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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, 1998
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
- ------------------------- ------------------------------------------------------
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 18, 1999, 19,986,771 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 18, 1999) WAS APPROXIMATELY $132,690,000.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
Revlon, Inc. (and together with its subsidiaries, the "Company")
operates in a single segment with many different products, which include an
extensive array of glamorous, exciting and innovative cosmetics and skin care,
fragrance, personal care products ("consumer products"), and hair and nail care
products principally for use in and resale by professional salons
("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, ULTIMA II, JEANNE GATINEAU and
NATURAL HONEY in skin care; CHARLIE and FIRE & ICE in fragrances; FLEX,
OUTRAGEOUS, MITCHUM, COLORSTAY, COLORSILK, AFRICAN PRIDE, JEAN NATE, PLUSBELLE,
BOZZANO and COLORAMA in personal care products; and ROUX FANCI-FULL, REALISTIC,
CREME OF NATURE, CREATIVE NAIL DESIGN SYSTEMS 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 lip makeup and nail enamel
(which the Company has occupied for the past 22 years), with the number one and
two selling brands of lip makeup for 1998. Propelled by the success of its new
product launches and its existing product lines, the REVLON brand captured in
1996 and continued to hold in 1998 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
21.2% for 1998. 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 includes
independent drug stores and chain drug stores (such as Walgreens, CVS, Eckerd
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.
On November 6, 1998, Revlon Consumer Products Corporation (together
with its subsidiaries, "Products Corporation"), a wholly owned subsidiary of
the Company issued and sold in a private placement $250.0 million aggregate
principal amount of 9% Senior Notes due 2006 (the "9% Notes"), receiving net
proceeds of $247.2 million. Products Corporation intends to use $200.0 million
of the net proceeds from the sale of the 9% Notes to refinance Products
Corporation's 9 1/2% Senior Notes due 1999 (the "1999 Notes"), including
through open market purchases. Products Corporation intends to use the balance
of the net proceeds for general corporate purposes, including to temporarily
reduce indebtedness under the working capital lines under the Credit Agreement
(as hereinafter defined). Pending the refinancing of the 1999 Notes, such net
proceeds will be retained by Products Corporation and a portion of such
proceeds will be used to temporarily reduce indebtedness under the working
capital lines under the Credit Agreement and under other short-term facilities.
On February 24, 1999, substantially all of the 9% Notes were exchanged for
registered notes with substantially identical terms (the 9% Notes and the
registered exchange notes shall each be referred to as the "9% Notes").
2
During 1998, Products Corporation completed the disposition of its
approximately 85% equity interest in The Cosmetic Center, Inc. ("Cosmetic
Center"), along with certain amounts due from Cosmetic Center to Products
Corporation for working capital and inventory, to a newly formed limited
partnership controlled by an unrelated third party. Products Corporation
received a minority limited partnership interest in the limited partnership as
consideration for the disposition. As a result, the Company recorded a loss on
disposal of $47.7 million during 1998.
In the fourth quarter of 1998 the Company committed to a restructuring
plan to realign and reduce personnel, exit excess leased real estate, realign
and consolidate regional activities, reconfigure certain manufacturing
operations and exit certain product lines. As a result, the Company recognized
a net charge of $42.9 million comprised of $26.6 million of employee severance
and termination benefits for 720 people worldwide, $14.9 million of costs to
exit excess leased real estate primarily in the United States and $2.7 million
of other costs (included in cost of sales) incurred to exit certain product
lines outside the United States, partially offset by a gain of $1.3 million for
the sale of a factory outside the United States. In the third quarter of 1998
the Company recognized a gain of approximately $7.1 million for the sale of the
wigs and hairpieces portion of its business in the United States.
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 and are therefore subject to some degree of variance.
BUSINESS STRATEGY
The Company's business strategy, which is intended to improve its
operating performance, is to:
o Strengthen and broaden core brands through globalization of marketing and
advertising, product development and manufacturing;
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 it competes and
enter new markets where the Company identifies opportunities for growth;
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; and
o Continue to expand market share and product lines through possible
strategic acquisitions or joint ventures.
3
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
- ----------------------------------------------------------------------------------------------------------------------
REVLON Revlon, ColorStay, Moon Drops, Charlie, Charlie Red, Flex, Outrageous, Revlon
Revlon Age Defying, Revlon Results, Charlie White, Aquamarine, Professional,
Super Lustrous, Eterna 27, Revlon Fire & Ice, Mitchum, Roux Fanci-full,
MoistureStay, Age Defying Jontue, Ciara Lady Mitchum, Realistic, Creme
Moon Drops, Hi & Dri, of Nature, Sensor
Line & Shine, ColorStay, Perm, Perfect
New Complexion, Colorsilk, Perm, Fermodyl,
Touch & Glow, African Pride, Perfect Touch,
Top Speed, Lashful, Frost & Glow, Salon Perfection,
Naturally Glamorous Revlon Shadings, Revlonissimo,
Custom Eyes, Timeliner, Jean Nate', Voila, Young
StreetWear, Roux Fanci-full, Color, Creative
Revlon Implements Realistic, Nail, Contours,
Creme of Nature, American Crew,
Herba Rich, R PRO,
Fabu-laxer True Cystem
ALMAY Almay, Time-Off, Sensitive Care, Almay
Amazing, One Coat, Oil Control,
Stay Smooth, Time-Off,
Almay Stay Clean Moisture
Balance,
Moisture Renew,
Almay Clear
Complexion Skin
Care
ULTIMA II Ultima II, Beautiful Glowtion, Vital
Nutrient, Wonderwear, Radiance,
The Nakeds, Full Interactives, CHR
Moisture
SIGNIFICANT Colorama(a), Jeanne Floid(a), Plusbelle(a), Colomer(a),
REGIONAL Juvena(a), Gatineau(a), Charlie Gold Bozzano(a), Intercosmo(a),
BRANDS Jeanne Gatineau(a), Natural Honey Juvena(a), Personal Bio
Cutex(a) Geniol(a), Point, Natural
Colorama(a), Wonder,
Llongueras(a), Llongueras(a)
Bain de Soleil(a),
ZP-11
- ----------------------------------------------------------------------------------------------------------------------
(a) 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
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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.
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 approximately 50 shades. SUPER LUSTROUS
lipstick is produced in approximately 70 shades. MOON DROPS, a moisturizing
lipstick, is produced in approximately 50 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
approximately 20 shades. MOISTURESTAY, which the Company introduced in March
1998, uses patent-pending technology to moisturize the lips even after the
color wears off, and is produced in approximately 40 shades.
