
major manufacturing, research and warehouse/distribution facilities, all of
which are owned except where otherwise noted.
APPROXIMATE FLOOR SPACE
LOCATION USE SQ. FT.
- -------- --- -----------------------
United States:
Oxford, North
Carolina.................... Manufacturing, warehousing, distribution and office 1,012,000
Phoenix,
Arizona..................... Manufacturing, warehousing, distribution and office 706,000
(partially leased)
Jacksonville,
Florida..................... Manufacturing, warehousing, distribution, research and 526,000
office
Columbia,
Maryland.................... Warehousing, distribution and office (leased) 200,000
Edison, New
Jersey...................... Research and office (leased) 133,000
Irvington, New
Jersey...................... Manufacturing, warehouse and office 96,000
International:
Sao Paulo,
Brazil...................... Manufacturing, warehousing, distribution, office and 435,000
research
Maesteg, South
Wales....................... Manufacturing,.distribution and office 316,000
Mississauga,
Canada...................... Manufacturing, warehousing, distribution and office 245,000
Santa Maria,
Spain....................... Manufacturing and warehousing 173,000
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
Escobar,
Argentina................... Manufacturing, warehousing, distribution and office 75,000
Argenteuil,
France...................... Warehousing and distribution (leased) 73,000
Bologna,
Italy....................... Manufacturing, warehousing, distribution and office 60,000
Dublin,
Ireland..................... Manufacturing, warehousing, distribution and office 32,500
In addition to the facilities described above, additional facilities
are owned and leased in various areas throughout the world, including the lease
for the Company's executive offices in New York, New York (345,000 square feet,
of which approximately 57,000 square feet are currently sublet to affiliates of
the Company and approximately 27,000 square feet are sublet to an unaffiliated
third party). Management considers the Company's facilities to be
well-maintained and satisfactory for the Company's operations, and believes
that the Company's facilities provide sufficient capacity for its current and
expected production requirements. Products Corporation leases from Holdings on
arms' length terms its research and development facility located in Edison, New
Jersey.
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.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MacAndrews & Forbes Holdings Inc. ("MacAndrews Holdings"), which is
indirectly wholly owned by Ronald O. Perelman, through REV Holdings Inc. ("REV
Holdings"), beneficially owns 11,250,000 shares of the Company's Class A Common
Stock (representing 56.6% of the outstanding shares of Class A Common Stock)
and all of the outstanding 31,250,000 shares of Class B Common Stock, which
together represent 83.1% of the outstanding shares of the Company's Common
Stock and have approximately 97.4% of the combined voting power of the
outstanding shares of the Company's Common Stock. The remaining 8,637,350
shares of Class A Common Stock outstanding at February 2, 1998 are owned by the
public. As of February 2, 1998, there were 529 holders of record of Class A
Common Stock. No dividends were declared or paid during 1997 or 1996. The terms
of the Credit Agreement, the Senior Subordinated Notes, the Senior Notes and
the 9 1/2% Senior Notes Due 1999 (the "1999 Notes") currently restrict, and,
after the Assumption, the terms of the Notes will restrict, the ability of
Products Corporation to pay dividends or make distributions to Revlon, Inc. See
the Consolidated Financial Statements of the Company and the Notes thereto.
The table below shows the Company's high and low quarterly stock
prices for the years ended December 31, 1997 and 1996.
1997 Quarterly Stock Prices (1)
---------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------------ ------------- ------------ -------------
High............................ $ 42 3/8 $ 51 13/16 $ 54 1/8 49
Low............................. 29 5/8 33 1/4 45 3/8 33 1/8
1996 Quarterly Stock Prices (1)
---------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------------ ------------- ------------ -------------
High............................ $ 28 1/4 $ 31 3/8 $ 31 1/8 $ 36 1/2
Low............................. 25 1/2 24 3/4 23 1/2 28 5/8
(1) Represents the closing price per share on the New York Stock
Exchange (NYSE), which is the market on which shares of the Company's Class A
Common Stock are listed. The Company's symbol is REV.
15
ITEM 6. SELECTED FINANCIAL DATA
The Consolidated Statements of Operations Data for each of the years
in the five-year period ended December 31, 1997 and the Balance Sheet Data as
of December 31, 1997, 1996, 1995, 1994 and 1993 are derived from the
Consolidated Financial Statements of the Company, which have been audited by
KPMG Peat Marwick 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,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(dollars in millions, except share data)
Statements of Operations Data:
Net sales.............................................. $ 2,390.9 $ 2,169.5 $ 1,940.0 $ 1,736.7 $ 1,595.2
============ =========== =========== =========== ===========
Operating income....................................... $ 213.3(a)$ 200.6 $ 145.6 $ 107.4 $ 50.5
============ =========== =========== =========== ===========
Income (loss) before extraordinary
items and cumulative effect of
accounting changes............................. $ 58.5 $ 24.8 $ (41.2) $ (75.0) $ (130.2)
Extraordinary items - early extinguishments of debt.... (14.9) (6.6) - - (9.5)
Cumulative effect of accounting changes................ - - - (28.8)(b) $ (6.0)(c)
============ =========== =========== =========== ===========
Net income (loss)...................................... $ 43.6 $ 18.2 $ (41.2) $ (103.8) $ (145.7)
============ =========== =========== =========== ===========
Basic income (loss) per common share:
Income (loss) before extraordinary items.............. $ 1.14 $ 0.50 $ (0.97) $ (1.76) $ (3.07)
Extraordinary items................................... (0.29) (0.13) - - (0.22)
Cumulative effect of accounting changes............... - - - (0.68) (0.14)
============ =========== =========== =========== ===========
Net income (loss) per common share.................... $ 0.85 $ 0.37 $ (0.97) $ (2.44) $ (3.43)
============ =========== =========== =========== ===========
Diluted income (loss) per common share:
Income (loss) before extraordinary items.............. $ 1.14 $ 0.50 $ (0.97) $ (1.76) $ (3.07)
Extraordinary items................................... (0.29) (0.13) - - (0.22)
Cumulative effect of accounting changes............... - - - (0.68) (0.14)
============ =========== =========== =========== ===========
Net income (loss) per common share.................... $ 0.85 $ 0.37 $ (0.97) $ (2.44) $ (3.43)
============ =========== =========== =========== ===========
Weighted average common shares outstanding: (d)
Basic.......................................... 51,131,440 49,687,500 42,500,000 42,500,000 42,500,000
============ =========== =========== =========== ===========
Dilutive....................................... 51,544,318 49,818,792 42,500,000 42,500,000 42,500,000
============ =========== =========== =========== ===========
December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(dollars in millions)
Balance Sheet Data:
Total assets........................................... $ 1,834.6 $ 1,621.9 $ 1,536.0 $ 1,419.4 $ 1,551.1
Long-term debt, excluding current portion.............. 1,458.7 1,352.2 1,467.5 1,327.5 1,203.8
Total stockholders' deficiency......................... (458.5) (497.1) (702.3) (656.2) (554.2)
(a) In 1997, the Company incurred business consolidation costs and other, net,
of approximately $7.6 million in connection with the implementation of its
business strategy to rationalize factory and warehouse operations, including
primarily severance and other related costs in certain operations and the
consolidation of certain warehouse, distribution and headquarter operations
related to the Cosmetic Center Merger partially offset by a settlement of a
claim of $12.7 million and gains associated with the sale of certain facilities
related to the rationalizations.
