| REVLON INC /DE/ Item 1A Risk Factors In addition to the other information in this report, investors should consider carefully the following risk factors when evaluating the Company’s business |
| is a holding company with no business operations of its own and is dependent on its subsidiaries to pay certain expenses and dividends |
| In addition, shares of the capital stock of Products Corporation, Revlon, Inc |
| apstas wholly-owned subsidiary, are pledged by Revlon, Inc |
| to secure obligations under the 2004 Credit Agreement |
| is a holding company with no business operations of its own |
| ’s only material asset is all of the outstanding capital stock of Products Corporation, Revlon, Inc |
| ’s wholly-owned subsidiary, through which the Company conducts its business operations |
| ’s net (loss) income has historically consisted predominantly of its equity in the net (loss) income of Products Corporation, which for 2005, 2004 and 2003 was approximately $(77dtta8) million, $(142dtta8) million and $(154dtta0) million, respectively, which excluded approximately dlra7dtta6 million, dlra1dtta2 million and dlra1dtta2 million, respectively, in expenses primarily related to being a public holding company |
| is dependent on the earnings and cash flow of, and dividends and distributions from, Products Corporation to pay Revlon, Inc |
| ’s expenses incidental to being a public holding company |
| Products Corporation may not generate sufficient cash flow to pay dividends or distribute funds to Revlon, Inc |
| because, for example, Products Corporation may not generate sufficient cash or net income; state laws may restrict or prohibit Products Corporation from issuing dividends or making distributions unless Products Corporation has sufficient surplus or net profits, which Products Corporation may not have; or because contractual restrictions, including negative covenants contained in Products Corporation’s various debt instruments, may prohibit or limit such dividends or distributions |
| The terms of the 2004 Credit Agreement, the 2004 Consolidated MacAndrews & Forbes Line of Credit (each as hereinafter defined) and the indentures governing Products Corporation’s outstanding 9½% Senior Notes and 8 5/8prca Senior Subordinated Notes (each as hereinafter defined) 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 make certain payments and pay expenses incidental to being a public holding company |
| Shares of the capital stock of Products Corporation held by Revlon, Inc |
| ’s guarantee of Products Corporationapstas obligations under the 2004 Credit Agreement |
| A foreclosure upon the shares of Products Corporationapstas common stock would result in Revlon, Inc |
| ’s common stock and would be a change of control under other debt instruments of Products Corporation |
| Products Corporation’s substantial indebtedness could adversely affect the Company’s operations and flexibility and Products Corporation’s ability to service its debt |
| Products Corporation has a substantial amount of outstanding indebtedness |
| As of December 31, 2005, the Company’s total indebtedness was dlra1cmam422dtta4 million, primarily including dlra327dtta0 million aggregate principal amount outstanding of Products Corporationapstas 8 5/8prca Senior Subordinated Notes, dlra386dtta4 million aggregate principal amount outstanding of Products Corporationapstas 9½% Senior Notes and dlra700dtta0 million aggregate principal amount outstanding under the 2004 Credit Agreement |
| Additionally, the Company has a history of net losses and if it is unable to achieve sustained profitability in future periods, it could adversely affect the Companyapstas operations and Products Corporationapstas ability to service its debt |
| In July 2004, Products Corporation entered into the 2004 Credit Agreement with a syndicate of lenders and Citicorp USA, Inc, as agent |
| The 2004 Credit Agreement currently consists of a dlra700dtta0 million Term Loan Facility (as hereinafter defined) and a dlra160dtta0 million asset-based Multi-Currency Facility (as hereinafter defined) |
| The Credit Facilities (as hereinafter defined) under the 2004 11 _________________________________________________________________ Credit Agreement are subject to termination on October 30, 2007 if the 8 5/8prca Senior Subordinated Notes, with an aggregate principal amount outstanding of dlra327dtta0 million as of December 31, 2005, are not redeemed, repurchased, defeased or repaid such that not more than dlra25dtta0 million of such notes remain outstanding on or before such date |
| In addition, it will be an event of default under the 2004 Credit Agreement and the 2004 Credit Agreement could terminate if Revlon, Inc |
| does not issue approximately dlra110 million of equity and transfer the proceeds of such issuance to Products Corporation by March 31, 2006 to promptly reduce outstanding indebtedness |
| (See ‘‘Recent Developments’’, as to Revlon, Inc |
| apstas plan to, among other things, conduct a rights offering by March 31, 2006 and redeem approximately dlra110 million of the 8 5/8prca Senior Subordinated Notes) |
| The Company is subject to the risks normally associated with substantial indebtedness, including the risk that the Company’s operating revenues and the operating revenues of its subsidiaries will be insufficient to meet required payments of principal and interest, and the risk that Products Corporation will be unable to refinance existing indebtedness when it becomes due or that the terms of any such refinancing will be less favorable than the current terms of such indebtedness |
| Products Corporation’s substantial indebtedness could also: [spacer |
| gif] • limit the Company’s ability to fund (including by obtaining additional financing) the costs and expenses of the continued implementation of, and refinement to, the Company’s business plan, including in connection with the Company’s previously-announced brand initiatives (consisting of the complete relaunch of Almay and the introduction of Vital Radiance), future working capital, capital expenditures, advertising or promotional expenses, new product development costs, purchases and reconfiguration of wall displays, acquisitions, investments, restructuring programs and other general corporate requirements; [spacer |
| gif] • require the Company to dedicate a substantial portion of its cash flow from operations to payments on Products Corporation’s indebtedness, thereby reducing the availability of the Company’s cash flow for the continued implementation of, and refinement to, the Company’s business plan, including funding the Company’s brand initiatives, and for other general corporate purposes; [spacer |