The Company's nail color and nail care lines include enamels, cuticle
preparations and enamel removers. The Company's flagship REVLON nail enamel is
produced in approximately 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 approximately 80 shades and contains a patented speed drying
polymer formula which sets in 90 seconds. REVLON has the number one position in
nail enamel in the United States self-select distribution channel. The Company
also sells CUTEX nail polish remover and nail care products in certain
countries outside the United States.
The Company sells face makeup, including foundation, powder, blush and
concealers, under such REVLON brand names as REVLON AGE DEFYING, which is
targeted for women in the over 35 age bracket; COLORSTAY, which uses
patent-pending transfer-resistant technology that provides long wear; and NEW
COMPLEXION, for consumers in the 18 to 34 age bracket.
The Company's eye makeup products include mascaras, eyeliners, eye
shadows and brow color. COLORSTAY eyecolor, mascara and brow color, LASHFUL
mascara, SOFTSTROKE eyeliners and REVLON CUSTOM EYES eye shadows are targeted
for women in the 18 to 49 age bracket.
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" with "no fuss."
ALMAY products include lip makeup, nail color and nail care products, eye and
face makeup, skin care products, and sunscreen lotions and creams, including
ALMAY AMAZING LASH mascara, ALMAY AMAZING eye makeup, ALMAY AMAZING LASTING
makeup, ALMAY CLEAR COMPLEXION SKIN CARE and MAKEUP, ALMAY EASY-TO-WEAR
eyecolor, TIME-OFF makeup and skin care, ALMAY ONE COAT mascara and the ALMAY
AMAZING collection, which includes AMAZING LASTING lip makeup, which uses the
Company's patented transfer-resistant technology developed for COLORSTAY. In
1998, the Company expanded the ONE COAT brand to include ONE COAT NAIL COLOR,
ONE COAT GEL EYECOLOR, ONE COAT GEL EYE Pencil and ONE COAT LIP SHINE. The
Company introduced ALMAY'S patent-pending STAY SMOOTH ANTI-CHAP LIP lipcolor,
the first anti-chap lip makeup with SPF 25, in the first quarter of 1998. The
Company targets ALMAY for value-conscious consumers by offering benefits
comparable to higher priced products, such as Clinique, at affordable prices.
ALMAY was the fastest-growing major brand in 1998.
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 young,
value-conscious consumer.
The Company's premium priced cosmetics and skin care products are sold
under the ULTIMA II brand name, which is the Company's flagship premium priced
brand sold throughout the world. ULTIMA II'S products include lip makeup, eye
and face makeup and skin care products including GLOWTION, a line of skin
brighteners which combines skin care and color; FULL MOISTURE FOUNDATION; VITAL
RADIANCE skin care products; the BEAUTIFUL NUTRIENT collection, a complete line
of nourishing makeup that provides advanced nutrient protection against
dryness; THE NAKEDS makeup, a trend-setting line of makeup emphasizing neutral
colors; and WONDERWEAR. The WONDERWEAR collection includes a long-wearing
foundation that uses patented technology, cheek and eyecolor products that use
proprietary technology that provides long wear, and WONDERWEAR lipstick, which
uses patented transfer-resistant technology. In the U.S. the Company is
broadening the distribution of ULTIMA II into the self-select channel.
5
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 and are the number one brand in the United States self-select distribution
channel.
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 and the Company's premium
priced JEANNE GATINEAU.
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 and CHARLIE WHITE. The Company's CHARLIE
fragrance has been a market leader since the mid-1970's. 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, BOZZANO, 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. The Company markets in 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's recent acquisition of AP Products Ltd. significantly enhanced the
Company's ability to service its ethnic consumers with the addition of the
AFRICAN PRIDE brand of hair care products sold primarily in the United States.
The Company intends to expand distribution of AFRICAN PRIDE products in various
international markets. The Company introduced SUPERLUSTRUOUS haircolor in the
fourth quarter of 1998, capitalizing on the SUPERLUSTRUOUS 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 acquisitions, CREATIVE NAIL, acquired in November 1995, and
AMERICAN Crew, 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, 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.
6
MARKETING
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, principally outside the U.S. 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. 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 approximately 78 countries and approximately
19 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. 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 has its own website
which features current product and promotional information.
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 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.
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 research and development group is comprised of departments
specialized in the technologies critical to the Company's various product
categories as well as an advanced concepts department that promotes
inter-departmental cross-functional research on a wide range of technologies to
develop new and innovative products. The Company independently develops
substantially all of its new products. 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
7
Company's new product research worldwide, performing research for new products,
ideas, concepts and packaging. The Company also has satellite research
facilities in Brazil, Spain, France 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, 1998, 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 1998, 1997 and 1996, the Company spent
approximately $31.9 million, $29.7 million and $26.3 million, respectively, on
research and development activities.
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
efforts to continuously 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 although the Company is in the process of
moving ULTIMA II production to its Phoenix, Arizona facility. Nail care
products for sale in salons worldwide are manufactured and distributed through
the Vista, California facility. 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. ISO-9002 certification is an internationally recognized
standard for manufacturing 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 currently 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 is
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 is centralized in Brazil. The Maestag and Ireland
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.
8
To promote the Company's understanding of and responsiveness to the needs of
its retail customers, the Company has dedicated teams assigned to significant
accounts, and has provided retail accounts with a designated customer service
representative. As a result of these efforts, accompanied by stronger and more
customer-focused management, the Company has developed strong relationships
with its retailers and has received several preferred vendor awards.
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 to outside
vendors for improvements to its management information systems were
approximately $11 million for 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 also developed a comprehensive plan intended to
address Year 2000 issues. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Year 2000."
DISTRIBUTION
The Company's products are sold in approximately 175 countries and
territories. The Company's worldwide sales force had approximately 1,800 people
as of December 31, 1998, including dedicated sales forces for cosmetics, skin
care and fragrance products in the self-select distribution channel, for the
demonstrator-assisted distribution channel, for personal care products
distribution and for salon distribution. In addition, the Company utilizes
sales representatives and independent distributors to serve specialized markets
and related distribution channels.
United States. Net sales in the United States accounted for
approximately 59.4% of the Company's 1998 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, 1998, 14
licenses were in effect relating to 18 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 are sold directly and through
wholesalers to chain drug stores and mass volume retailers.
International. Net sales outside the United States accounted for
approximately 40.6% of the Company's 1998 net sales. The ten largest countries
in terms of these sales, which include, among others, Brazil, Spain, the United
Kingdom, Australia, South Africa and Canada, accounted for approximately 30% of
the Company's net sales in 1998, with Brazil accounting for approximately 5.4%
of the Company's net sales. The Company 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 Company also distributes outside the United
States through department stores and specialty stores such as perfumeries. The
Company'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 outside the United
States. At December 31, 1998, the Company actively sold its products through
wholly owned subsidiaries established in 26 countries outside of the United
States 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 markets where the Company identifies opportunities for growth.