(b) Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 112, "Employers' Accounting for
Postemployment Benefits." The Company recognized a charge of $28.8 million in
the first quarter of 1994 to reflect the cumulative effect of the accounting
change, net of income tax benefit.
(c) Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," for its retiree
benefit plan in the United States. Accordingly, the Company recognized a charge
of $6.0 million in the first quarter of 1993 to reflect the cumulative effect
of the accounting change.
(d) Represents the weighted average common shares outstanding for the period.
See Note 1 to the Consolidated Financial Statements.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(DOLLARS IN MILLIONS)
OVERVIEW
The Company operates in a single business segment with many different
products, which include an extensive array of glamorous, exciting and
innovative cosmetics and skin care, fragrance and personal care products, and
professional products, consisting of hair and nail care products principally
for use in and resale by professional salons. In addition, the Company also
operates retail and outlet stores and has a licensing group.
The Company presents its business geographically as its United States
operation, which comprises the Company's business in the United States, and its
International operation, which comprises its business outside of the United
States.
RESULTS OF OPERATIONS
The following table sets forth the Company's net sales by operation
for each of the last three years:
Year Ended December 31,
-----------------------------------------------
Net sales: 1997 * 1996 * 1995 *
------------ ------------ ------------
United States ................................. $ 1,452.5 $ 1,259.7 $ 1,115.4
International ................................. 938.4 909.8 824.6
============ ============ ============
$ 2,390.9 $ 2,169.5 $ 1,940.0
============ ============ ============
The following sets forth certain statements of operations data as a
percentage of net sales for each of the last three years:
Year Ended December 31,
-----------------------------------------------
1997 ** 1996 ** 1995 **
------------ ------------ ------------
Cost of sales................................... 34.8% 33.5% 33.7%
Gross profit.................................... 65.2 66.5 66.3
Selling, general and administrative expenses.... 56.0 57.3 58.8
Business consolidation costs and other, net..... 0.3 - -
Operating income................................ 8.9 9.2 7.5
* The results of Cosmetic Center, after giving effect to certain intercompany
adjustments for 1997, 1996 and 1995, were as follows, respectively: Net sales
of $152.3, $77.4 and $72.7, cost of sales of $89.5, $37.6 and $38.0, S,G&A
expenses of $61.9, $38.4 and $36.5, and operating (loss) income of ($3.1), $1.4
and ($1.8). 1997 includes business consolidation costs of $4.0 in the operating
(loss).
** Excluding the results of Cosmetic Center, after giving effect to certain
intercompany adjustments for 1997, 1996 and 1995, the above percentages would
have been, respectively: cost of sales of 33.2%, 32.9% and 32.9%, gross profit
of 66.8%, 67.1% and 67.1%, S,G&A expenses of 57.0%, 57.6 % and 59.2%, business
consolidation costs and other, net, of 0.1%, 0% and 0% and operating income of
9.7%, 9.5% and 7.9%.
17
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
NET SALES
Net sales were $2,390.9 and $2,169.5 for 1997 and 1996, respectively,
an increase of $221.4, or 10.2% or 12.6% on a constant U.S. dollar basis,
primarily as a result of successful new product introductions worldwide,
increased demand in the United States, the impact of the Cosmetic Center
Merger, increased distribution internationally into the expanding self-select
distribution channel and the further development of new international markets.
United States. The United States operation's net sales increased to
$1,452.5 for 1997 from $1,259.7 for 1996, an increase of $192.8, or 15.3%. Net
sales improved for 1997, primarily as a result of continued consumer acceptance
of new product offerings, general improvement in consumer demand for the
Company's color cosmetics and the impact of the Cosmetic Center Merger. These
results were partially offset by a decline in the Company's fragrance business
caused by downward trends in the mass fragrance industry and the Company's
strategy to de-emphasize new fragrance products. Even though consumer
sell-through for the REVLON and ALMAY brands, as described below in more
detail, has increased significantly, the Company's sales to its customers have
been during 1997 and may continue to be impacted by retail inventory balancing
and reductions resulting from consolidation in the chain drugstore industry in
the U.S.