| gif] • place the Company at a competitive disadvantage compared to its competitors that have less debt; [spacer |
| gif] • limit the Company’s flexibility in responding to changes in its business and the industry in which it operates; and [spacer |
| gif] • make the Company more vulnerable in the event of adverse economic conditions or a downturn in its business |
| Although agreements governing Products Corporation’s indebtedness, including the indentures governing Products Corporation’s outstanding 9½% Senior Notes and 8 5/8prca Senior Subordinated Notes, the agreement governing the 2004 Consolidated MacAndrews & Forbes Line of Credit and the 2004 Credit Agreement, limit Products Corporation’s ability to borrow additional money, under certain circumstances Products Corporation is allowed to borrow a significant amount of additional money, some of which, in certain circumstances and subject to certain limitations, could be secured indebtedness |
| Products Corporation’s ability to pay the principal of its indebtedness depends on many factors |
| Products Corporation currently anticipates that, in order to pay the principal amount of its outstanding indebtedness upon the occurrence of any event of default, to repurchase its 9½% Senior Notes and 8 5/8prca Senior Subordinated Notes if a change of control occurs or in the event that Products Corporation’s cash flows from operations are insufficient to allow it to pay the principal amount of its indebtedness at maturity, the Company may be required to refinance Products Corporation’s indebtedness, seek to sell assets or operations, seek to sell additional Revlon, Inc |
| securities, or seek additional capital contributions or loans from MacAndrews & Forbes or from the Company’s other affiliates or third parties |
| is a public holding company and has no business operations of its own, and Revlon, Inc |
| ’s only material asset is the capital stock of Products Corporation |
| None of the Company’s affiliates are required to make any capital contributions, loans or other payments to Products Corporation regarding its obligations on its indebtedness |
| Products Corporation may not be able to pay the principal amount of 12 _________________________________________________________________ its indebtedness if the Company took any of the above actions because, under certain circumstances, the indentures governing Products Corporation’s outstanding 9½% Senior Notes and 8 5/8prca Senior Subordinated Notes or any of its other debt instruments (including the 2004 Credit Agreement and the 2004 Consolidated MacAndrews & Forbes Line of Credit) or the debt instruments of Products Corporation’s subsidiaries then in effect may not permit the Company to take such actions |
| (See ‘‘Restrictions and covenants in Products Corporation’s debt agreements limit its ability to take certain actions and impose consequences in the event of failure to comply |
| Restrictions and covenants in Products Corporation’s debt agreements limit its ability to take certain actions and impose consequences in the event of failure to comply |
| Agreements governing Products Corporation’s indebtedness, including the 2004 Credit Agreement, the agreement governing the 2004 Consolidated MacAndrews & Forbes Line of Credit and the indentures governing Products Corporation’s outstanding 9½% Senior Notes and 8 5/8prca Senior Subordinated Notes, contain a number of significant restrictions and covenants that limit Products Corporation’s ability and its subsidiaries &apos ability, among other things (subject in each case to limited exceptions), to: [spacer |
| gif] • borrow money; [spacer |
| gif] • use assets as security in other borrowings or transactions; [spacer |
| gif] • pay dividends on stock or purchase stock; [spacer |
| gif] • sell assets; [spacer |
| gif] • enter into certain transactions with affiliates; and [spacer |
| gif] • make certain investments |
| In addition, the 2004 Credit Agreement contains financial covenants limiting Products Corporation’s secured debt-to-EBITDA ratio and, under certain circumstances, requiring Products Corporation to maintain a minimum consolidated fixed charge coverage ratio |
| (See ‘‘Recent Developments’’ regarding Products Corporation’s recent amendment to its 2004 Credit Agreement) |
| The 2004 Credit Agreement also includes provisions that would cause the acceleration of the maturities of the Credit Facilities if the 8 5/8prca Senior Subordinated Notes are not refinanced prior to October 30, 2007 such that not more than dlra25dtta0 million of such notes remain outstanding |
| fails to issue approximately dlra110 million of equity and transfer the proceeds of such issuance to Products Corporation by March 31, 2006 to promptly reduce outstanding indebtedness |
| (See ‘‘Recent Developments’’ as to Revlon, Inc |
| These covenants affect Products Corporation’s operating flexibility by, among other things, restricting its ability to incur expenses and indebtedness that could be used to fund the costs of implementing and refining the Company’s business plan and to grow the Company’s business, including with respect to the Company’s brand initiatives, as well as to fund general corporate purposes |
| The breach of certain covenants contained in the 2004 Credit Agreement would permit Products Corporation’s lenders to accelerate amounts outstanding under the 2004 Credit Agreement, which would in turn constitute an event of default under the 2004 Consolidated MacAndrews & Forbes Line of Credit and the indentures governing Products Corporation’s outstanding 9½% Senior Notes and 8 5/8prca Senior Subordinated Notes, if the amount accelerated exceeds dlra25dtta0 million and such default remains uncured for 10 days following notice from MacAndrews & Forbes with respect to the 2004 Consolidated MacAndrews & Forbes Line of Credit or the trustee or holders of the applicable percentage under the applicable indenture |
| In addition, holders of Products Corporation’s outstanding 9½% Senior Notes and 8 5/8prca Senior Subordinated Notes may require Products Corporation to repurchase their respective notes in the event of a change of control under the applicable indenture |
| (See ‘‘Products Corporation’s ability to pay the principal of its indebtedness depends on many factors |
| Products Corporation may not have sufficient funds at the time of any such breach of any such covenant or change of control to repay in full the borrowings under the 2004 Credit Agreement, or to repurchase or redeem its outstanding 9½% Senior Notes and/or 8 5/8prca Senior Subordinated Notes |