In 1996 the Company established a subsidiary in China 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.
9
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. Wal-Mart and its affiliates worldwide accounted for
approximately 10.1% of the Company's 1998 consolidated net sales. Although the
loss of Wal-Mart as a customer could have an adverse effect on the Company, the
Company believes that its relationship with Wal-Mart is satisfactory and the
Company has no reason to believe that Wal-Mart will not continue as a customer.
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 and Unilever N.V. in the self-select distribution channel; L'Oreal
S.A., Unilever N.V. and Estee Lauder, Inc. in the demonstrator-assisted
distribution channel; and L'Oreal S.A, Matrix Essentials, Inc., which is owned
by Bristol-Myers Squibb Company and Wella GmbH 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, CUTEX (outside the
U.S.), AFRICAN PRIDE, MITCHUM, ETERNA 27, ULTIMA II, ALMAY, CHARLIE, JEAN
NATE, REVLON RESULTS, COLORAMA, FIRE & ICE, MOON DROPS, SUPER LUSTROUS and
WONDERWEAR 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 hair color, classic REVLON nail
enamel, TOP SPEED nail enamel, REVLON AGE DEFYING foundation and cosmetics, NEW
COMPLEXION makeup, WONDERWEAR foundation, WONDERWEAR 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 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.
10
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, Oxford, North Carolina and Jacksonville, Florida
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 segment. Certain geographic,
financial and other information of the Company is set forth in Note 19 of the
Notes to Consolidated Financial Statements of the Company.
EMPLOYEES
As of December 31, 1998, the Company employed the equivalent of
approximately 13,000 full-time persons (before the effect of the
restructuring). Approximately 2,000 of such employees in the United States are
covered by collective bargaining agreements. The Company believes that its
employee relations are satisfactory. Although the Company has experienced minor
work stoppages of limited duration in the past in the ordinary course of
business, such work stoppages have not had a material effect on the Company's
results of operations or financial condition.
11
ITEM 2. PROPERTIES
The following table sets forth as of December 31, 1998 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.
- -------- --- ------
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
Edison, New Jersey..........Research and office (leased) 175,000
Irvington, New Jersey.......Manufacturing, warehousing and office 96,000
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
Buenos Aires, Argentina.....Manufacturing, warehousing, distribution and office 75,000
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 was sublet to affiliates of the
Company and approximately 27,000 square feet was sublet to an unaffiliated
third party as of December 31, 1998). 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.
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.
12
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 56.3% 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 approximately 83.0% 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
8,736,771 shares of Class A Common Stock outstanding at February 18, 1999 are
owned by the public. As of February 18, 1999, there were 643 holders of record
of Class A Common Stock. No dividends were declared or paid during 1998 or
1997. The terms of the Credit Agreement, the 1999 Notes, the Notes (as
hereinafter defined) and the 9% Notes currently restrict the ability of
Products Corporation to pay dividends or make distributions to Revlon, Inc. See
the Consolidated Financial Statements of the Company and the Notes thereto.
The table below shows the Company's high and low quarterly stock
prices for the years ended December 31, 1998 and 1997.
1998 QUARTERLY STOCK PRICES (1)
----------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
----------- ---------- --------- -----------
High... $51 13/16 $56 1/16 $54 1/2 $27 13/16
Low.... 33 5/8 47 9/16 30 7/8 12 1/2
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
(1) Represents the closing price per share on the New York Stock
Exchange (NYSE), which is the exchange on which shares of the Company's Class A
Common Stock are listed. The Company's symbol is REV.
13
ITEM 6. SELECTED FINANCIAL DATA
The Consolidated Statements of Operations Data for each of the years
in the four-year period ended December 31, 1998 and the Balance Sheet Data as
of December 31, 1998, 1997 and 1996 are derived from the Consolidated Financial
Statements of the Company, which have been audited by KPMG LLP, independent
certified public accountants. The Consolidated Statements of Operations Data
for the year ended December 31, 1994 and the Balance Sheet Data as of December
31, 1995 and 1994 are derived from unaudited consolidated financial statements
for such periods, which have been restated to reflect the Company's retail and
outlet store business as discontinued operations. 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,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Net sales ................................ $ 2,252.2 $ 2,238.6 $ 2,092.1 $1,867.3 $ 1,674.0
Operating income ......................... 124.6(a) 214.9(b) 199.2 147.5 108.1
(Loss) income from continuing operations (27.3) 57.8 24.4 (37.2) (73.0)
Basic (loss) income from continuing
operations per common share ............. $ (0.53) $ 1.13 $ 0.49 $ (0.88) $ (1.72)
============ ============ ============ ============ ============
Diluted (loss) income from continuing
operations per common share ............. $ (0.53) $ 1.13 $ 0.49 $ (0.88) $ (1.72)
============ ============ ============ ============ ============
Weighted average number of
common shares outstanding: (c)
Basic .................................. 51,217,997 51,131,440 49,687,500 42,500,000 42,500,000
============ ============ ============ ============ ============
Dilutive ............................... 51,217,997 51,544,318 49,818,792 42,500,000 42,500,000
============ ============ ============ ============ ============
DECEMBER 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
BALANCE SHEET DATA:
Total assets . ............................ $1,830.0 $1,756.0 $1,617.3 $1,532.6 $1,414.3
Long-term debt, including current portion 1,660.0 1,425.2 1,361.0 1,476.7 1,330.4
Total stockholder's deficiency ............ (648.0) (458.5) (497.1) (702.3) (656.2)
(a) Includes non-recurring charges, net, of $35.8 million. See Note 4 to the
Consolidated Financial Statements.
(b) Includes non-recurring charges, net, of $3.6 million. See Note 4 to the
Consolidated Financial Statements.
(c) Represents the weighted average number of common shares outstanding for
the period. See Note 1 to the Consolidated Financial Statements.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
OVERVIEW
The Company operates in a single segment 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 has a licensing group.
RESULTS OF OPERATIONS
The following table sets forth the Company's net sales for each of the
last three years:
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
Net sales:
United States ....... $1,338.5 $1,300.2 $1,182.3
International ....... 913.7 938.4 909.8
---------- ---------- ----------
$2,252.2 $2,238.6 $2,092.1
========== ========== ==========
The following table sets forth certain statements of operations data
as a percentage of net sales for each of the last three years:
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997 1996
------- ------- -------
Cost of sales* .............................. 34.0% 33.2% 32.9%
Gross profit ................................ 66.0 66.8 67.1
Selling, general and administrative expenses
("SG&A").................................... 59.0 57.1 57.6
Business consolidation costs and other, net . 1.5 0.1 --
Operating income ............................ 5.5 9.6 9.5
* 1998 includes $2.7 (0.1% of net sales) for charges related to
restructuring.