REVLON brand color cosmetics continued as the number one brand in
dollar market share in the self-select distribution channel with a share of
21.6% for 1997 versus 21.4% for 1996. Market share, which is subject to a
number of conditions, can vary from quarter to quarter as a result of such
things as timing of new product introductions and advertising and promotional
spending. New product introductions (including, in 1997, certain products
launched during 1996) generated incremental net sales in 1997, principally as a
result of launches of products in the COLORSTAY collection, including COLORSTAY
eye makeup and face products such as powder and blush, COLORSTAY haircolor,
launched in the third quarter of 1997, TOP SPEED nail enamel, launched in the
third quarter of 1997, and launches of REVLON AGE DEFYING line extensions, the
STREETWEAR collection, NEW COMPLEXION face makeup, LINE & SHINE lip makeup and
launches of products in the ALMAY AMAZING collection, including lip makeup, eye
makeup, face makeup and concealer, ALMAY ONE COAT, and ALMAY TIME-OFF
REVITALIZER.
International. The International operation's net sales increased to
$938.4 for 1997 from $909.8 for 1996, an increase of $28.6, or 3.1% on a
reported basis or 8.8% on a constant U.S. dollar basis. Net sales improved for
1997, principally as a result of increased distribution into the expanding
self-select distribution channel, successful new product introductions,
including the continued roll-out of the COLORSTAY cosmetics collection and the
further development of new international markets. This was partially offset by
the Company's decision to exit the unprofitable demonstrator-assisted channel
in Japan in the second half of 1996, unfavorable economic conditions in several
international markets, and, on a reported basis, the unfavorable effect on
sales of a stronger U.S. dollar against certain foreign currencies, primarily
the Spanish peseta, the Italian lira and several other European currencies, the
Australian dollar, the South African rand and the Japanese yen. New products
such as COLORSTAY haircolor and STREETWEAR were introduced in select
international markets in the second half of 1997. During 1997, the
International operation's sales were divided into the following geographic
areas: Europe, which is comprised of Europe, the Middle East and Africa (in
which net sales increased by 3.4% on a reported basis to $417.9 for 1997 as
compared to 1996 or an increase of 11.3% on a constant U.S. dollar basis); the
Western Hemisphere, which is comprised of Canada, Mexico, Central America,
South America and Puerto Rico (in which net sales increased by 11.1% on a
reported basis to $346.6 for 1997 as compared to 1996 or an increase of 14.5%
on a constant U.S. dollar basis); and the Far East (in which net sales
decreased by 10.3% on a reported basis to $173.9 for 1997 as compared to 1996
or a decrease of 5.5% on a constant U.S. dollar basis). Excluding in both
periods the effect of the Company's strategy of exiting the
demonstrator-assisted distribution channel in Japan, Far East net sales on a
constant U.S. dollar basis for 1997 would have been at approximately the same
level as those in 1996.
The Company's operations in Brazil are significant and, along with
operations in certain other countries, have been subject to, and may continue
to be subject to, significant political and economic uncertainties. In Brazil,
net sales, operating income and income before taxes were $130.9, $16.0 and
$7.7, respectively, for 1997 compared to $132.7, $25.1 and $20.0, respectively,
for 1996. Results of operations in Brazil for 1997 were adversely
18
impacted by competitive activity affecting the Company's toiletries business.
Cost of sales
As a percentage of net sales, cost of sales was 34.8% for 1997
compared to 33.5% for 1996. The increase in cost of sales as a percentage of
net sales is due primarily to the impact of the Cosmetic Center Merger.
Excluding the results of Cosmetic Center, as a percentage of net sales, cost of
sales would have been 33.2% for 1997 compared to 32.9% for 1996. Other factors
which increased cost of sales as a percentage of net sales included factors
which enhanced overall operating income, including increased sales of the
Company's higher cost, enhanced-performance, technology-based products and
increased export sales and other factors including the effect of weaker local
currencies on the cost of imported purchases and competitive pressures on the
Company's toiletries business in certain International markets. These factors
were partially offset by the benefits of improved overhead absorption against
higher production volumes and more efficient global production and purchasing.
S,G&A expenses
As a percentage of net sales, S,G&A expenses were 56.0% for 1997, an
improvement from 57.3% for 1996. S,G&A expenses other than advertising and
consumer-directed promotion expenses, as a percentage of net sales, improved to
39.3% for 1997 compared with 40.9% for 1996, primarily as a result of reduced
general and administrative expenses, improved productivity and lower
distribution costs in 1997 compared with those in 1996. In accordance with its
business strategy, the Company increased advertising and consumer-directed
promotion expenditures in 1997 compared with 1996 to support growth in existing
product lines, new product launches and increased distribution in the
self-select distribution channel in many of the Company's markets in the
International operation. Advertising and consumer-directed promotion expenses
increased by 11.8% to $397.4, or 16.6% of net sales, for 1997 from $355.5, or
16.4% of net sales, for 1996.
Business consolidation costs and other, net
Business consolidation costs and other, net, in 1997 include severance
and other costs in connection with the consolidation of certain warehouse,
distribution and headquarter operations related to the Cosmetic Center Merger,
severance, writedowns of certain assets to their estimated net realizable value
and other related costs to rationalize factory operations in certain operations
in accordance with the Company's business strategy, partially offset by related
gains from the sales of certain factory operations and an approximately $12.7
settlement of a claim in the second quarter of 1997. These business
consolidations are intended to lower the Company's operating costs and increase
efficiency in the future.
Operating income
As a result of the foregoing, operating income increased by $12.7, or
6.3%, to $213.3 for 1997 from $200.6 for 1996.
Other expenses/income
Interest expense was $136.2 for 1997 compared to $133.4 for 1996. The
slight increase in interest expense in 1997 is due to higher average
outstanding borrowings, partially offset by lower interest rates.
Gain on sale of subsidiary stock of $6.0 was recognized in the second
quarter of 1997 as a result of the Cosmetic Center Merger.
Foreign currency losses, net, were $6.4 for 1997 compared to $5.7 for
1996. The increase in foreign currency losses for 1997 as compared to 1996
resulted primarily from a non recurring gain recognized in 1996 in connection
with the Company's simplification of its international corporate structure and
from the strengthening of the U.S. dollar versus currencies in the Far East and
most European currencies, partially offset by the stabilization of the
Venezuelan bolivar and Mexican peso versus the devaluations which occurred
during 1996.