| Events beyond the Company’s control, such as decreased consumer spending in response to weak economic conditions, weakness in the mass-market cosmetics category, retailer inventory management, 13 _________________________________________________________________ adverse changes in currency, increased competition from the Company’s competitors, changes in consumer purchasing habits, including with respect to shopping channels, lower than anticipated success of the Company’s advertising and marketing plans, lower than expected customer or consumer acceptance of the Company’s brand initiatives, decreased sales of the Company’s existing products as a result of the Company’s brand initiatives and changes in the competitive environment, could impair the Company’s operating performance, which could affect Products Corporation’s ability and that of its subsidiaries to comply with the terms of Products Corporation’s debt instruments |
| Products Corporation and its subsidiaries may be unable to comply with the provisions of Products Corporation’s debt instruments, including the financial covenants in the 2004 Credit Agreement |
| If Products Corporation is unable to satisfy such covenants or other provisions at any future time, Products Corporation would need to seek an amendment or waiver of such financial covenants or other provisions |
| The lenders under the 2004 Credit Agreement may not consent to any amendment or waiver requests that Products Corporation may make in the future, and, if they do consent, they may not do so on terms which are favorable to it and Revlon, Inc |
| In the event that Products Corporation was unable to obtain such a waiver or amendment and it was not able to refinance or repay its debt instruments, including the 2004 Credit Agreement, Products Corporation’s inability to meet the financial covenants or other provisions would constitute an event of default under its debt instruments, including the 2004 Credit Agreement, which would permit the bank lenders to accelerate the 2004 Credit Agreement, which in turn would constitute an event of default under the 2004 Consolidated MacAndrews & Forbes Line of Credit and the indentures governing Products Corporation’s outstanding 9½% Senior Notes and 8 5/8prca Senior Subordinated Notes, if the amount accelerated exceeds dlra25dtta0 million and such default remains uncured for 10 days following notice from MacAndrews & Forbes with respect to the 2004 Consolidated MacAndrews & Forbes Line of Credit or the trustee under the applicable indenture |
| Products Corporation’s assets and/or cash flow and/or that of Products Corporation’s subsidiaries may not be sufficient to repay fully borrowings under the outstanding debt instruments, either upon maturity or if accelerated upon an event of default, and if Products Corporation was required to repurchase its outstanding 9½% Senior Notes and/or 8 5/8prca Senior Subordinated Notes upon a change of control, Products Corporation may be unable to refinance or restructure the payments on such debt |
| Further, if Products Corporation was unable to repay, refinance or restructure its indebtedness under the 2004 Credit Agreement, the lenders could proceed against the collateral securing that indebtedness |
| Limits on Products Corporation’s borrowing capacity under the Multi-Currency Facility may affect the Company’s ability to finance its operations |
| While the Multi-Currency Facility currently provides for up to dlra160dtta0 million of commitments, Products Corporation’s ability to borrow funds under this facility is limited by a borrowing base determined relative to the value, from time to time, of eligible accounts receivable and eligible inventory in the US and the UK and eligible real property and equipment in the US If the value of these eligible assets is not sufficient to support the full dlra160dtta0 million borrowing base, Products Corporation will not have full access to the Multi-Currency Facility but rather could have access to a lesser amount determined by the borrowing base |
| Further, if Products Corporation borrows funds under this facility, subsequent changes in the value or eligibility of the assets could cause Products Corporation to be required to pay down the amounts outstanding so that there is no amount outstanding in excess of the then-existing borrowing base |
| Products Corporation’s ability to make borrowings under the Multi-Currency Facility is also conditioned upon its compliance with other covenants in the 2004 Credit Agreement, including a fixed charge coverage ratio that applies when the excess borrowing base is less than dlra30dtta0 million |
| Because of these limitations, Products Corporation may not always be able to meet its cash requirements with funds borrowed under the Multi-Currency Facility, which could have a material adverse effect on the Company’s business, results of operations or financial condition |
| On February 1, 2006, the Term Loan Facility was fully drawn, and availability under the Multi-Currency Facility, based upon the calculated borrowing base less approximately dlra16 million of outstanding letters of credit, was approximately dlra144 million, as the Multi-Currency Facility was undrawn at such date |
| 14 _________________________________________________________________ A substantial portion of Products Corporation’s indebtedness is subject to floating interest rates |
| A substantial portion of Products Corporation’s indebtedness, principally under the 2004 Credit Agreement, is subject to floating interest rates, which makes the Company more vulnerable in the event of adverse economic conditions, increases in prevailing interest rates or a downturn in the Company’s business |
| As of December 31, 2005, dlra709dtta0 million of Products Corporation’s total indebtedness was subject to floating interest rates |
| The Term Loan Facility and the Multi-Currency Facility under the 2004 Credit Agreement bear interest, at Products Corporation’s option, at either the Eurodollar Rate (as defined in the 2004 Credit Agreement), which is based on LIBOR, or the Alternate Base Rate (as defined in the 2004 Credit Agreement), which is based on the greater of Citibank, NAapstas announced base rate and the US federal fund rate plus 0dtta5prca, or the equivalent for loans denominated in currencies other than US dollars |
| If any of LIBOR, the base rate, the US federal funds rate or such equivalent local currency rate increases, the Company’s debt service costs will increase to the extent that Products Corporation has elected such rates for its outstanding loans |
