UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

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
incorporation or organization)
(I.R.S. Employer
Identification No.)
237 Park Avenue, New York, New York 10017
(Address of principal executive offices) (Zip Code)

212-527-4000
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                                                                                                                                        Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ‘‘accelerated filer’’ and ‘‘large accelerated filer’’ in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ]                        Accelerated filer [X]                            Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes [ ] No [X]

As of June 30, 2006, 381,319,745 shares of Class A Common Stock and 31,250,000 shares of Class B Common Stock were outstanding. 214,579,170 shares of Class A Common Stock and all of the 31,250,000 shares of Class B Common Stock were beneficially owned directly and indirectly by MacAndrews & Forbes Holdings Inc. and its affiliates.

Total Pages – 39




REVLON, INC. AND SUBSIDIARIES
    
INDEX


PART I – Financial Information  
Item 1. Financial Statements  
  Consolidated Balance Sheets as of June 30, 2006 (Unaudited) and December 31, 2005 2
  Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2006 and 2005 3
  Unaudited Consolidated Statement of Stockholders' Deficiency and Comprehensive Loss for the Six Months Ended June 30, 2006 4
  Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005 5
  Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of
     Operations
17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
Item 4. Controls and Procedures 34
PART II – Other Information  
Item 1A. Risk Factors 39
Item 4. Submission of Matters to a Vote of Security Holders 39
Item 6. Exhibits 40
  Signatures 41

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Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.    Financial Statements

REVLON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except per share amounts)


  June 30,
2006
December 31,
2005
  (Unaudited)  
ASSETS  
 
Current assets:  
 
Cash and cash equivalents $ 21.2
$ 32.5
Trade receivables, less allowances of $16.2 and $18.9 as of June 30, 2006 and December 31, 2005, respectively 173.0
282.2
Inventories 230.2
220.6
Prepaid expenses and other 56.9
56.7
Total current assets 481.3
592.0
Property, plant and equipment, net 120.5
119.7
Other assets 172.8
146.0
Goodwill, net 186.1
186.0
Total assets $ 960.7
$ 1,043.7
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY  
 
Current liabilities:  
 
Short-term borrowings $ 12.1
$ 9.0
Current portion of long-term debt 5.3
Accounts payable 110.2
133.1
Accrued expenses and other 298.3
328.4
Total current liabilities 425.9
470.5
Long-term debt 1,403.3
1,413.4
Other long-term liabilities 258.1
255.7
Stockholders’ deficiency:  
 
Class B Common Stock, par value $.01 per share; 200,000,000 shares authorized, 31,250,000 issued and outstanding as of June 30, 2006 and December 31, 2005, respectively 0.3
0.3
Class A Common stock, par value $.01 per share; 900,000,000 shares authorized and 383,755,515 and 344,472,735 shares issued and outstanding as of June 30, 2006 and December 31, 2005, respectively 3.8
3.4
Additional paid-in capital 878.9
764.8
Treasury stock, at cost; 410,766 and 236,315 shares of Class A Common Stock as of June 30, 2006 and December 31, 2005, respectively (1.4
)
(0.8
)
Accumulated deficit (1,887.2
)
(1,741.9
)
Accumulated other comprehensive loss (121.0
)
(121.7
)
Total stockholders’ deficiency (1,126.6
)
(1,095.9
)
Total liabilities and stockholders’ deficiency $ 960.7
$ 1,043.7

See Accompanying Notes to Unaudited Consolidated Financial Statements

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Table of Contents

REVLON, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in millions, except per share amounts)


  Three Months Ended
June 30,
Six Months Ended
June 30,
  2006 2005 2006 2005
Net sales $ 321.1
$ 318.3
$ 646.6
$ 619.2
Cost of sales 138.0
118.9
255.3
233.1
Gross profit 183.1
199.4
391.3
386.1
Selling, general and administrative expenses 228.5
199.9
444.9
387.0
Restructuring (benefit) costs, net 0.5
(0.2
)
9.5
1.5
Operating loss (45.9
)
(0.3
)
(63.1
)
(2.4
)
Other expenses (income):  
 
 
 