19
Provision for income taxes
The provision for income taxes was $9.4 and $25.5 for 1997 and 1996,
respectively. The decrease was primarily attributable to lower taxable income
in certain International operations, partially as a result of the
implementation of tax planning, including the utilization of net operating loss
carryforwards in certain International operations, and benefits from net
operating loss carryforwards domestically.
Extraordinary item
The extraordinary item in 1997 resulted from the write-off in the
second quarter of 1997 of deferred financing costs associated with the early
extinguishment of borrowings under the 1996 Credit Agreement prior to maturity
with proceeds from the Credit Agreement, and costs of approximately $6.3 in
connection with the redemption of Products Corporation's Sinking Fund
Debentures. The extraordinary item in 1996 resulted from the write-off in the
first quarter of 1996 of deferred financing costs associated with the early
extinguishment of borrowings under the 1995 Credit Agreement prior to maturity
with the net proceeds from the Revlon IPO and proceeds from the 1996 Credit
Agreement.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Net sales
Net sales were $2,169.5 and $1,940.0 for 1996 and 1995, respectively,
an increase of $229.5, or 11.8%, primarily as a result of successful new
product introductions worldwide, increased demand in the United States,
acquisitions of certain exclusive line professional product businesses,
increased distribution internationally into the expanding self-select
distribution channel and the further development of new international markets.
United States. The United States operation's net sales increased to
$1,259.7 for 1996 from $1,115.4 for 1995, an increase of $144.3, or 12.9%. Net
sales improved for 1996 primarily as a result of continued consumer acceptance
of new product offerings, general improvement in consumer demand for the
Company's color cosmetics in the United States and acquisitions of certain
exclusive line professional product businesses, partially offset by overall
softness in the fragrance industry and lower sales of one of the Company's
prestige brands. The Company improved the dollar share of its REVLON brand
cosmetics in the color cosmetics business in the United States self-select
distribution channel to 21.4% for 1996 from 19.5% for 1995, moving into the
leading position in market share. Market share, which is subject to a number of
conditions, can vary from quarter to quarter as a result of such things as
timing of new product introductions and advertising and promotional spending.
New product introductions (including, in 1996, certain products launched during
1995) generated incremental net sales in 1996, principally as a result of
launches of products in the COLORSTAY collection, including COLORSTAY
foundation, lip makeup, eye makeup and COLORSTAY LASHCOLOR mascara, launches of
products in the ALMAY AMAZING collection, including lip makeup, eye makeup,
face makeup and concealer, and launches of Cherish fragrance and MITCHUM CLEAR
and ALMAY CLEAR COMPLEXION line extensions.
International. The International operation's net sales increased to
$909.8 for 1996 from $824.6 for 1995, an increase of $85.2, or 10.3% on a
reported basis or 12.6% on a constant U.S. dollar basis. Net sales improved
principally as a result of successful new product introductions, including the
continued roll-out of the COLORSTAY cosmetics collection and REVLON AGE DEFYING
makeup, increased distribution into the expanding self-select distribution
channel, the further development of new international markets, partially
offset, on a reported basis, by the unfavorable effect on sales of a stronger
U.S. dollar against certain foreign currencies, primarily the South African
rand, Japanese yen, and several European currencies. During 1996, the
International operation's sales were divided into the following geographic
areas: Europe, which is comprised of Europe, the Middle East and Africa (in
which net sales increased to $404.0 for 1996 from $374.6 for 1995, an increase
of $29.4, or 7.8%); the Western Hemisphere, which is comprised of Canada,
Mexico, Central America, South America and Puerto Rico (in which net sales
increased to $311.9 for 1996 from $275.4 for 1995, an increase of $36.5, or
13.3%); and the Far East (in which net sales increased to $193.9 for 1996 from
$174.6 for 1995, an increase of $19.3, or 11.1%).
The Company's operations in Brazil are significant and, along with
operations in certain other countries, have been subject to, and may continue
to be subject to, significant political and economic uncertainties. In Brazil,
net sales,
20
operating income and income before taxes were $132.7, $25.1 and $20.0,
respectively, for 1996 compared to $118.6, $22.8 and $19.8, respectively, for
1995. In Mexico, net sales for 1996 and 1995 were adversely affected by the
December 1994 devaluation of the Mexican peso and related economic weakness. In
Venezuela, net sales and income before taxes for 1996 and 1995 were adversely
affected by high inflation and in the 1996 period by a currency devaluation.
Cost of sales
As a percentage of net sales, cost of sales was 33.5% for 1996
compared to 33.7% for 1995, respectively. The improvement for 1996 resulted
from the benefits of improved overhead absorption against higher production
volumes and more efficient global production and purchasing. This improvement
was partially offset by changes in product mix involving an increase in sales
of the Company's higher cost technology-based products, an increase in export
sales, lower margin products (such as those products sold in Brazil), the
effect of weaker local currencies on the cost of imported purchases and
competitive pressures on the Company's toiletries business in certain
international markets in Europe and the Far East. The aforementioned increases
in sales that negatively impacted cost of sales were, however, more profitable
to the Company's overall operating results.
S,G&A expenses
As a percentage of net sales, S,G&A expenses were 57.3% for 1996, an
improvement from 58.8% for 1995. S,G&A expenses other than advertising and
consumer-directed promotion expenses, as a percentage of net sales, improved to
40.9% for 1996 compared with 43.2% for 1995 primarily as a result of reduced
general and administrative expenses, improved productivity and lower
distribution costs in 1996 compared with 1995, partially offset by additional
costs incurred in Japan in 1996 in connection with the Company's strategy of
exiting the demonstrator-assisted distribution channel. In accordance with its
business strategy, the Company increased advertising and consumer-directed
promotion expenditures in 1996 compared with 1995 to support growth in existing
product lines, new product launches and increased distribution in the
self-select distribution channel in many of the Company's markets in the
International operation. Advertising and consumer-directed promotion expenses
increased by 17.4% to $355.5, or 16.4% of net sales, for 1996 compared to
$302.9, or 15.6% of net sales, for 1995.