| Based on the amounts outstanding under the 2004 Credit Agreement and other short-term borrowings (which, in the aggregate, is Products Corporation’s only debt currently subject to floating interest rates) as of December 31, 2005, an increase in LIBOR of 1prca would increase the Company’s annual interest expense by dlra7dtta1 million |
| Increased debt service costs would adversely affect the Company’s cash flow |
| While Products Corporation may enter into various interest hedging contracts, it may not be able to do so on a cost-effective basis, any hedging transactions it might enter into may not achieve their intended purpose and shifts in interest rates may have a material adverse effect on the Company |
| The Company depends on its Oxford, North Carolina facility for production of a substantial portion of its products |
| Disruptions to this facility could affect the Company’s sales and financial condition |
| A substantial portion of the Company’s products are produced at its Oxford, North Carolina facility |
| Significant unscheduled downtime at this facility due to equipment breakdowns, power failures, natural disasters, weather conditions hampering delivery schedules or other disruptions, including those caused by transitioning manufacturing from other facilities primarily to the Company’s Oxford, North Carolina facility, or any other cause could adversely affect the Company’s ability to provide products to its customers, which would affect the Company’s sales and financial condition |
| Additionally, if product sales exceed forecasts, the Company could, from time to time, not have an adequate supply of products to meet customer demands, which could cause the Company to lose sales |
| The Company’s brand initiatives may not be as successful as the Company anticipates in furthering its growth objectives |
| As described under ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Overview of Brand Initiatives,’’ the Company recently announced two brand initiatives, one of which involves a complete relaunch of the Almay brand and builds on Almay’s healthy beauty heritage and the desire among consumers for simplicity and personalization and the other of which is focused on the more mature consumer and involves the launch of a complete line of cosmetics under a new brand name, Vital Radiance, that is designed to serve this affluent and growing consumer demographic currently underserved in the marketplace |
| The Company may not be successful in achieving its growth objectives |
| Each of the elements of the brand initiatives carries significant risks, as well as the possibility of unexpected consequences, including: [spacer |
| gif] • the acceptance of the brand initiatives by the Company’s retail customers may not be as high as the Company anticipates; [spacer |
| gif] • sales of the new products to the Company’s retail customers may not be as high as the Company anticipates; [spacer |
| gif] • the Company’s marketing strategies for the brand initiatives may be less effective than planned and may fail to effectively reach the targeted consumer base or engender the desired consumption and the rate of purchases by the Company’s consumers may not be as high as the Company anticipates; [spacer |
| gif] • the Company’s wall displays to showcase the new products may fail to achieve their intended effects; 15 _________________________________________________________________ [spacer |
| gif] • the Company may experience product returns exceeding its expectations as a result of the brand initiatives; [spacer |
| gif] • the Company may incur costs exceeding its expectations as a result of the continued development and launch of the brand initiatives, including, for example, costs in connection with the purchase and installation of new wall displays and advertising and promotional expenses or other costs, including trade support, related to launching the brand initiatives; [spacer |
| gif] • the Company may experience a decrease in sales of certain of the Company’s existing products as a result of the products related to the brand initiatives; [spacer |
| gif] • the Company’s product pricing strategies for the brand initiatives may not be accepted by its retail customers and/or its consumers, which may result in the Company’s sales being less than it anticipates; [spacer |
| gif] • any delays or other difficulties impacting the Company’s ability, or the ability of the Company’s third party manufacturers and suppliers, to timely manufacture, distribute and ship products in connection with launching the brand initiatives, such as inclement weather conditions or those delays or difficulties discussed under ‘‘— The Company depends on its Oxford, North Carolina facility for production of a substantial portion of its products |
| Disruptions to this facility could affect the Company’s sales and financial condition,’’ could affect the Company’s ability to ship and deliver products to meet its retail customers’ reset deadlines; [spacer |
| gif] • the brand initiatives will require that the Company cause to be manufactured, shipped and installed new display walls at the Company’s retail customers’ stores in time for such customers’ reset schedules |
| Any delays or other difficulties impacting the manufacture, distribution and installation of these display walls could affect the Company’s ability to meet its retail customers’ reset deadlines; and [spacer |
| gif] • attempting to accomplish all of the elements of the brand initiatives simultaneously may prove to be a financial and operational burden on the Company and the Company may be unable to successfully accomplish all of the elements of the initiatives simultaneously |
| Each of the risks referred to above could delay or impede the Company’s ability to achieve its growth objectives, which could have a material adverse effect on the Company’s business, results of operations and financial condition |
| The Company’s ability to service its debt and meet its cash requirements depends on many factors, including achieving anticipated levels of revenue growth and expenses |
| If such levels prove to be other than as anticipated, the Company may be unable to meet its cash requirements or Products Corporation may be unable to meet the requirements of the financial covenants under the 2004 Credit Agreement, which could have a material adverse effect on the Company’s business |