Interest expense 35.9
31.8
71.1
61.5
Interest income (0.5
)
(1.8
)
(0.8
)
(3.4
)
Amortization of debt issuance costs 1.8
1.7
3.6
3.3
Foreign currency (gains) losses, net (0.4
)
(1.2
)
(1.2
)
1.3
Loss on early extinguishment of debt 0.4
1.5
0.4
9.0
Miscellaneous, net 0.7
0.2
0.4
1.6
Other expenses, net 37.9
32.2
73.5
73.3
Loss before income taxes (83.8
)
(32.5
)
(136.6
)
(75.7
)
Provision for income taxes 3.3
3.3
8.7
6.9
Net loss $ (87.1
)
$ (35.8
)
$ (145.3
)
$ (82.6
)
Basic and diluted loss per common share $ (0.21
)
$ (0.10
)
$ (0.37
)
$ (0.22
)
Weighted average number of common shares outstanding:  
 
 
 
Basic and diluted 412,379,628
374,169,802
395,684,062
373,611,830

See Accompanying Notes to Unaudited Consolidated Financial Statements

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Table of Contents

REVLON, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
AND COMPREHENSIVE LOSS
(dollars in millions)


  Common
Stock
Additional
Paid-In-Capital
Treasury
Stock
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Stockholders’
Deficiency
Balance, January 1, 2006 $ 3.7
$ 764.8
$ (0.8
)
$ (1,741.9
)
$ (121.7
)
$ (1,095.9
)
Net proceeds from Rights Offering 0.4
106.8
 
 
 
107.2
Treasury stock acquired, at
cost (1)
 
 
(0.6
)
 
 
(0.6
)
Stock option compensation  
4.5
 
 
 
4.5
Exercise of stock options for common stock  
0.2
 
 
 
0.2
Amortization of deferred compensation for restricted stock  
2.6
 
 
 
2.6
Comprehensive loss:  
 
 
 
 
 
Net loss  
 
 
(145.3
)
 
(145.3
)
Revaluation of foreign currency forward exchange contracts  
 
 
 
0.6
0.6
Currency translation adjustment  
 
 
 
0.1
0.1
Total comprehensive loss  
 
 
 
 
(144.6
)
Balance, June 30, 2006 $ 4.1
$ 878.9
$ (1.4
)
$ (1,887.2
)
$ (121.0
)
$ (1,126.6
)
(1) Amount relates to 174,451 shares of Revlon, Inc. Class A Common Stock withheld from certain executives to satisfy the minimum statutory tax withholding requirements related to the vesting of shares of restricted stock (see Note 2, ‘‘Stock Compensation Plan’’ to the Unaudited Consolidated Financial Statements).

See Accompanying Notes to Unaudited Consolidated Financial Statements

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Table of Contents

REVLON, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)


  Six Months Ended
June 30,
  2006 2005
CASH FLOWS FROM OPERATING ACTIVITIES:  
 
Net loss $ (145.3
)
$ (82.6
)
Adjustments to reconcile net loss to net cash used for operating activities:  
 
Depreciation and amortization 54.8
48.6
Amortization of debt discount 0.3
Stock compensation amortization 7.1
3.1
Loss on early extinguishment of debt 0.4
9.0
Change in assets and liabilities:  
 
Decrease in trade receivables 110.4
47.5
Increase in inventories (8.3
)
(39.7
)
Decrease (increase) in prepaid expenses and other current assets 0.7
(0.3
)
(Decrease) increase in accounts payable (17.9
)
6.9
Decrease in accrued expenses and other current liabilities (50.3
)
(23.6
)
Purchase of permanent displays (68.9
)
(28.5
)
Other, net 21.5
12.8
Net cash used for operating activities (95.5
)
(46.8
)
CASH FLOWS FROM INVESTING ACTIVITIES:  
 
Capital expenditures (11.3
)
(9.6
)
Investment in debt defeasance trust
(197.9
)
Liquidation of investment in debt defeasance trust
197.9
Net cash used for investing activities (11.3
)
(9.6
)
CASH FLOWS FROM FINANCING ACTIVITIES:  
 