15
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
NET SALES
Net sales were $2,252.2 and $2,238.6 for 1998 and 1997, respectively,
an increase of $13.6, or 0.6% (or 2.7% on a constant U.S. dollar basis).
United States. Net sales in the United States were $1,338.5 for 1998
compared to $1,300.2 for 1997, an increase of $38.3, or 2.9%. The increase in
net sales in 1998 reflects improvements in net sales of products in the
Company's ALMAY and ULTIMA franchises and expansion of certain of the Company's
professional product lines including an acquisition. For the first half of
1998, net sales for the Company's REVLON franchise increased as compared to the
first half of 1997 as a result of continued consumer acceptance of new product
offerings and general improvement in consumer demand for the Company's color
cosmetics. Beginning in the third quarter of 1998, such sales were adversely
affected by a slowdown in the rate of growth in the mass market color cosmetics
category and a leveling of market share. Additionally, net sales for 1998 were
impacted by reduced purchases by some retailers, particularly chain drugstores,
resulting from improved inventory management through systems upgrades and
inventory reductions following several recent business combinations. The
Company expects retail inventory balancing and reductions to continue to affect
sales in 1999.
REVLON brand color cosmetics continued as the number one brand in
dollar market share in the U.S. self-select distribution channel. New product
introductions (including, in 1998, certain products launched during 1997)
generated incremental net sales in 1998, principally as a result of launches of
TOP SPEED nail enamel, MOISTURESTAY lip makeup, products in the NEW COMPLEXION
line, COLORSTAY shampoo, ALMAY STAY SMOOTH lip makeup, products in the ALMAY
AMAZING collection, products in the ALMAY ONE COAT collection, products in the
ULTIMA II BEAUTIFUL NUTRIENT and ULTIMA II FULL MOISTURE lipcolor lines and
ULTIMA II GLOWTION skin brighteners.
International. Net sales outside the United States were $913.7 for
1998 compared to $938.4 for 1997, a decrease of $24.7, or 2.6%, on a reported
basis (an increase of 2.4% on a constant U.S. dollar basis). The increase in
net sales for 1998 on a constant dollar basis reflects the benefits of
increased distribution, including acquisitions, and successful new product
introductions in several markets including MOISTURESTAY lip makeup and TOP
SPEED nail enamel. The decrease in net sales for 1998 on a reported basis
reflects the unfavorable effect on sales of a stronger U.S. dollar against most
foreign currencies and unfavorable economic conditions in several international
markets. These unfavorable economic conditions restrained consumer and trade
demand outside the U.S., particularly in South America and the Far East, as
well as Russia and other developing economies. Sales outside the United States
are divided into three geographic regions. In Europe, which is comprised of
Europe, the Middle East and Africa, net sales decreased by 2.6% on a reported
basis to $406.9 for 1998 as compared to 1997 (an increase of 0.5% on a constant
U.S. dollar basis). In the Western Hemisphere, which is comprised of Canada,
Mexico, Central America, South America and Puerto Rico, net sales increased by
4.8% on a reported basis to $363.3 for 1998 as compared to 1997 (an increase of
9.5% on a constant U.S. dollar basis). The Company's operations in Brazil are
significant. In Brazil, net sales were $122.5 on a reported basis for 1998
compared to $130.9 for 1997, a decrease of $8.4, or 6.4% (an increase of 0.5%
on a constant U.S. dollar basis). On a reported basis, net sales in Brazil were
adversely affected by the stronger U.S. dollar against the Brazilian real. In
the Far East, net sales decreased by 17.5% on a reported basis to $143.5 for
1998 as compared to 1997 (a decrease of 7.4% on a constant U.S. dollar basis).
Net sales outside the United States, including without limitation in Brazil,
were, and may continue to be, adversely impacted by generally weak economic
conditions, political and economic uncertainties, including without limitation
currency fluctuations, and competitive activities in certain markets.
16
Cost of sales
As a percentage of net sales, cost of sales was 34.0% for 1998
compared to 33.2% for 1997. The increase in cost of sales as a percentage of
net sales for 1998 compared to 1997 is due to changes in product mix, the
effect of weaker local currencies on the cost of imported purchases, the effect
of lower net sales in the second half of 1998 and the inclusion of $2.7 of
other costs incurred to exit certain product lines outside the United States in
connection with the restructuring charge in the fourth quarter of 1998. These
factors were partially offset by the benefits of more efficient global
production and purchasing.
SG&A expenses
As a percentage of net sales, SG&A expenses were 59.0% for 1998
compared to 57.1% for 1997. SG&A expenses other than advertising and
consumer-directed promotion expenses, as a percentage of net sales, were 40.2%
for 1998 compared to 39.3% for 1997. The increase in SG&A expenses other than
advertising and consumer-directed promotion expenses as a percentage of net
sales was due primarily to the effects of lower than expected sales. The
Company's advertising and consumer-directed promotion expenditures were
incurred to support existing product lines, new product launches and increased
distribution. Advertising and consumer-directed promotion expenses as a
percentage of net sales were 18.8%, or $422.9, for 1998 compared to 17.8%, or
$397.4, for 1997.
Business consolidation costs and other, net
In the fourth quarter of 1998 the Company committed to a restructuring
plan to realign and reduce personnel, exit excess leased real estate, realign
and consolidate regional activities, reconfigure certain manufacturing
operations and exit certain product lines. As a result, the Company recognized
a net charge of $42.9 comprised of $26.6 of employee severance and termination
benefits for 720 sales, marketing, administrative, factory and distribution
employees worldwide, $14.9 of costs to exit excess leased real estate primarily
in the United States and $2.7 of other costs described above in cost of sales,
partially offset by a gain of $1.3 for the sale of a factory outside the United
States.
In the third quarter of 1998 the Company recognized a gain of
approximately $7.1 for the sale of the wigs and hairpieces portion of its
business in the United States.
In 1997 the Company incurred business consolidation costs of $20.6 in
connection with the implementation of its business strategy to rationalize
factory operations. These costs primarily included severance for 415 factory
and administrative employees and other costs related to the rationalization of
certain factory and warehouse operations worldwide. Such costs were partially
offset by an approximately $12.7 settlement of a claim and related gains of
approximately $4.3 for the sales of certain factory operations outside the
United States.
Operating income
As a result of the foregoing, operating income decreased by $90.3, or
42.0%, to $124.6 for 1998 from $214.9 for 1997.
17
Other expenses/income
Interest expense was $137.9 for 1998 compared to $133.7 for 1997. The
increase in interest expense for 1998 as compared to 1997 is due to higher
average outstanding borrowings partially offset by lower interest rates.