| The Company currently expects that operating revenues, cash on hand, net cash proceeds from the planned dlra75 million equity issuance described in ‘‘Recent Developments’’ and funds available for borrowing under the 2004 Credit Agreement, the 2004 Consolidated MacAndrews & Forbes Line of Credit and other permitted lines of credit will be sufficient to enable the Company to cover its operating expenses for 2006, including cash requirements in connection with the Company’s operations, the continued implementation of, and refinement to, the Company’s plan, including with respect to the Company’s brand initiatives, the Company’s debt service requirements for 2006, the organizational realignment described in ‘‘Recent Developments’’ and regularly scheduled pension and post-retirement benefit plan contributions |
| If the Company’s anticipated level of revenue growth is not achieved, however, because of, for example, decreased consumer spending in response to weak economic conditions or weakness in the mass-market cosmetics category, retailer inventory management, adverse changes in currency, increased competition from the Company’s competitors, changes in consumer purchasing habits, including with respect to shopping channels, or because the Company’s advertising and marketing plans or the brand initiatives are not as successful as anticipated, or if the Company’s expenses associated with continued implementation of, and refinement to, the Company’s plan, including expenses related to the Company’s 16 _________________________________________________________________ brand initiatives, exceed the anticipated level of expenses, the Company’s current sources of funds may be insufficient to meet its cash requirements |
| In addition, such developments, if significant, could reduce the Company’s revenues and could adversely affect Products Corporation’s ability to comply with certain financial covenants under the 2004 Credit Agreement |
| If operating revenues, cash on hand, net cash proceeds from the planned dlra75 million equity issuance described in ‘‘Recent Developments’’ and funds available for borrowing are insufficient to cover the Company’s expenses or are insufficient to enable Products Corporation to comply with the financial covenants under the 2004 Credit Agreement, the Company could be required to adopt one or more alternatives listed below |
| gif] • delay the implementation of or revise certain aspects of the Company’s plan, including potentially delaying, suspending or revising certain aspects of the Company’s brand initiatives; [spacer |
| gif] • reduce or delay purchases of wall displays or advertising or promotional expenses, including spending on new wall displays anticipated to be undertaken in connection with the Company’s brand initiatives; [spacer |
| gif] • reduce or delay capital spending, including in connection with the Company’s brand initiatives; [spacer |
| gif] • restructure Products Corporation’s indebtedness; [spacer |
| gif] • sell assets or operations; [spacer |
| gif] • delay, reduce or revise the Company’s restructuring plans (including as described in ‘‘Recent Developments’’); [spacer |
| gif] • seek additional capital contributions or loans from MacAndrews & Forbes, Revlon, Inc, the Company’s other affiliates and/or third parties; [spacer |
| gif] • sell additional Revlon, Inc |
| securities or debt securities of Products Corporation; or [spacer |
| gif] • reduce other discretionary spending |
| If the Company is required to take any of these actions, it could have a material adverse effect on its business, financial condition and results of operations |
| In addition, the Company may be unable to take any of these actions, because of a variety of commercial or market factors or constraints in Products Corporation’s debt instruments, including, for example, market conditions being unfavorable for an equity or debt issuance, additional capital contributions or loans not being available from affiliates and/or third parties, or that the transactions may not be permitted under the terms of the various debt instruments then in effect, because of restrictions on the incurrence of debt, incurrence of liens, asset dispositions and/or related party transactions |
| Such actions, if ever taken, may not enable the Company to satisfy its cash requirements or enable Products Corporation to comply with the financial covenants under the 2004 Credit Agreement if the actions do not result in savings or generate a sufficient amount of additional capital, as the case may be |
| The Company depends on a limited number of customers for a large portion of its net sales and the loss of one or more of these customers could reduce the Company’s net sales |
| For 2005, 2004 and 2003, Wal-Mart, Inc |
| and its affiliates accounted for approximately 24dtta0prca, 21dtta0prca, and 20dtta6prca, respectively, of the Company’s worldwide net sales |
| The Company expects that for 2006 and future periods, Wal-Mart and a small number of other customers will, in the aggregate, continue to account for a large portion of the Company’s net sales |
| As is customary in the consumer products industry, none of the Company’s customers is under an obligation to continue purchasing products from the Company in the future |
| The loss of Wal-Mart or one or more of the Company’s other customers that may account for a significant portion of the Company’s net sales, or any significant decrease in sales to these customers or any significant decrease in the Company’s retail display space in any of these customers &apos stores, could reduce the Company’s net sales and therefore could have a material adverse effect on the Company’s business, financial condition and results of operations |
| The Company may be unable to increase its sales through the Company’s primary distribution channels |
| Although the US mass-market for color cosmetics advanced 3dtta2prca for the year ended December 31, 2005, as compared with 2004, the US mass-market color cosmetics category declined by 17 _________________________________________________________________ approximately 0dtta6prca in 2004 from 2003 and declined by approximately 1dtta1prca in 2003 from 2002 |
| In the US, mass volume retailers and chain drug and food stores currently are the primary distribution channels for the Company’s products |
| Additionally, other channels, including department stores, door-to-door and the internet, combined account for a significant amount of sales of cosmetics and beauty care products |