Operating income
As a result of the foregoing, operating income increased by $55.0, or
37.8%, to $200.6 for 1996 from $145.6 for 1995.
Other expenses/income
Interest expense was $133.4 for 1996 compared to $142.6 for 1995. The
reduction in interest expense is attributable to lower average outstanding
borrowings as a result of the paydown of debt under the 1996 Credit Agreement
and under the 1995 Credit Agreement with the use of proceeds from the Revlon
IPO in the 1996 period and lower interest rates under the 1996 Credit Agreement
than under the 1995 Credit Agreement.
Foreign currency losses, net, were $5.7 for 1996 compared to $10.9 for
1995. The reduction in the foreign currency loss in 1996 as compared to 1995
was due to lower foreign currency losses primarily in Mexico and Venezuela and
the Company's simplification of its international corporate structure, which
resulted in $2.1 of gains, previously deferred in the currency translation
account, partially offset by the strengthening of the U.S. dollar against the
Spanish peseta and the strengthening of the U.K. pound against several European
currencies.
Miscellaneous, net, was $6.3 for 1996 compared to $1.8 for 1995. The
increase relates primarily to the Company's continued investment in certain
emerging markets.
21
Extraordinary item
The extraordinary item resulted from the write-off recorded in the
first quarter of 1996 of deferred financing costs associated with the early
extinguishment of the 1995 Credit Agreement prior to its maturity with the net
proceeds from the Revlon IPO and borrowings under the 1996 Credit Agreement.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used for) operating activities was $6.9, ($9.6)
and ($52.1) for 1997, 1996 and 1995, respectively. The increase in net cash
provided by operating activities for 1997 compared with net cash used in 1996
resulted primarily from higher operating income and improved working capital
management, partially offset by increased spending on merchandise display units
in connection with the Company's continued expansion into the self-select
distribution channel. The decrease in net cash used for operating activities
for 1996 compared with 1995 resulted primarily from higher operating income,
lower restructuring payments ($13.3 for 1996 compared with $24.2 for 1995) and
improved management of inventory relative to business growth, partially offset
by higher trade receivable balances as a result of higher net sales and
increased spending on merchandise display units in connection with the
Company's continued expansion into the self-select distribution channel.
Net cash used for investing activities was $108.4, $65.1 and $72.5 for
1997, 1996 and 1995, respectively. Net cash used for investing activities for
1997, 1996 and 1995 included capital expenditures of $56.5, $58.0 and $54.3,
respectively, and $60.4, $7.1 and $21.2, respectively, used for acquisitions.
Net cash used for acquisitions in 1997 consisted primarily of cash paid to the
CCI shareholders in connection with the cash election pursuant to the Cosmetic
Center Merger and cash paid for the acquisition of a South American hair care
manufacturer and its distributor.
Net cash provided by financing activities was $109.3, $77.9 and $125.6
for 1997, 1996 and 1995, respectively. Net cash provided by financing
activities for 1997 included cash drawn under the 1996 Credit Agreement, the
Credit Agreement and Cosmetic Center's credit facility, partially offset by the
repayment of borrowings under the 1996 Credit Agreement, the payment of fees
and expenses related to entering into the Credit Agreement, the repayment of
borrowings under the Company's Japanese yen-denominated credit agreement (the
"Yen Credit Agreement"), the repayment of borrowings under CCI's former credit
agreement and the redemption of the Sinking Fund Debentures. Net cash provided
by financing activities for 1996 included the net proceeds from the Revlon IPO,
cash drawn under the 1995 Credit Agreement and under the 1996 Credit Agreement,
partially offset by the repayment of borrowings under the 1995 Credit
Agreement, the payment of fees and expenses related to the 1996 Credit
Agreement and the repayment of borrowings under the Yen Credit Agreement. Net
cash provided by financing activities for 1995 consisted primarily of
borrowings under the credit agreement of Products Corporation in effect prior
to the 1995 Credit Agreement and borrowings under the 1995 Credit Agreement,
partially offset by repayments of cash drawn under those credit agreements,
repayments under the Yen Credit Agreement and payment of debt issuance costs
under the 1995 Credit Agreement.
In May 1997, Products Corporation entered into the Credit Agreement
with a syndicate of lenders, whose individual members change from time to time.
The proceeds of loans made under the Credit Agreement were used for the purpose
of repaying the loans outstanding under the 1996 Credit Agreement and to redeem
the Sinking Fund Debentures and were and will be used for general corporate
purposes or, in the case of the Acquisition Facility, the financing of
acquisitions. See Note 10(a) to the Consolidated Financial Statements. At
December 31, 1997 Products Corporation had approximately $200.0 outstanding
under the Term Loan Facilities, $102.7 outstanding under the Multi-Currency
Facility, $41.9 outstanding under the Acquisition Facility and $34.8 of issued
but undrawn letters of credit under the Special LC Facility.
A subsidiary of Products Corporation is the borrower under the Yen
Credit Agreement, which had a principal balance of approximately Yen 4.3
billion as of December 31, 1997 (approximately $33.3 U.S. dollar equivalent as
of December 31, 1997). In accordance with the terms of the Yen Credit
Agreement, approximately Yen 539 million (approximately $5.2 U.S. dollar
equivalent) was paid in January 1996 and approximately Yen 539 million
(approximately $4.6 U.S. dollar equivalent) was paid in January 1997. In June
1997, Products Corporation amended and restated the Yen Credit Agreement to
extend the term to December 31, 2000 subject to earlier termination under
certain circumstances. In accordance with the terms of the Yen Credit
Agreement, as amended
22
and restated, approximately Yen 539 million (approximately $4.2 U.S. dollar
equivalent as of December 31, 1997) is due in each of March 1998, 1999 and 2000
and Yen 2.7 billion (approximately $20.7 U.S. dollar equivalent as of
December 31, 1997) is due on December 31, 2000.