Foreign currency losses, net, were $4.6 for 1998 compared to $6.4 for
1997. The foreign currency losses for 1998 were comprised primarily of losses
in several markets in Latin America. The losses in 1997 were comprised
primarily of losses in several markets in Europe and the Far East.
Provision for income taxes
The provision for income taxes was $5.0 and $9.3 for 1998 and 1997,
respectively. The decrease was primarily attributable to lower taxable income
outside the United States in 1998.
Discontinued operations
During 1998, the Company completed the disposition of its
approximately 85% equity interest in Cosmetic Center. In connection with such
transaction, the Company recorded a loss on disposal of $47.7 during 1998.
(Loss) income from discontinued operations was $(16.5) (excluding the $47.7
loss on disposal) and $0.7 for 1998 and 1997, respectively. The 1997 period
includes a $6.0 non-recurring gain resulting from the merger of Prestige
Fragrance & Cosmetics, Inc., then a wholly owned subsidiary of the Company,
with and into Cosmetic Center on April 25, 1997, partially offset by related
business consolidation costs of $4.0. The 1998 period includes the Company's
share of a non-recurring charge of $10.5 taken by Cosmetic Center primarily
related to inventory and severance.
Extraordinary items
The extraordinary item of $51.7 in 1998 resulted primarily from the
write-off of deferred financing costs and payment of call premiums associated
with the redemption of the 9 3/8% Senior Notes and the 10 1/2% Senior
Subordinated Notes. The extraordinary item in 1997 resulted from the write-off
of deferred financing costs associated with the extinguishment of borrowings
under the 1996 Credit Agreement (as hereinafter defined) prior to maturity with
proceeds from the Credit Agreement, and costs of approximately $6.3 in
connection with the redemption of Products Corporation's 10 7/8% Sinking Fund
Debentures due 2010 (the "Sinking Fund Debentures").
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
NET SALES
Net sales were $2,238.6 and $2,092.1 for 1997 and 1996, respectively,
an increase of $146.5, or 7.0% or 9.5% on a constant U.S. dollar basis,
primarily as a result of successful new product introductions worldwide,
increased demand in the United States, increased distribution internationally
into the expanding self-select distribution channel and the further development
of new international markets.
United States. Net sales in the United States increased to $1,300.2
for 1997 from $1,182.3 for 1996, an increase of $117.9, or 10.0%. Net sales
improved for 1997, primarily as a result of continued consumer acceptance of
new product offerings and general improvement in consumer demand for the
Company's color cosmetics. 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
18
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. Net sales outside the United States 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. Sales outside the United
States 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 impacted by
competitive activity affecting the Company's toiletries business.
Cost of sales
As a percentage of net sales, cost of sales was 33.2% for 1997
compared to 32.9% for 1996. The increase in 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.
SG&A expenses
As a percentage of net sales, SG&A expenses were 57.1% for 1997, an
improvement from 57.6% for 1996. SG&A expenses other than advertising and
consumer-directed promotion expenses, as a percentage of net sales, improved to
39.3% for 1997 compared with 40.6% 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 outside the
United States. Advertising and consumer-directed promotion expenses increased
by 11.8% to $397.4, or 17.8% of net sales,
19
for 1997 from $355.5, or 17.0% of net sales, for 1996.
Business consolidation costs and other, net
Business consolidation costs and other, net, in 1997 include
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 for 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 $15.7, or
7.9%, to $214.9 for 1997 from $199.2 for 1996.
Other expenses/income
Interest expense was $133.7 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.
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.
Provision for income taxes
The provision for income taxes was $9.3 and $25.5 for 1997 and 1996,
respectively. The decrease was primarily attributable to lower taxable income
with respect to operations outside the United States, partially as a result of
the implementation of tax planning, including the utilization of net operating
loss carryforwards with respect to operations outside the United States, and
benefits from net operating loss carryforwards domestically.
Discontinued operations
Income from discontinued operations was $0.7 and $0.4 for 1997 and
1996, respectively. The 1997 period includes a $6.0 non-recurring gain
resulting from the merger of Prestige Fragrance & Cosmetics, Inc., then a
wholly owned subsidiary of Products Corporation, with and into Cosmetic Center
on April 25, 1997, partially offset by related business consolidation costs of
$4.0 and operating losses of Cosmetic Center.
Extraordinary items
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 credit agreement in effect at that time
(the "1995 Credit Agreement") prior to maturity with the net proceeds from the
Company's initial public equity offering (the "Revlon IPO") and proceeds from
the 1996 Credit Agreement.
20
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash (used for) provided by operating activities was $(51.5), $8.7
and $(10.3) for 1998, 1997 and 1996, respectively. The increase in net cash
used for operating activities for 1998 compared with cash provided in 1997
resulted primarily from lower operating income and increased cash used for
business consolidation costs and other, net in 1998. 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 in 1997, partially offset by increased spending on merchandise
display units in connection with the Company's expansion into the self-select
distribution channel.
Net cash used for investing activities was $91.0, $84.3 and $61.8 for
1998, 1997 and 1996, respectively. Net cash used for investing activities for
1998 and 1997 includes cash paid in connection with acquisitions of businesses
and capital expenditures, partially offset by the proceeds from the sale of the
wigs and hairpieces portion of the Company's business in the United States in
1998 and from the sale of certain assets in 1998 and 1997. Net cash used for
investing activities for 1998, 1997 and 1996 included capital expenditures of
$60.8, $52.3 and $54.7, respectively, and $57.6, $40.5 and $7.1, respectively,
used for acquisitions.
Net cash provided by financing activities was $159.1, $84.9 and $77.9
for 1998, 1997 and 1996, respectively. Net cash provided by financing
activities for 1998 included proceeds from the issuance of the 9% Notes, the
8 1/8% Notes (as hereinafter defined) and the 8 5/8% Notes (as hereinafter
defined) and cash drawn under the Credit Agreement, partially offset by the
payment of fees and expenses related to the issuance of the 9% Notes, the
8 1/8% Notes and the 8 5/8% Notes, the redemption of the Senior Subordinated
Notes (as hereinafter defined), the Senior Notes (as hereinafter defined), and
the repayment of borrowings under the Company's Japanese yen-denominated credit
agreement (the "Yen Credit Agreement"). During 1998, 1997 and 1996, net cash
used by discontinued operations was $17.3, $3.4 and $2.7, respectively. Net
cash provided by financing activities for 1997 included cash drawn under the
1996 Credit Agreement and the Credit Agreement, 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 Yen 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.
On November 6, 1998, Products Corporation issued and sold $250.0
aggregate principal amount of the 9% Notes in a private placement, receiving
net proceeds of $247.2. Products Corporation intends to use $200.0 of the net
proceeds from the sale of the 9% Notes to refinance the 1999 Notes, including
through open market purchases. Products Corporation intends to use the balance
of the net proceeds for general corporate purposes, including to temporarily
reduce indebtedness under the working capital lines under the Credit Agreement.