| A decrease in consumer demand in the US mass-market for color cosmetics, retailer inventory management and/or a change in consumers’ purchasing habits, such as by buying more cosmetics and beauty care products in channels in which the Company does not currently compete, could cause the Company to be unable to increase sales of its products through these distribution channels, which could reduce the Company’s net sales and therefore have a material adverse effect on the Company’s business, financial condition and results of operations |
| The Company has a limited operating history under its business plan, and it may not be successful or enable the Company to achieve or maintain profitable operations |
| The Company has a limited operating history under its three-phase business plan |
| If the Company fails to successfully execute its plan, including if the Company fails to successfully execute its brand initiatives, the Company may not achieve the expected increases in its net sales or improvements in its operating profit margin, which could adversely affect the Company’s profitability and liquidity |
| Additionally, it is possible that implementation of the plan may have unanticipated consequences that could be adverse to the Company’s business |
| Each of the components of the Company’s plan carries significant risks, as well as the possibility of unexpected consequences |
| Potential risks include: [spacer |
| gif] • the Company’s attempts to make its advertising and media more effective may fail to achieve their intended effects; [spacer |
| gif] • changes to the Company’s wall displays may fail to achieve their intended effects; [spacer |
| gif] • the Company may experience product returns and/or other costs exceeding the Company’s expectations as a result of new product introductions or brand launches, including as a result of the brand initiatives, or additional repositioning, repackaging and reformulating one or more of the Company’s product lines or brands, or further refining the Company’s approach to retail merchandising; [spacer |
| gif] • the Company may incur costs exceeding its expectations as a result of the roll out of wall displays, including costs in connection with rolling out new wall displays in connection with the Company’s brand initiatives, or making further refinements to the Company’s wall displays, or the wall displays or refinements to such displays may fail to achieve their intended effects; [spacer |
| gif] • the Company’s new product development process may not be as successful as contemplated, or consumers may not accept the Company’s new product offerings to the degree envisioned, including products to be sold in connection with the Company’s brand initiatives; [spacer |
| gif] • the Company’s competitors, some of which have greater resources than the Company, could increase their spending on advertising and media, increase their new product development spending or take other steps in response to the Company’s plan, including in response to its brand initiatives, which could impact the effectiveness of the Company’s plan, including the effectiveness of its brand initiatives, and the Company’s ability to achieve its objective of increased revenues and profitability over the long term; [spacer |
| gif] • the Company may experience difficulties, delays or higher than expected costs in implementing its comprehensive program to develop and train the Company’s employees with the objective of improving its organizational capabilities or in attracting and retaining talented and experienced personnel; [spacer |
| gif] • the Company may be unable to achieve its growth objectives in connection with its brand initiatives or the Company may experience difficulties, delays or higher than expected costs in implementing its brand initiatives, including as discussed in ‘‘— The Company’s brand initiatives may not be as successful as the Company anticipates in furthering its growth objectives;’’ and 18 _________________________________________________________________ [spacer |
| gif] • attempts to accomplish all of the elements of the Company’s plan simultaneously may prove to be financially or operationally burdensome and may cause disruption or difficulties in the Company’s business |
| (See ‘‘— The Company’s ability to service its debt and meet its cash requirements depends on many factors, including achieving anticipated levels of revenue growth and expenses |
| If such levels prove to be other than as anticipated, the Company may be unable to meet its cash requirements or Products Corporation may be unable to meet the requirements of the financial covenants under the 2004 Credit Agreement, which could have a material adverse effect on the Company’s business’’ and ‘‘— The Company’s brand initiatives may not be as successful as the Company anticipates in furthering its growth objectives |
| Unanticipated circumstances may adversely affect the Company’s assumptions and expectations regarding the Company’s ‘‘Destination Model’’ |
| The Company’s ‘‘Destination Model’’ is based upon its expectation that the Company will achieve an improvement in its operating profit margin as a result of improvements in various aspects of the Company’s business, including, without limitation, in its international supply chain, in its promotion redesign, in its cost of goods (due to various initiatives including value analyses, packaging initiatives, strategic sourcing and make versus buy analyses), in its product life cycle management, in its in-store merchandising and by leveraging the Company’s fixed cost structure and other initiatives, for an aggregate targeted operating profit margin of approximately 12prca (measured as a percentage of gross sales) by the end of 2008 |
| Although the Company believes that these expectations are reasonable and achievable, the Company may achieve less than expected savings from one or more of these initiatives, the Company’s progress may not be spread ratably and the margin transformation initiatives may not be implemented successfully and/or other events and circumstances, such as difficulties, delays or unexpected costs in achieving those results, may occur which could result in the Company’s not achieving its ‘‘Destination Model’’, achieving only a portion of it, or achieving it later than the Company expects |
| Additionally, if product sales exceed forecasts, the Company’s focus on closely managing inventory levels could result, from time to time, in the Company’s not having an adequate supply of products to meet consumer demand, which would cause the Company to lose sales |
| In addition, if the Company experiences lower than expected sales, the Company may experience difficulties or delays in achieving its targeted operating profit margin |