Products Corporation made an optional sinking fund payment of $13.5
and redeemed all of the outstanding $85.0 principal amount Sinking Fund
Debentures during 1997 with the proceeds of borrowings under the Credit
Agreement. $9.0 aggregate principal amount of previously purchased Sinking Fund
Debentures were used for the mandatory sinking fund payment due July 15, 1997.
Products Corporation borrows funds from its affiliates from time to
time to supplement its working capital borrowings at interest rates more
favorable to Products Corporation than interest rates under the Credit
Agreement. No such borrowings were outstanding as of December 31, 1997.
On February 2, 1998, Revlon Escrow issued and sold the Notes in a
private placement, with the net proceeds deposited into escrow. The proceeds
from the sale of the Notes will be used to finance the redemptions of the Old
Notes. Products Corporation delivered a redemption notice to the holders of the
Senior Subordinated Notes for the redemption of the Senior Subordinated Notes
on March 4, 1998, at which time Products Corporation consummated the 8 5/8%
Notes Assumption, and to the holders of the Senior Notes for the redemption of
the Senior Notes on April 1, 1998, at which time Products Corporation will
consummate the 8 1/8% Notes Assumption. On or before March 19, 1998 either
Revlon Escrow or Products Corporation is required to file a registration
statement with the Commission with respect to the Exchange Offer, which is
expected to occur on or before July 2, 1998. In connection with the early
redemptions of the Old Notes, the Company expects to record an extraordinary
loss of up to $52 in 1998. The indentures governing the 8 5/8% Notes (the "8
5/8% Notes Indenture") and the 8 1/8% Notes (the "8 1/8% Notes Indenture" and,
together with the 8 5/8% Notes Indenture, the "Notes Indentures") contain
covenants that, after the Assumption among other things, limit (i) the issuance
of additional debt and redeemable stock by Products Corporation, (ii) the
incurrence of liens, (iii) the issuance of debt and preferred stock by Products
Corporation's subsidiaries, (iv) the payment of dividends on capital stock of
Products Corporation, (v) the sale of assets and subsidiary stock, (vi)
transactions with affiliates, (vii) consolidations, mergers and transfers of
all or substantially all Products Corporation assets and (viii) in the case of
the 8 5/8% Notes Indenture, the issuance of additional subordinated debt that
is senior in right of payment to the 8 5/8% Notes. The Notes Indentures also
prohibit certain restrictions on distributions from Products Corporation and
subsidiaries of Products Corporation. All of these limitations and
prohibitions, however, are subject to a number of important qualifications.
The Company's principal sources of funds are expected to be cash flow
generated from operations and borrowings under the Credit Agreement and other
existing working capital lines. The Credit Agreement and the Senior Notes, the
1999 Notes and the Senior Subordinated Notes currently contain, and, following
the Assumption, the Notes will contain, certain provisions that by their terms
limit Products Corporation's and/or its subsidiaries' ability to, among other
things, incur additional debt. The Company's principal uses of funds are
expected to be the payment of operating expenses, working capital and capital
expenditure requirements and debt service payments.
The Company estimates that capital expenditures for 1998 will be
approximately $65, including upgrades to the Company's management information
systems. Pursuant to a tax sharing agreement (see "Certain Relationships and
Related Transactions-Tax Sharing Agreement"), Revlon, Inc. may be required to
make tax sharing payments to Mafco Holdings Inc. as if Revlon, Inc. were filing
separate income tax returns, except that no payments are required by Revlon,
Inc. if and to the extent that Products Corporation is prohibited under the
Credit Agreement from making tax sharing payments to Revlon, Inc. The Credit
Agreement prohibits Products Corporation from making any tax sharing payments
other than in respect of state and local income taxes. Revlon, Inc. currently
anticipates that, as a result of net operating tax losses and prohibitions
under the Credit Agreement, no cash federal tax payments or cash payments in
lieu of taxes pursuant to the tax sharing agreement will be required for 1998.
As of December 31, 1997, Products Corporation was party to a series of
interest rate swap agreements totaling a notional amount of $225.0 in which
Products Corporation agreed to pay on such notional amount a variable interest
rate equal to the six month LIBOR to its counterparties and the counterparties
agreed to pay on such notional amounts fixed interest rates averaging
approximately 6.03% per annum. Products Corporation entered
23
into these agreements in 1993 and 1994 (and in the first quarter of 1996
extended a portion equal to a notional amount of $125.0 through December 2001)
to convert the interest rate on $225.0 of fixed-rate indebtedness to a variable
rate. If Products Corporation had terminated these agreements, which Products
Corporation considered to be held for other than trading purposes, on December
31, 1997 and 1996, a loss of approximately $0.1 and $3.5, respectively, would
have been realized. Certain other swap agreements were terminated in 1993 for a
gain of $14.0 and were amortized over the original lives of the agreements
through 1997. The amortization of the 1993 realized gain in 1997, 1996, and
1995 was approximately $3.1, $3.2 and $3.2, respectively. Cash flow from the
agreements outstanding at December 31, 1997 was approximately break even for
1997. Products Corporation terminated these agreements in January 1998 and
realized a gain of approximately $1.6, which will be recognized upon repayment
of the hedged indebtedness.
Products Corporation enters into forward foreign exchange contracts
and option contracts from time to time to hedge certain cash flows denominated
in foreign currencies. At December 31, 1997 and 1996, Products Corporation had
forward foreign exchange contracts denominated in various currencies of
approximately $90.1 and $62.0, respectively, and option contracts of
approximately $94.9 outstanding at December 31, 1997. Such contracts are
entered into to hedge transactions predominantly occurring within twelve
months. If Products Corporation had terminated these contracts on December 31,
1997 and 1996, no material gain or loss would have been realized.
Based upon the Company's current level of operations and anticipated
growth in net sales and earnings as a result of its business strategy, the
Company expects that cash flows from operations and funds from currently
available credit facilities and refinancings of existing indebtedness will be
sufficient to enable the Company to meet its anticipated cash requirements for
the foreseeable future on a consolidated basis, including for debt service.