Pending the refinancing of the 1999 Notes, such net proceeds will be retained
by Products Corporation and a portion of such proceeds will be used to
temporarily reduce indebtedness under the working capital lines under the
Credit Agreement and under other short-term facilities. On February 24, 1999,
substantially all of the 9% Notes were exchanged for registered notes with
substantially identical terms.
On February 2, 1998, Revlon Escrow Corp., an affiliate of Products
Corporation, issued and sold in a private placement $650.0 aggregate principal
amount of 8 5/8% Senior Subordinated Notes due 2008 (the "8 5/8% Notes") and
$250.0 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
of approximately $886 deposited into escrow. The proceeds from the sale of the
Notes were used to finance the redemption by Products Corporation of $555.0
aggregate principal amount of its 10 1/2% Senior Subordinated Notes due 2003
(the "Senior Subordinated Notes") and $260.0 aggregate principal amount of its
9 3/8% Senior Notes due 2001 (the "Senior 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 assumed 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"). In connection
21
with the redemptions of the Senior Subordinated Notes and the Senior Notes, the
Company recorded an extraordinary loss of $51.7 during 1998 resulting primarily
from the write-off of deferred financing costs and payment of call premiums on
the Senior Subordinated Notes and the Senior Notes. On May 7, 1998,
substantially all of the Notes were exchanged for registered notes with
substantially identical terms (the Notes and the registered exchange notes
shall each be referred to as the "Notes").
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 Sinking Fund Debentures and were and will be used for
general corporate purposes and, in the case of the Acquisition Facility (as
hereinafter defined), the financing of acquisitions. The Credit Agreement
provides up to $749.0 and is comprised of five senior secured facilities:
$199.0 in two term loan facilities (the "Term Loan Facilities"), a $300.0
multi-currency facility (the "Multi-Currency Facility"), a $200.0 revolving
acquisition facility, which may be increased to $400.0 under certain
circumstances with the consent of a majority of the lenders (the "Acquisition
Facility"), and a $50.0 special standby letter of credit facility (the "Special
LC Facility"). At December 31, 1998, the Company had approximately $199.0
outstanding under the Term Loan Facilities, $9.7 outstanding under the
Multi-Currency Facility, $63.5 outstanding under the Acquisition Facility and
$29.0 of issued but undrawn letters of credit under the Special LC Facility. In
connection with the issuance of the 9% Notes, Products Corporation amended the
Credit Agreement to provide that it can retain the net proceeds of such
issuance which exceed the amount of the 1999 Notes refinanced plus related
costs and expenses. Additionally, Products Corporation agreed that until the
1999 Notes are refinanced, $200.0 of the Multi-Currency Facility available
under the Credit Agreement (reduced by the amount of 1999 Notes actually
repurchased or refinanced), which would otherwise be available for working
capital purposes, will be used solely to refinance the 1999 Notes. In December
1998, Products Corporation amended the Credit Agreement to modify the terms of
certain of the financial ratios and tests to account for, among other things,
the expected charges in connection with the Company's restructuring effort. In
addition, the amendment increased the applicable margin and provides that
Products Corporation may use the proceeds of the Acquisition Facility for
general corporate purposes as well as for acquisitions.
A subsidiary of Products Corporation is the borrower under the Yen
Credit Agreement, which had a principal balance of approximately (Yen)1.5
billion as of December 31, 1998 (approximately $13.6 U.S. dollar equivalent as
of December 31, 1998) (after giving effect to the repayment described below).
Approximately (Yen)539 million (approximately $4.2 U.S. dollar equivalent) was
paid in March 1998, approximately (Yen)539 million (approximately $4.7 U.S.
dollar equivalent as of December 31, 1998) is due in each of March 1999 and
2000 and approximately (Yen)474 million (approximately $4.2 U.S. dollar
equivalent as of December 31, 1998) is due on December 31, 2000. On December
10, 1998, in connection with the disposition of the stock of Cosmetic Center,
which had served as collateral under the Yen Credit Agreement, Products
Corporation repaid (Yen)2.22 billion (approximately $19.0 U.S. dollar
equivalent as of December 10, 1998) principal amount.
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, 1998.
The Company's principal sources of funds are expected to be cash flow
generated from operations and borrowings under the Credit Agreement,
refinancings and other existing working capital lines. The Credit Agreement,
the 1999 Notes, the Notes and the 9% Notes contain certain provisions that by
their terms limit Products Corporation's and/or its subsidiaries' ability to,
among other things, incur additional debt. The Company's principal uses of
funds are expected to be the payment of operating expenses, working capital and
capital expenditure requirements, expenses in connection with the Company's
restructuring referred to above and debt service payments (including purchase
and repayment of the 1999 Notes).
22
The Company estimates that capital expenditures for 1999 will be
approximately $60, including upgrades to the Company's management information
systems. The Company estimates that cash payments related to the 1998
restructuring charge will be approximately $35, of which approximately $22 will
be paid in 1999. 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 1999.
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 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.
Products Corporation terminated these agreements in January 1998 and realized a
gain of approximately $1.6, which was recognized upon repayment of the hedged
indebtedness and is included in the 1998 extraordinary item for the early
extinguishment of debt.
Products Corporation enters into forward foreign exchange contracts
and option contracts from time to time to hedge certain cash flows denominated
in foreign currencies. Products Corporation had forward foreign exchange
contracts denominated in various currencies of approximately $197.5 and $90.1
(U.S. dollar equivalent) outstanding at December 31, 1998 and 1997,
respectively, and option contracts of approximately $51.0 and $94.9 outstanding
at December 31, 1998 and 1997, respectively. Such contracts are entered into to
hedge transactions predominantly occurring within twelve months. If Products
Corporation had terminated these contracts on December 31, 1998 and 1997 or the
contracts then outstanding on December 31, 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
(including refinancing the 1999 Notes). 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, or 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 dividend or distribution of
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
1999 Notes, the Notes and the 9% Notes generally restrict Products Corporation
from paying dividends or making distributions, except that Products Corporation
is permitted to pay dividends and make distributions to Revlon, Inc., among
other things, to enable Revlon, Inc. to pay expenses incidental to being a
public holding company, including, among other things, professional fees such
as legal and accounting, regulatory fees such as Securities and Exchange
Commission (the "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
23
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.