Net (decrease) increase in short-term borrowings and overdraft (2.7
)
2.2
Borrowings under the Multi-Currency Facility, net 104.6
Proceeds from the issuance of long-term debt
310.0
Repayment of long-term debt, including prepayment fee and premiums (109.7
)
(297.9
)
Payment of financing costs (3.3
)
(8.9
)
Net proceeds from the 2006 Rights Offering 107.2
Proceeds from exercise of stock options for common stock 0.2
Net cash provided by financing activities 96.3
5.4
Effect of exchange rate changes on cash and cash equivalents (0.8
)
(3.1
)
Net decrease in cash and cash equivalents (11.3
)
(54.1
)
Cash and cash equivalents at beginning of period 32.5
120.8
Cash and cash equivalents at end of period $ 21.2
$ 66.7
Supplemental schedule of cash flow information:  
 
Cash paid during the period for:  
 
Interest $ 72.7
$ 60.3
Income taxes, net of refunds $ 8.0
$ 8.1
Supplemental schedule of noncash investing and financing activities:  
 
Treasury stock received to satisfy tax withholding liabilities $ 0.6
$ 0.6

See Accompanying Notes to Unaudited Consolidated Financial Statements

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Table of Contents

REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except per share amounts)

(1) Basis of Presentation

Revlon, Inc. (and together with its subsidiaries, the ‘‘Company’’) conducts its business exclusively through its direct wholly-owned operating subsidiary, Revlon Consumer Products Corporation and its subsidiaries (‘‘Products Corporation’’). The Company manufactures and sells an extensive array of cosmetics, skincare, fragrances, beauty tools, hair color, anti-perspirants/deodorants and other personal care products. The Company's principal customers include large mass volume retailers and chain drug stores, as well as certain department stores and other specialty stores, such as perfumeries. The Company also sells consumer products to U.S. military exchanges and commissaries and has a licensing group, pursuant to which the Company licenses certain of its key brand names to third parties for complementary beauty-related products and accessories.

Revlon, Inc. is an indirect majority-owned subsidiary of MacAndrews & Forbes Holdings Inc. (‘‘MacAndrews & Forbes Holdings’’ and, together with its affiliates, ‘‘MacAndrews & Forbes’’), a corporation wholly-owned by Ronald O. Perelman.

The accompanying Consolidated Financial Statements are unaudited. In management’s opinion, all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation have been made. The Unaudited Consolidated Financial Statements include the accounts of the Company after elimination of all material intercompany balances and transactions.

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from these estimates. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Significant estimates made in the accompanying Unaudited Consolidated Financial Statements include, but are not limited to, allowances for doubtful accounts, inventory valuation reserves, expected sales returns and allowances, certain assumptions related to the recoverability of intangible and long-lived assets, reserves for estimated tax liabilities, certain estimates and assumptions used in the calculation of the fair value of stock options issued to employees and the derived compensation expense and certain estimates regarding the calculation of the net periodic benefit costs and the projected benefit obligation for the Company’s pension and other post-retirement plans. The Unaudited Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

The results of operations and financial position, including working capital, for interim periods are not necessarily indicative of those to be expected for a full year.

Certain prior year amounts have been reclassified to conform to the current period's presentation, due to the transfer, during the second quarter of 2006, of management responsibility for the Company’s Canadian operations from the Company’s North American operations to the European region of its international operations.

Stock-Based Compensation

Prior to January 1, 2006 (including the three- and six-month periods ended June 30, 2005), the Company applied the intrinsic value method as outlined in Accounting Principles Board (‘‘APB’’) Opinion No. 25, ‘‘Accounting for Stock Issued to Employees’’ (‘‘APB No. 25’’) and related interpretations in accounting for stock options granted. Under the intrinsic value method, no compensation expense was recognized in fiscal periods ended prior to January 1, 2006 if the exercise price of the Company’s employee stock options was greater than or equal to the market price of Revlon, Inc.’s Class A common stock, par value of $0.01 per share (the ‘‘Class A Common Stock’’) on the date of the grant. Since all options granted under Revlon, Inc.’s Stock Plan (as hereinafter defined) had an exercise price equal to the market value

6




Table of Contents

REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except per share amounts)

of the underlying Class A Common Stock on the date of grant, no compensation expense was recognized in the accompanying consolidated statements of operations for the fiscal periods ended on or before December 31, 2005 (including the three- and six-month periods ended June 30, 2005) on stock options granted to employees.