However, there can be no assurance that cash flow from operations and funds
from existing credit facilities and refinancing of existing indebtedness will
be sufficient to meet the Company's cash requirements on a consolidated basis.
If the Company is unable to satisfy such cash requirements, the Company could
be required to adopt one or more alternatives, such as reducing or delaying
capital expenditures, restructuring indebtedness, selling assets or operations,
seeking capital contributions or loans from affiliates of the Company or
issuing additional shares of capital stock of Revlon, Inc. Revlon, Inc., as a
holding company, will be dependent on the earnings and cash flow of, and
dividends and distributions from, Products Corporation to pay its expenses and
to pay any cash dividends or distributions on the Class A Common Stock that may
be authorized by the Board of Directors of Revlon, Inc. There can be no
assurance that any of such actions could be effected, that they would enable
the Company to continue to satisfy its capital requirements or that they would
be permitted under the terms of the Company's various debt instruments then in
effect. The terms of the Credit Agreement, the Senior Subordinated Notes, the
1999 Notes and the Senior Notes generally restrict and, after the Assumption,
the terms of the Notes generally will restrict, Products Corporation from
paying dividends or making distributions, except that Products Corporation is
permitted to pay dividends and make distributions to Revlon, Inc., among other
things, to enable Revlon, Inc. to pay expenses incidental to being a public
holding company, including, among other things, professional fees such as legal
and accounting, regulatory fees such as Commission filing fees and other
miscellaneous expenses related to being a public holding company and to pay
dividends or make distributions in certain circumstances to finance the
purchase by Revlon, Inc. of its Class A Common Stock in connection with the
delivery of such Class A Common Stock to grantees under the Revlon, Inc.
Amended and Restated 1996 Stock Plan, provided that the aggregate amount of
such dividends and distributions taken together with any purchases of Revlon,
Inc. common stock on the open market to satisfy matching obligations under the
excess savings plan may not exceed $6.0 per annum.
24
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K for the year ended December 31, 1997
as well as other public documents of the Company contain forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ materially from those discussed in such forward-looking statements.
Such statements include, without limitation, the Company's expectations and
estimates as to introduction of new products and expansion into markets, future
financial performance, including growth in net sales and earnings, and the
effect on sales of inventory balancing and consolidation in the chain drugstore
industry in the U.S., cash flows from operations, improved results from
business consolidations, information system upgrades and globalization of the
Company's manufacturing operations, capital expenditures, the availability of
funds from currently available credit facilities and refinancings of
indebtedness, capital contributions or loans from affiliates, the sale of
assets or additional shares of Revlon, Inc., and the cost and timely
implementation of the Company's Year 2000 compliance modifications. Readers are
urged to consider that statements which use the terms "believes," "does not
believe," "no reason to believe," "expects," "plans," "intends," "estimates,"
"anticipated," "anticipates" and similar expressions, as they relate to the
Company or the Company's management, are intended to identify forward-looking
statements. Such statements reflect the current views of the Company with
respect to future events and are subject to certain risks, uncertainties and
assumptions. In addition to factors that may be described in the Company's
Commission filings, including this filing, the following factors, among others,
could cause the Company's actual results to differ materially from those
expressed in any forward-looking statements made by the Company: (i)
difficulties or delays in developing and introducing new products or failure of
customers to accept new product offerings; (ii) changes in consumer
preferences, including reduced consumer demand for the Company's color
cosmetics and other current products; (iii) difficulties or delays in the
Company's continued expansion into the self-select distribution channel and
into certain markets and development of new markets; (iv) unanticipated costs
or difficulties or delays in completing projects associated with the Company's
strategy to improve operating efficiencies, including information system
upgrades, and to globalize its manufacturing operations; (v) the inability to
refinance indebtedness, secure capital contributions or loans from affiliates
or sell assets or additional shares of Revlon, Inc.; (vi) effects of and
changes in economic conditions, including inflation and monetary conditions,
and in trade, monetary, fiscal and tax policies in countries outside of the
U.S. in which the Company operates, including Brazil; (vii) actions by
competitors, including business combinations, technological breakthroughs, new
product offerings and marketing and promotional successes; (viii) combinations
among significant customers or the loss, insolvency or failure to pay its debts
by a significant customer or customers; (ix) difficulties or delays in
realizing improved results from business consolidations; (x) lower than
expected sales as a result of inventory balancing and consolidation in the
chain drugstore industry in the U.S.; and (xi) unanticipated costs or
difficulties or delays in implementing the Company's Year 2000 compliance
modifications. The Company assumes no responsibility to update forward-looking
information contained herein.
EFFECT OF NEW ACCOUNTING STANDARD
In June 1997, the Financial Accounting Standards Board issued SFAS 130
"Reporting Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components in a full set of
general-purpose financial statements. The Company will adopt SFAS 130 in fiscal
1998.
25
INFLATION
In general, costs are affected by inflation and the effects of
inflation may be experienced by the Company in future periods. Management
believes, however, that such effects have not been material to the Company
during the past three years in the United States or foreign
non-hyperinflationary countries. The Company operates in certain countries
around the world, such as Brazil, Venezuela and Mexico, that have experienced
hyperinflation in the past three years. The Company's operations in Brazil were
accounted for as operating in a hyperinflationary economy until June 30, 1997.
Effective July 1, 1997 Brazil was considered a non-hyperinflationary economy.
The impact of accounting for Brazil as a non-hyperinflationary economy was not
material to the Company's operating results. Effective January 1997, Mexico was
considered a hyperinflationary economy for accounting purposes. In
hyperinflationary foreign countries, the Company attempts to mitigate the
effects of inflation by increasing prices in line with inflation, where
possible, and efficiently managing its working capital levels.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index on page F-1 of the Consolidated
Financial Statements of the Company and the Notes thereto contained herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the
Directors and executive officers of the Company. Each Director holds office
until his successor is duly elected and qualified or until his resignation or
removal, if earlier.