| Competition in the consumer products business could materially adversely affect the Company’s net sales and its market share |
| The consumer products business is highly competitive |
| The Company competes primarily on the basis of: [spacer |
| gif] • developing quality products with innovative performance features, shades, finishes and packaging; [spacer |
| gif] • educating consumers on the Company’s product benefits; [spacer |
| gif] • anticipating and responding to changing consumer demands in a timely manner, including the timing of new product introductions and line extensions; [spacer |
| gif] • offering attractively priced products, relative to the product benefits provided; [spacer |
| gif] • maintaining favorable brand recognition; [spacer |
| gif] • generating competitive margins and inventory turns for the Company’s retail customers by providing market-right products and executing effective pricing, incentive and promotion programs; [spacer |
| gif] • ensuring product availability through effective planning and replenishment collaboration with retailers; [spacer |
| gif] • providing strong and effective advertising, marketing, promotion and merchandising support; [spacer |
| gif] • maintaining an effective sales force; and 19 _________________________________________________________________ [spacer |
| gif] • obtaining sufficient retail floor space, optimal in-store positioning and effective presentation of the Company’s products at retail |
| An increase in the amount of competition that the Company faces could have a material adverse effect on its market share and revenues |
| The Company experienced declines in its market share in the US mass-market in color cosmetics from the end of the first half of 1998 through the first half of 2002, including a decline in the Company’s combined color cosmetics market share from approximately 32prca in the second quarter of 1998 to approximately 22prca in the second quarter of 2002 |
| From the second half of 2002 through 2005, the Company’s US mass-market share in color cosmetics stabilized, and the Company achieved a combined US mass-market share of 21dtta6prca for 2005 |
| The Revlon brand registered a US mass-market share of 15dtta4prca for 2005, while the Almay brand advanced to 6dtta2prca for 2005 |
| It is possible that declines in the Company’s market share could occur in the future |
| In addition, the Company competes in selected product categories against a number of multinational manufacturers, some of which are larger and have substantially greater resources than the Company, and which may therefore have the ability to spend more aggressively on advertising and marketing and more flexibility to respond to changing business and economic conditions than the Company |
| In addition to products sold in the mass-market, the Company’s products also compete with similar products sold in prestige department store channels, door-to-door, on the internet and through mail-order or telemarketing by representatives of direct sales companies |
| The Company’s foreign operations are subject to a variety of social, political and economic risks and may be affected by foreign currency fluctuation, which could adversely affect the results of the Company’s operations and the value of its foreign assets |
| As of December 31, 2005, the Company had operations based in 16 foreign countries and its products were sold in over 100 countries |
| The Company is exposed to the risk of changes in social, political and economic conditions inherent in operating in foreign countries, including those in Asia, Eastern Europe and Latin America, which could adversely affect the Company’s business, results of operations and financial condition |
| Such changes include changes in the laws and policies that govern foreign investment in countries where the Company has operations, changes in consumer purchasing habits including as to shopping channels, as well as, to a lesser extent, changes in US laws and regulations relating to foreign trade and investment |
| In addition, fluctuations in foreign currency exchange rates may affect the results of the Company’s operations and the value of its foreign assets, which in turn may adversely affect the Company’s reported earnings and, accordingly, the comparability of period-to-period results of operations |
| Changes in currency exchange rates may affect the relative prices at which the Company and its foreign competitors sell products in the same markets |
| The Company’s net sales outside of the US and Canada for the years ended December 31, 2005, 2004, and 2003 were approximately 36prca, 34prca and 31prca of the Company’s total consolidated net sales, respectively |
| In addition, changes in the value of relevant currencies may affect the cost of certain items and materials required in the Company’s operations |
| Products Corporation enters into forward foreign exchange contracts to hedge certain cash flows denominated in foreign currency |
| At December 31, 2005, the notional amount of Products Corporation’s foreign currency forward exchange contracts was dlra31dtta9 million |
| The hedges Products Corporation enters into may not protect against currency fluctuations |
| Terrorist attacks, acts of war or military actions may adversely affect the markets in which the Company operates and the Company’s operations and profitability |
| On September 11, 2001, the US was the target of terrorist attacks of unprecedented scope |
| These attacks contributed to major instability in the US and other financial markets and reduced consumer confidence |
| These terrorist attacks, as well as terrorist attacks such as those that have occurred in Madrid, Spain and London, England, military responses to terrorist attacks and future developments, or other military actions, such as the military actions in Iraq, may adversely affect prevailing economic conditions, resulting in reduced consumer spending and reduced demand for the Company’s products |
| These developments subject the Company’s worldwide operations to increased risks and, depending on their magnitude, could reduce net sales and therefore could have a material adverse effect on the Company’s business, results of operations and financial condition |
| 20 _________________________________________________________________ The Company’s products are subject to federal, state and international regulations that could adversely affect the Company’s financial results |