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (‘‘SFAS’’) No. 123(R), ‘‘Share-Based Payment’’ (‘‘SFAS No. 123(R)’’). This statement, which replaces SFAS No. 123, ‘‘Accounting for Stock-Based Compensation’’ (‘‘SFAS No. 123’’) and supersedes APB No. 25. SFAS No. 123(R), requires that effective for fiscal periods ending after December 31, 2005 all stock-based compensation be recognized as an expense, net of the effect of expected forfeitures, in the financial statements and that such expense be measured at the fair value of the Company’s stock-based awards. The Company uses the modified prospective method of application, which requires recognition of compensation expense on a prospective basis. Therefore, the Company’s financial statements for fiscal periods ended on or before December 31, 2005 have not been restated to reflect compensation expense in respect of awards of stock options under the Stock Plan. Under this method, in addition to reflecting compensation expense for new share-based awards granted on or after January 1, 2006, expense is also recognized to reflect the remaining service period (generally, the vesting period of the award) of awards that had been included in the Company’s pro forma disclosures in fiscal periods ended on or before December 31, 2005. SFAS No. 123(R) also requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows. For the six-month period ended June 30, 2006, no adjustments have been made to the cash flow statement, as any excess tax benefits that would have been realized have been fully provided for, given the Company’s historical losses and deferred tax valuation allowance.

        Recent Accounting Pronouncements

In June 2006, the FASB issued Financial Interpretation Number (‘‘FIN’’) 48, ‘‘Accounting for Uncertainty in Income Taxes – an interpretation of SFAS No. 109’’. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of FIN 48.

(2) Stock Compensation Plan

The Company maintains an Amended and Restated Revlon, Inc. Stock Plan (the ‘‘Stock Plan’’) which provides for the issuance of awards of shares of Revlon, Inc.'s Class A Common Stock in the form of stock options, stock appreciation rights and restricted or unrestricted stock to eligible employees and directors of Revlon, Inc. and its subsidiaries, including Products Corporation.

Stock options

Total net stock option compensation expense includes amounts attributable to the granting of, and the remaining requisite service period of, stock options issued under the Stock Plan, which awards were unvested at January 1, 2006 or granted on or after such date. Net stock option compensation expense in the three- and six-month periods ended June 30, 2006 was $2.1 million and $4.5 million, or $0.01 and $0.01, respectively, for both basic and diluted earnings per share. As of June 30, 2006, the total unrecognized stock option compensation expense related to unvested stock options in the aggregate was $8.8 million.

Prior to the Company's adoption of SFAS No. 123(R), SFAS No. 123 required that the Company provide pro forma information regarding net loss and net loss per common share as if compensation

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Table of Contents

REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except per share amounts)

expense for the Company's stock-based awards had been determined in accordance with the fair value method prescribed therein. The Company had previously adopted the disclosure portion of SFAS No. 148, ‘‘Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statements No. 123’’ (‘‘SFAS No. 148’’), requiring quarterly SFAS No. 123 pro forma disclosure. The pro forma charge for compensation expense related to stock-based awards granted was recognized over the service period. For stock options, the service period represents the period of time between the date of grant and the date each stock option becomes exercisable without consideration of acceleration provisions (e.g., retirement, change of control and similar types of acceleration events).

A summary of the status of stock option grants under the Stock Plan as of June 30, 2006 and changes during the six-month period then ended is presented below:


  Shares
(000’s)
Weighted Average
Exercise Price
Outstanding at January 1, 2006 33,033.1
$ 4.25
Granted 12.5
3.05
Exercised (47.2
)
3.02
Forfeited and expired (593.2
)
4.84
Outstanding at March 31, 2006 32,405.2
4.24
Granted 10.0
1.46
Exercised (13.3
)
2.59
Forfeited and expired (1,351.8
)
3.51
Outstanding at June 30, 2006 31,050.1
4.27