NAME POSITION
- ---- --------
Ronald O. Perelman Chairman of the Executive Committee of the Board and Director
George Fellows President, Chief Executive Officer and Director
Jerry W. Levin Chairman of the Board and Director
William J. Fox Senior Executive Vice President and Director
Frank J. Gehrmann Executive Vice President and Chief Financial Officer
Wade H. Nichols III Executive Vice President and General Counsel
M. Katherine Dwyer Senior Vice President
Ronald H. Dunbar Senior Vice President, Human Resources
Donald G. Drapkin Director
Meyer Feldberg Director
Howard Gittis Director
Morton L. Janklow Director
Vernon E. Jordan Director
Henry A. Kissinger Director
Edward J. Landau Director
Linda G. Robinson Director
Terry Semel Director
Martha Stewart Director
The name, age, principal occupation for the last five years and
selected biographical information for each of the Directors and executive
officers of the Company are set forth below. Information is as of February 13,
1998.
Mr. Perelman (55) has been Chairman of the Executive Committee of the
Board of the Company and of Products Corporation since November 1995, and a
Director of the Company and of Products Corporation since their respective
formations in 1992. Mr. Perelman was Chairman of the Board of the Company and
of Products Corporation from their respective formations in 1992 until November
1995. Mr. Perelman has been Chairman of
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the Board and Chief Executive Officer of Mafco Holdings Inc. ("Mafco Holdings")
and MacAndrews Holdings and various of its affiliates for more than the past
five years. Mr. Perelman also is Chairman of the Executive Committees of the
Boards of The Coleman Company, Inc. ("Coleman"), Consolidated Cigar Holdings
Inc. ("Cigar Holdings") and M&F Worldwide Corp. ("M&F Worldwide") and Chairman
of the Board of Meridian Sports Incorporated ("Meridian"). Mr. Perelman is a
Director of the following corporations which file reports pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"): California
Federal Bank, a Federal Savings Bank ("Cal Fed"), Cigar Holdings, CLN Holdings
Inc. ("CLN"), Coleman, Coleman Worldwide Corporation ("Coleman Worldwide"),
Consolidated Cigar Corporation ("Consolidated Cigar"), First Nationwide
Holdings Inc. ("FN Holdings"), First Nationwide (Parent) Holdings Inc. ("First
Nationwide Parent"), M&F Worldwide, Meridian, Products Corporation and REV
Holdings. (On December 27, 1996, Marvel Entertainment Group, Inc. ("Marvel"),
Marvel Holdings Inc. ("Marvel Holdings"), Marvel (Parent) Holdings Inc.
("Marvel Parent") and Marvel III Holdings Inc. ("Marvel III"), of which Mr.
Perelman was a Director on such date, and several subsidiaries of Marvel filed
voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code.)
Mr. Fellows (55) has been President and Chief Executive Officer of the
Company and of Products Corporation since January 1997. He was President and
Chief Operating Officer of the Company and Products Corporation from November
1995 until January 1997 and has been a Director of the Company since November
1995 and a Director of Products Corporation since September 1994. Mr. Fellows
was Senior Executive Vice President of the Company and of Products Corporation
and President and Chief Operating Officer of the Company's Consumer Group from
February 1993 until November 1995. From 1989 through January 1993, he was a
senior executive officer of Mennen Corporation and then Colgate-Palmolive
Company, which acquired Mennen Corporation in 1992. From 1986 to 1989 he was
Senior Vice President of Holdings. Mr. Fellows is a Director of Cosmetic
Center, Products Corporation and VF Corporation, each of which files reports
pursuant to the Exchange Act.
Mr. Levin (53) has been Chairman of the Board of the Company and of
Products Corporation since November 1995 and a Director of the Company and of
Products Corporation since their respective formations in 1992. Mr. Levin was
Chief Executive Officer of the Company and of Products Corporation from their
respective formations in 1992 until January 1997 and President of the Company
and of Products Corporation from their respective formations in 1992 until
November 1995. Mr. Levin has been Executive Vice President of MacAndrews
Holdings since March 1989. Mr. Levin has been Chairman of the Board and Chief
Executive Officer of Coleman since February 1997 and has been Chairman of the
Board of Cosmetic Center since April 1997. For 15 years prior to joining
MacAndrews Holdings, he held various senior executive positions with The
Pillsbury Company. Mr. Levin is a Director of the following corporations which
file reports pursuant to the Exchange Act: Coleman, Coleman Worldwide, Cosmetic
Center, Ecolab, Inc., U.S. Bancorp, Inc., Meridian and Products Corporation.
Mr. Fox (41) was appointed President, Strategic and Corporate
Development, Revlon Worldwide, of the Company and of Products Corporation and
Chief Executive Officer, Revlon Technologies in January 1998. He has been
Senior Executive Vice President of the Company and of Products Corporation
since January 1997. Mr. Fox was Chief Financial Officer of the Company and of
Products Corporation from their respective formations in 1992 until January
1998 and was also Executive Vice President of the Company and of Products
Corporation from their respective formations in 1992 until January 1997. Mr.
Fox was elected as a Director of the Company in November 1995 and of Products
Corporation in September 1994. He has been Senior Vice President of MacAndrews
Holdings since August 1990. He was Vice President of MacAndrews Holdings from
February 1987 to August 1990 and was Treasurer of MacAndrews Holdings from
February 1987 to September 1992. Prior to February 1987, he was Vice President
and Assistant Treasurer of MacAndrews Holdings. Mr. Fox joined MacAndrews &
Forbes Group, Incorporated in 1983 as Assistant Controller, prior to which time
he was a certified public accountant at the international auditing firm of
Coopers & Lybrand. Mr. Fox is Vice Chairman of the Board and a Director of
Cosmetic Center, and a Director of The Hain Food Group, Inc. and Products
Corporation, each of which files reports pursuant to the Exchange Act.
Mr. Gehrmann (43) was elected as Executive Vice President and Chief
Financial Officer of the Company and of Products Corporation in January 1998.
From January 1997 until January 1998 he had been Vice President of the Company
and of Products Corporation. Prior to January 1997 he served