YEAR 2000
Commencing in 1997, the Company undertook a business process
enhancement program to substantially upgrade management information technology
systems in order to provide comprehensive order processing, production and
accounting support for the Company's business. The Company also developed a
comprehensive plan to address Year 2000 issues. The Year 2000 plan addresses
three main areas: (a) information technology systems; (b) non-information
technology systems (including factory equipment, building systems and other
embedded systems); and (c) business partner readiness (including without
limitation customers, inventory and non-inventory suppliers, service suppliers,
banks, insurance companies and tax and other governmental agencies). To oversee
the process, the Company has established a Steering Committee comprised of
senior executives of the Company.
In connection with and as part of the Company's business process
enhancement program, certain information technology systems have been and will
continue to be upgraded to be Year 2000 compliant. In addition, as part of its
Year 2000 plan, the Company has identified potential deficiencies related to
Year 2000 in certain of its information technology systems, both hardware and
software, and is in the process of addressing them through upgrades and other
remediation. The Company currently expects to complete upgrade and remediation
and testing of its information systems by the third quarter of 1999. In respect
of non-information technology systems with date sensitive operating controls,
the Company is in the process of identifying those items which may require
remediation or replacement, and has commenced an upgrade and remediation
program for systems identified as Year 2000 non-compliant. The Company expects
to complete remediation or replacement and testing of these by the third
quarter of 1999. The Company has identified and contacted and continues to
identify and contact key suppliers, both inventory and non-inventory, key
customers and other strategic business partners, such as banks, pension trust
managers and marketing data suppliers, either by soliciting written responses
to questionnaires and/or by meeting with certain of such third parties. The
parties from whom the Company has received responses to date generally have
indicated that their systems are or will be Year 2000 compliant. The Company
currently expects to gain a better understanding of the Year 2000 readiness of
third party business partners by early 1999.
The Company does not expect that incremental out-of-pocket costs of
its Year 2000 program (which do not include costs incurred in connection with
the Company's comprehensive business process enhancement program) will be
material. These costs are expected to continue to be incurred through fiscal
1999 and include the cost of third party consultants, remediation of existing
computer software and replacement and remediation of embedded systems.
The Company believes that at the current time it is difficult to
identify specifically the most reasonably likely worst case Year 2000 scenario.
As with all manufacturers and distributors of products such as those sold by
the Company, a reasonable worst case scenario would be the result of failures
of third parties (including, without limitation, governmental entities and
entities with which the Company has no direct involvement, as well as the
Company's suppliers of goods and services and customers) that continue for more
than a brief period in various geographic areas where the Company's products
are produced or sold at retail or in areas from which the Company's raw
materials and components are sourced. In connection with functions that
represent a particular Year 2000 risk, including the production, warehousing
and distribution of products and the supply of raw materials and components,
the Company is considering various contingency plans. Continuing failures in
key geographic areas in the United States and in certain European, South
American and Asian countries that limit the Company's ability to produce
products, its customers' ability to purchase and pay for the Company's products
and/or consumers' ability to shop, would be likely to have a material adverse
effect on the Company's results of operations, although it would be expected
that at least part of any lost sales eventually would be recouped. The extent
of such deferred or lost revenue cannot be estimated at this time.
The Company's Year 2000 efforts are ongoing and its overall plan, as
well as the consideration of contingency plans, will continue to evolve as new
information becomes available. While the Company currently anticipates
continuity of its business activities, that continuity will be dependent upon
its ability, and the ability of third parties upon which the Company relies
directly, or indirectly, to be Year 2000 compliant. There can be no
24
assurance that the Company and such third parties will eliminate potential Year
2000 issues in a timely manner or as to the ultimate cost to the Company of
doing so.
EURO CONVERSION
As part of the European Economic and Monetary Union, a single currency
(the "Euro") will replace the national currencies of the principal European
countries (other than the United Kingdom) in which the Company conducts business
and manufacturing. The conversion rates between the Euro and the participating
nations' currencies were fixed as of January 1, 1999, with the participating
national currencies being removed from circulation between January 1, 2002 and
June 30, 2002 and replaced by Euro notes and coinage. During the transition
period from January 1, 1999 through December 31, 2001, public and private
entities as well as individuals may pay for goods and services using checks,
drafts, or wire transfers denominated either in the Euro or the participating
country's national currency. Under the regulations governing the transition to
a single currency, there is a "no compulsion, no prohibition" rule which states
that no one is obliged to use the Euro before July 2002. In keeping with this
rule, the Company expects to either continue using the national currencies or
the Euro for invoicing or payments. Based upon the information currently
available, the Company does not expect that the transition to the Euro will
have a material adverse effect on the business or consolidated financial
condition of the Company.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K for the year ended December 31, 1998
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, the effect
on sales of retail inventory balancing and reductions, the effect on sales of
political and/or economic conditions in international markets, the Company's
estimate of restructuring activities, costs and benefits, cash flow from
operations, information systems upgrades, the Company's plan to address the
Year 2000 issue, the costs associated with the Year 2000 issue and the results
of Year 2000 non-compliance by the Company or by one or more of the Company's
customers, suppliers or other strategic business partners, capital
expenditures, the Company's qualitative and quantitative estimates as to market
risk, the Company's expectations about the transition to the Euro, the
availability of funds from currently available credit facilities and
refinancings of indebtedness, and capital contributions or loans from
affiliates or the sale of assets or operations or additional shares of Revlon,
Inc. Statements that are not historical facts, including statements about the
Company's beliefs and expectations, are forward-looking statements.
Forward-looking statements can be identified by, among other things, the use of
forward-looking language, such as "believe," "expects," "may," "will,"
"should," "seeks," "plans," "scheduled to," "anticipates" or "intends" or the
negative of those terms, or other variations of those terms or comparable
language, or by discussions of strategy or intentions. Forward-looking
statements speak only as of the date they are made, and the Company undertakes
no obligation to update them. A number of important factors could cause actual
results to differ materially from those contained in any forward-looking
statement. In addition to factors that may be described in the Company's
filings with the Commission, including this filing, the following factors,
among others, could cause the Company's actual results to differ materially
from those expressed in any forward-looking statements made by the Company: (i)
difficulties or delays in developing and introducing new products or failure of
customers to accept new product offerings; (ii) 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; (v) the inability to refinance indebtedness, secure capital
contributions or loans from affiliates or sell assets or operations or
additional shares of Revlon, Inc.; (vi) effects of and changes in political
and/or economic conditions, including inflation and monetary conditions, and in
trade, monetary, fiscal and tax policies in international markets, including
but not limited to Brazil; (vii) actions by competitors, including business
combinations, technological breakthroughs, new products offerings and marketing
and promotional successes; (viii) combinations among significant customers or
the loss, insolvency or failure to pay debts by a significant customer or
customers; (ix) lower than expected sales as a result of a longer than expected
25
duration of retail inventory balancing and reductions; (x) difficulties, delays
or unanticipated costs or less than expected benefits resulting from the
Company's restructuring activities; (xi) interest rate or foreign exchange rate
changes affecting the Company's market sensitive financial instruments; (xii)
difficulties, delays or unanticipated costs associated with the transition to
the Euro; and (xiii) difficulties, delays or unanticipated costs in achieving
Year 2000 compliance or unanticipated consequences from non-compliance by the
Company or one or more of the Company's customers, suppliers or other strategic
business partners.