The weighted average grant date fair value of options granted during the six-month periods ended June 30, 2006 and 2005 approximated $1.30 and $1.37, respectively, and was estimated using the Black-Scholes option valuation model with the following weighted-average assumptions:


  Six Months Ended June 30,
  2006 2005
Expected life of option (a) 4.75 years 4.75 years
Risk-free interest rate (b) 4.84
%
3.95
%
Expected volatility (c) 64
%
61
%
Expected dividend yield (d) N/A
N/A
(a) The expected life of an option is calculated using a formula based on the vesting term and contractual life of the option.
(b) The risk-free interest rate is based upon the rate in effect at the time of the option grant on a zero coupon U.S. Treasury bill for periods approximating the expected life of the option.
(c) Expected volatility is based on the daily historical volatility of the NYSE closing price of the Company’s Class A Common Stock price over the expected life of the option.
(d) Assumes a dividend rate of nil on the Company’s Class A Common Stock for options granted during the six-month periods ended June 30, 2006 and 2005, respectively.

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Table of Contents

REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except per share amounts)

The following table summarizes information about the Stock Plan's options outstanding at June 30, 2006:


  Outstanding Exercisable
Range of
Exercise Prices
Number of
Options (000’s)
Weighted
Average Years
Remaining
Weighted
Average
Exercise Price
Number of
Options
(000’s)
Weighted
Average
Exercise Price
$  1.46 to $  3.78 27,832.4
5.09
$ 2.99
13,869.7
$ 3.07
    3.82 to     6.88 1,400.6
5.36
4.84
972.1
5.28
    7.06 to   15.00 992.4
3.38
10.62
992.4
10.62
  18.50 to   50.00 824.7
1.44
38.85
824.7
38.85
    1.46 to   50.00 31,050.1
 
 
16,658.9
 

Restricted stock awards

The Stock Plan also allows for awards of restricted stock to employees and directors of Revlon, Inc. and its subsidiaries, including Products Corporation. The restricted stock awards vest over service periods that range from three to five years.

A summary of the status of grants of restricted stock under the Stock Plan and Supplemental Stock Plan (as hereinafter defined) as of June 30, 2006 and changes during the six-month period then ended is presented below:


  Shares
(000’s)
Outstanding at January 1, 2006 3,810.0
Granted
Vested (a)(b) (300.0
)
Forfeited and expired
Outstanding at March 31, 2006 3,510.0
Granted
Vested (b) (1,421.7
)
Forfeited and expired (63.3
)
Outstanding at June 30, 2006 2,025.0
(a) Of the amount vested during the three-month period ended March 31, 2006, 17,594 shares were withheld by the Company to satisfy a certain grantee’s minimum withholding tax requirements. (See discussion under ‘‘Treasury Stock’’ below).
(b) Of the amount vested during the three- and six-month periods ended June 30, 2006, 156,857 and 174,451 shares, respectively were withheld by the Company to satisfy certain grantees’ minimum withholding tax requirements. (See discussion under ‘‘Treasury Stock’’ below).

In 2002, Revlon, Inc. adopted the Revlon, Inc. 2002 Supplemental Stock Plan (the ‘‘Supplemental Stock Plan’’), the purpose of which was to provide Mr. Jack Stahl, the sole eligible participant, with inducement awards to entice him to join the Company as its President and Chief Executive Officer to enhance the Company's long-term performance and profitability. The Supplemental Stock Plan covers 530,000 shares of Class A Common Stock. All of the 530,000 shares were issued in the form of restricted shares of Class A Common Stock to Mr. Stahl in February 2002. The terms of the Supplemental Stock Plan and the foregoing grant of restricted shares to Mr. Stahl are substantially the same as the terms and

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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except per share amounts)

grants under the Stock Plan. Pursuant to the terms of the Supplemental Stock Plan, such grant was made conditioned upon his execution of the Company's standard Employee Agreement as to Confidentiality and Non-Competition.