| The Company is subject to regulation by the FTC and the FDA, in the US, as well as various other federal, state, local and foreign regulatory authorities, including the EU in Europe |
| The Company’s Oxford, North Carolina manufacturing facility is registered with the FDA as a drug manufacturing establishment, permitting the manufacture of cosmetics that contain over-the-counter drug ingredients, such as sunscreens and antiperspirants |
| State and local regulations in the US and regulations in the EU that are designed to protect consumers or the environment have an increasing influence on the Company’s product claims, ingredients and packaging |
| To the extent regulatory changes occur in the future, they could require the Company to reformulate or discontinue certain of its products or revise its product packaging or labeling, either of which could result in, among other things, increased costs to the Company, delays in product launches or result in product returns |
| Shares of Revlon, Inc |
| Class A Common Stock and Products Corporation’s capital stock are pledged to secure various of Revlon, Inc |
| ’s and/or other of the Company’s affiliates’ obligations and foreclosure upon these shares or dispositions of shares could result in the acceleration of debt under the 2004 Credit Agreement and could have other consequences |
| Products Corporation’s shares of common stock are pledged to secure Revlon, Inc |
| ’s guarantee under the 2004 Credit Agreement |
| As of December 31, 2005, there were 2cmam325cmam291 shares of Class A Common Stock pledged by REV Holdings to secure dlra18dtta5 million principal amount of REV Holdings’ 13prca Senior Secured Notes due 2007 |
| MacAndrews & Forbes has advised the Company that it has pledged additional shares of Class A Common Stock to secure other obligations |
| A default under any of these obligations that are secured by the pledged shares could cause a foreclosure with respect to such shares of Class A Common Stock, Products Corporation’s common stock or stock of intermediate holding companies |
| A foreclosure upon any such shares of common stock or dispositions of shares of Class A Common Stock, Products Corporationapstas common stock or stock of intermediate holding companies beneficially owned by MacAndrews & Forbes could, in a sufficient amount, constitute a "e change of control "e under the 2004 Credit Agreement, the 2004 Consolidated MacAndrews & Forbes Line of Credit and the indentures governing the 9½% Senior Notes and the 8 5/8prca Senior Subordinated Notes |
| A change of control constitutes an event of default under the 2004 Credit Agreement, which would permit Products Corporation’s lenders to accelerate amounts outstanding under the 2004 Credit Agreement |
| In addition, holders of the 9½% Senior Notes and the 8 5/8prca Senior Subordinated Notes may require Products Corporation to repurchase their respective notes under those circumstances |
| Products Corporation may not have sufficient funds at the time of any such change of control to repay in full the borrowings under the 2004 Credit Agreement or to repurchase or redeem the 9½% Senior Notes and/or the 8 5/8prca Senior Subordinated Notes |
| (See ‘‘The Company’s ability to service its debt and meet its cash requirements depends on many factors, including achieving anticipated levels of revenue growth and expenses |
| If such levels prove to be other than as anticipated, the Company may be unable to meet its cash requirements or Products Corporation may be unable to meet the requirements of the financial covenants under the 2004 Credit Agreement, which could have a material adverse effect on the Company’s business |
| MacAndrews & Forbes has the power to direct and control the Company’s business |
| MacAndrews & Forbes is wholly owned by Ronald O Perelman |
| Perelman, directly and through MacAndrews & Forbes, beneficially owns approximately 60prca of Revlon, Inc |
| ’s outstanding common stock |
| Perelman, directly and through MacAndrews & Forbes, controls approximately 77prca of the combined voting power of Revlon, Inc |
| ’s common stock |
| As a result, MacAndrews & Forbes is able to control the election of the entire Board of Directors of Revlon, Inc |
| and Products Corporation and controls the vote on all matters submitted to a vote of Revlon, Inc |
| ’s and Products Corporation’s stockholders, including the approval of mergers, consolidations, sales of some, all or substantially all of Revlon, Inc |
| ’s or Products Corporation’s assets, issuances of capital stock and similar transactions |
| 21 _________________________________________________________________ New accounting requirements will cause the Company to record compensation expense for employee stock option grants, which will affect the Company’s reported earnings |
| In December 2004, the FASB issued SFAS Nodtta 123 (revised 2004), ‘‘Share-Based Payment,’’ an amendment to FASB Statements Nos |
| 123 and 95 (‘‘SFAS Nodtta 123(R)’’), which replaces SFAS Nodtta 123, and supercedes APB Opinion Nodtta 25, ‘‘Accounting for Stock Issued to Employees |
| ’’ SFAS Nodtta 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values |
| In April 2005, the US Securities and Exchange Commission (the ‘‘SEC’’ or the ‘‘Commission’’) adopted a rule allowing companies to implement SFAS Nodtta 123(R) at the beginning of their next fiscal year that begins after June 15, 2005, which for the Company will be effective beginning January 1, 2006 |
| The Company will use the modified prospective transition method, utilizing the Black-Scholes option pricing model for the calculation of the fair value of its employee stock options |
| Under the modified prospective method, stock option awards that are granted, modified or settled after January 1, 2006 will be measured and accounted for in accordance with SFAS Nodtta 123(R) |
| Compensation cost for stock option awards granted prior to, but not vested, as of January 1, 2006 would be based on the grant date attributes originally used to value those awards for pro forma purposes under SFAS Nodtta 123 |
| The Company expects the adoption of SFAS Nodtta 123(R) will result in approximately dlra10 million in additional expenses for fiscal year 2006 |
| This estimate is based on the number of unvested options outstanding as of January 1, 2006 and the estimated number of options to be granted in 2006 |
| This estimate could change based on a number of factors, including differences in the estimate of the number of options granted before 2006 which are forfeited during 2006 and the number of options actually granted in 2006 and the fair value of these options at their grant date |