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The effect of adopting
the statement and the date of such adoption by the Company have not yet been
determined.
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. Effective
January 1, 1999, it will no longer be considered a hyperinflationary economy.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
The Company has exposure to changing interest rates, primarily in the
United States. The Company's policy is to manage interest rate risk through the
use of a combination of fixed and floating rate debt. The Company from time to
time makes use of derivative financial instruments to adjust its fixed and
floating rate ratio. The table below provides information about the Company's
indebtedness that is sensitive to changes in interest rates. The table presents
cash flows with respect to principal on indebtedness and related weighted
average interest rates by expected maturity dates. Weighted average variable
rates are based on implied forward rates in the yield curve at December 31,
1998. The information is presented in U.S. dollar equivalents, which is the
Company's reporting currency.
Exchange Rate Sensitivity
The Company manufactures and sells its products in a number of
countries throughout the world and, as a result, is exposed to movements in
foreign currency exchange rates. In addition, a portion of the Company's
borrowings are denominated in foreign currencies, which are also subject to
market risk associated with exchange rate movement (See "Financial Condition,
Liquidity and Capital Resources"). The Company's policy is to hedge major net
foreign currency cash exposures generally through foreign exchange forward and
option contracts. The contracts are entered into with major financial
institutions to minimize counterparty risk. These contracts generally have a
duration of less than twelve months and are primarily against the U.S. dollar.
In addition, the Company enters into foreign currency swaps to hedge
intercompany financing transactions. The table below provides information about
the Company's foreign exchange financial instruments by functional currency and
presents such information in U.S. dollar equivalents. For foreign currency
forward exchange agreements and option contracts, the table presents the gross
notional amounts and weighted average exchange rates by contractual maturity
dates. The
26
fair value of foreign currency options and forward exchange contracts is the
estimated amount the Company would receive (pay) to terminate the agreements.
The Company does not hold or issue financial instruments for trading
purposes.
AVERAGE EXPECTED MATURITY DATE FOR YEAR ENDED DECEMBER 31, FAIR VALUE
CONTRACTUAL ----------------------------------------------------------------- DEC. 31,
RATE (a) 1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
------------- ------- ------ ------- -------- ------ ------------ --------- ------------
DEBT (US DOLLAR EQUIVALENT IN MILLIONS)
Short-term variable rate
(various currencies)........ $ 27.8 $ 27.8 $ 27.8
Average interest rate...... 6.7%
Long-term fixed rate ($US)... 200.0 $1,149.1 1,349.1 1,286.0
Average interest rate...... 9.5% 8.6%
Long-term variable rate
($US)....................... 1.0 $1.0 $39.5 $227.6 269.1 269.1
Average interest rate...... 7.9% 7.9% 7.9% 8.0%
Long-term variable rate
(various currencies)........ 5.0 9.3 0.3 3.1 0.1 17.8 17.8
Average interest rate........ 3.8% 3.9% 7.3% 7.7% 7.3%
FORWARD AND OPTION CONTRACTS
(b)
British Pound
Forward contracts........... 0.60 55.0 55.0 --
Option contracts........... 0.60 8.5 8.5 --
Canadian Dollar
Forward contracts........... 1.53 41.2 41.2 0.1
Option contracts............ 1.56 17.5 17.5 (0.2)
Japanese Yen
Forward contracts........... 118.39 36.4 36.4 (1.5)
Option contracts............ 116.28 4.8 4.8 0.1
French Franc
Forward contracts........... 5.60 17.7 17.7 --
South African Rand
Forward contracts........... 6.40 11.2 11.2 (0.2)
Netherland Guilder
Forward contracts........... 1.88 9.5 9.5 --
Hong Kong Dollar
Forward contracts........... 7.82 6.1 6.1 --
Australian Dollar
Forward contracts........... 1.61 9.9 9.9 0.1
Option contracts............ 1.64 10.9 10.9 --
German Deutschemark
Forward contracts........... 1.65 4.8 4.8 --
Option contracts............ 1.67 9.3 9.3 --
New Zealand Dollar
Forward contracts........... 1.92 4.6 4.6 (0.1)
Switzerland Franc
Forward contracts........... 1.34 1.1 1.1 --
(a) Stated in units of local currency per U.S. dollar.
(b) Maturity amounts for forward and option contracts are stated in contract
notional amounts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index on page F-1 of the Consolidated
Financial Statements of the Company and the Notes thereto contained herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. 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 Board, Chairman of the Executive
Committee of the Board and Director
George Fellows President, Chief Executive Officer and Director
Irwin Engelman Vice Chairman, Chief Administrative Officer and
Director
M. Katherine Dwyer Senior Vice President
Frank J. Gehrmann Executive Vice President and Chief Financial Officer
Wade H. Nichols III Executive Vice President and General Counsel
D. Eric Pogue Senior Vice President, Human Resources
Donald G. Drapkin Director
Meyer Feldberg Director
William J. Fox Director
Howard Gittis Director
Morton L. Janklow Director
Vernon E. Jordan Director
Henry A. Kissinger Director
Edward J. Landau Director
Jerry W. Levin Director
Linda Gosden Robinson Director
Terry Semel Director
Martha Stewart Director
The name, age (as of February 18, 1999), 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.
Mr. Perelman (56) has been Chairman of the Board of Directors of the
Company and of the Company's wholly owned subsidiary Products Corporation since
June 1998, Chairman of the Executive Committee of the
28
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 the Board and Chief Executive Officer
of Mafco Holdings Inc. ("Mafco Holdings" and, collectively with MacAndrews
Holdings, "MacAndrews & Forbes") and MacAndrews Holdings and various of its
affiliates since 1980. Mr. Perelman is also Chairman of the Executive
Committees of the Boards of Directors of M&F Worldwide Corp. ("M&F Worldwide")
and Panavision Inc. ("Panavision"), and Chairman of the Board of Meridian
Sports Incorporated ("Meridian"). Mr. Perelman is also a Director of the
following corporations which file reports pursuant to the Securities Exchange
Act of 1934, as amended (the "Exchange Act"): Golden State Bancorp Inc.
("Golden State"), Golden State Holdings Inc. ("Golden State Holdings"), M&F
Worldwide, Meridian, Panavision 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, filed
voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code.)
Mr. Fellows (56) 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 Products Corporation's Consumer
Group from February 1993 until November 1995. From 1989 thr