Generally, no dividends will be paid on unvested restricted stock, provided, however, that in connection with the 2002 grants to Mr. Stahl of 470,000 shares of restricted stock under the Stock Plan and 530,000 shares of restricted stock under the Supplemental Stock Plan (of which an aggregate 500,000 shares of restricted stock from both plans remained unvested at June 30, 2006), in the event any cash or in-kind distributions are made in respect of Common Stock (as hereinafter defined) prior to the lapse of the restrictions on such shares, such dividends will be held by the Company and paid to Mr. Stahl when and if such restrictions lapse.

The Company recognizes non-cash compensation expense related to restricted stock awards under the Stock Plan and Supplemental Stock Plan using the straight-line method over the remaining service period. The Company recorded compensation expense related to restricted stock awards under the Stock Plan and Supplemental Stock Plan of $2.6 million and $2.9 million during the six-month periods ended June 30, 2006 and 2005, respectively. The deferred stock-based compensation related to restricted stock awards is $3.8 million at June 30, 2006. At June 30, 2006, there were 2,025,004 shares of restricted stock unvested under the Stock Plan and the Supplemental Stock Plan.

Treasury stock

In the first and second fiscal quarters of 2006, certain executives, in lieu of paying withholding taxes on the vesting of certain restricted stock, authorized the withholding of an aggregate 17,594 and 156,857 shares, respectively, of Revlon, Inc. Class A Common Stock to satisfy the minimum statutory tax withholding requirements related to such vesting in accordance with the share withholding provisions of the Stock Plan. These shares were recorded as treasury stock using the cost method, at $3.56 and $3.16 per share, respectively, the market price on the respective vesting dates, for a total of approximately $0.1 and $0.5 million, respectively.

Pro forma net loss

The following table illustrates the effect on net loss and net loss per basic and diluted common share as if the Company had applied the fair value method to its stock-based compensation under the disclosure provisions of SFAS No. 123 and amended disclosure provisions of SFAS No. 148:


  Three Months Ended
June 30, 2005
Six Months Ended
June 30, 2005
Net loss as reported $ (35.8
)
$ (82.6
)
Add: Stock-based employee compensation expense included in reported net loss 1.4
3.1
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards (5.2
)
(10.9
)
Pro forma net loss $ (39.6
)
$ (90.4
)
Basic and diluted loss per common share:  
 
As reported $ (0.10
)
$ (0.22
)
Pro forma $ (0.11
)
$ (0.24
)

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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except per share amounts)

(3) Post-retirement Benefits

The Company sponsors pension plans and certain other post-retirement benefit plans for a substantial portion of its U.S. employees, as well as certain other non-U.S. employees. Relevant aspects of these plans are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. Currently, the Company expects to contribute approximately $32.3 million to its pension plans and approximately $1.0 million to other post-retirement plans in 2006.

The components of net periodic benefit cost for the pension and the other post-retirement benefit plans for the three-month periods ended June 30, 2006 and 2005, respectively, are as follows:


  Pension Plans Other
Post-retirement
Benefit Plans
  2006 2005 2006 2005
Service cost $ 2.6
$ 2.6
$ 0.1
$
Interest cost 7.9
7.8
0.2
0.2
Expected return on plan assets (7.9
)
(7.1
)
Amortization of prior service cost (0.1
)
(0.1
)
Amortization of actuarial loss 1.7
2.0
  4.2
5.2
0.3
0.2
Portion allocated to Revlon Holdings LLC (0.1
)
(0.1
)
  $ 4.1
$ 5.1
$ 0.3
$ 0.2

The components of net periodic benefit cost for the pension and the other post-retirement benefit plans for the six-month periods ended June 30, 2006 and 2005, respectively, are as follows:


  Pension Plans Other
Post-retirement
Benefit Plans
  2006 2005 2006 2005
Service cost $ 5.2
$ 5.2
$ 0.1
$ (0.2
)
Interest cost 15.8
15.6
0.4
0.3
Expected return on plan assets (15.8
)
(14.2
)
Amortization of prior service cost (0.2
)
(0.2
)
Amortization of actuarial loss 3.4
4.0
  8.4
10.4
0.5
0.1
Portion allocated to Revlon Holdings LLC (0.1
)
(0.1
)
  $ 8.3
$ 10.3
$ 0.5
$ 0.1

(4) Inventories


  June 30,
2006
December 31,
2005
Raw materials and supplies $ 59.1
$ 60.7
Work-in-process 18.7
17.6
Finished goods 152.4
142.3
  $ 230.2
$ 220.6

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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except per share amounts)

(5) Basic and Diluted Loss Per Common Share

Shares used in basic loss per share are computed using the weighted average number of common shares outstanding each period. Shares used in diluted loss per share include the dilutive effect of unvested restricted shares and outstanding stock options using the treasury stock method, if dilutive. Options to purchase 31,050,114 and 33,565,276 shares of Class A Common Stock with weighted average exercise prices of $4.27 and $4.24, respectively, were outstanding at June 30, 2006 and 2005, respectively. Additionally, 2,025,004 and 4,095,002 shares of unvested restricted stock were outstanding as of June 30, 2006 and 2005, respectively. Because the Company incurred losses for the three- and six-month periods ended June 30, 2006 and 2005, respectively, these shares are excluded from the calculation of diluted loss per common share as their effect would be antidilutive. As a result of the consummation of the Rights Offering (See Note 11), Revlon, Inc. issued a total of 39,285,714 shares of its Class A Common Stock. As of June 30, 2006, Revlon, Inc. had issued and outstanding 381,319,745 shares of Class A Common Stock and the total number of shares of common stock outstanding as of such date, including Revlon, Inc.'s existing 31,250,000 shares of Class B common stock, with a par value of $0.01 per share (‘‘Class B Common Stock,’’ and together with the Class A Common Stock, the ‘‘Common Stock’’), was 412,569,745 shares of Common Stock. MacAndrews & Forbes beneficially owned as of such date approximately 56% of Revlon, Inc.'s outstanding Class A Common Stock and approximately 60% of Revlon, Inc.’s total outstanding Common Stock, which together represent approximately 76% of the combined voting power of such shares as of such date. Upon consummation of the Rights Offering, the fair value of Revlon, Inc.’s Class A Common Stock was more than the Rights Offering’s $2.80 per share subscription price. Accordingly, basic and diluted loss per common share has been restated for the three- and six-month periods ended June 30, 2005, to reflect a stock dividend of 2,929,501 and 2,925,132 shares, respectively, of Revlon, Inc.’s Class A Common Stock.

For each period presented, the amount of loss used in the calculation of diluted loss per common share was the same as the amount of loss used in the calculation of basic loss per common share.

(6) Comprehensive Loss

The components of comprehensive loss for the three- and six-month periods ended June 30, 2006 and 2005, respectively, are as follows:


  Three Months Ended
June 30,
Six Months Ended
June 30,
  2006 2005 2006 2005
Net loss $ (87.1
)
$ (35.8
)
$ (145.3
)
$ (82.6
)
Other comprehensive (loss) income:  
 
 
 
Revaluation of foreign currency forward exchange contracts
1.5
0.6
2.6
Currency translation adjustment 0.1
(3.5
)
0.1
(5.0
)
Other comprehensive (loss) income 0.1
(2.0
)
0.7
(2.4
)
Comprehensive loss $ (87.0
)
$ (37.8
)
$ (144.6
)
$ (85.0
)

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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except per share amounts)

(7) Restructuring Costs, Net

During the six-month period ended June 30, 2006, the Company recorded net charges of $9.5 million, primarily for employee severance and other personnel benefits related to the organizational realignment announced by Revlon, Inc. in February 2006. The organizational realignment largely involved the consolidation of certain functions within the Company’s sales, marketing and creative groups, as well as certain headquarters functions, which changes were designed to streamline internal processes and to enable the Company to continue to be more effective and efficient in meeting the needs of its consumers and retail customers (the ‘‘2006 program’’). During the six months ended June 30, 2005, the Company recorded $1.5 million in restructuring expense for employee severance and other personnel benefits related to the 2004 program.

Details of the activities described above during the six-month period ended June 30, 2006 are as follows:


  Balance
as of
January 1,
2006
Expenses,
Net
Utilized, Net Balance
as of
June 30,
2006
  Cash Noncash
Employee severance and other personnel benefits:  
 
 
 
2003 program $ 1.2
$
$ (0.6
)
$
$ 0.6
2004 program 2.4
(0.7
)
1.7
2006 program
9.7
(3.5
)
6.2
  3.6
9.7
(4.8
)
8.5
Leases and equipment write-offs 0.6
(0.2
)
0.4
  $ 4.2
$ 9.5
$ (4.8
)
$
$ 8.9

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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except per share amounts)

(8) Geographic Information

The Company manages its business on the basis of one reportable operating segment. The Company has operations established in 16 countries outside of the U.S. and its products are sold throughout the world. Certain prior year amounts have been reclassified to conform to the current period's presentation, due to the transfer, during the second quarter of 2006, of management responsibility for the Company’s Canadian operations from the Company’s North American operations to the European region of its international operations.


  Three Months Ended
June 30,
Six Months Ended
June 30,
  2006 2005 2006 2005
Geographic area:        
Net sales:  
 
 
 
United States $ 180.0
$ 181.2
$ 378.3
$ 360.5
International 141.1
137.1
268.3
258.7
  $ 321.1
$ 318.3
$ 646.6
$ 619.2

  June 30,
2006
December 31,
2005
                        
Long-lived assets:  
 
 
United States $ 389.4
$ 366.9
 
International 90.0
84.8
 
  $ 479.4
$ 451.7
 

  Three Months Ended
June 30,
Six Months Ended
June 30,
  2006 2005 2006 2005
Classes of similar products:        
Net sales:  
 
 
 
Cosmetics, skin care and fragrances $ 197.5
$ 208.6
$ 414.1
$ 409.8
Personal care 123.6
109.7
232.5
209.4
  $ 321.1
$ 318.3
$ 646.6
$ 619.2

(9) Derivative Financial Instruments

The Company uses derivative financial instruments, primarily foreign currency forward exchange contracts, to reduce the effects of fluctuations in foreign currency exchange rates. These contracts, which have been designated as cash flow hedges, were entered into primarily to hedge anticipated inventory purchases and certain intercompany payments denominated in foreign currencies and have maturities of less than one year. Any unrecognized income (loss) related to these contracts is recorded in the Statement of Operations primarily in cost of goods sold when the underlying transactions hedged are realized (e.g., when inventory is sold or intercompany transactions are settled). Products Corporation enters into these contracts with counterparties that are major financial institutions, and accordingly the Company believes that the risk of counterparty nonperformance is remote. The notional amount of the foreign currency forward exchange contracts outstanding at June 30, 2006 and December 31, 2005 was $37.4 million and $31.9 million, respectively. The fair value of the foreign currency forward exchange contracts outstanding at June 30, 2006 and December 31, 2005 was $0.4 million and $(0.2) million, respectively.

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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except per share amounts)

(10) Long-term Debt


  June 30,
2006
December 31,
2005
2004 Credit Agreement:  
 
Term Loan Facility due 2010 $ 700.0
$ 700.0
Multi-Currency Facility due 2009 104.6
8 5/8% Senior Subordinated Notes due 2008 217.4
327.0
9½% Senior Notes due 2011, net of discounts 386.6
386.4
2004 Consolidated MacAndrews & Forbes Line of Credit
  1,408.6
1,413.4
Less current portion (5.3
)
  $ 1,403.3
$ 1,413.4

Amendment to Credit Agreement

In February 2006, Products Corporation secured an amendment to the credit agreement that it and certain of its subsidiaries entered into in 2004 with a syndicate of lenders and Citicorp USA, Inc., as multi-currency administrative agent, term loan administrative agent and collateral agent (the ‘‘2004 Credit Agreement’’). The amendment excludes from various financial covenants certain charges in connection with Products Corporation’s organizational realignment announced in February 2006 described in Note 7 above, as well as some start-up costs incurred by the Company in 2005 related to the launch of its Vital Radiance brand and the re-stage of the Almay brand. Specifically, the amendment provides for the add-back to the definition of ‘‘EBITDA’’ the lesser of (i) $50 million; or (ii) the cumulative one-time charges associated with (a) the aforementioned February 2006 organizational realignment and (b) the non-recurring costs in the third and fourth quarters of 2005 associated with the launch of the Company's Vital Radiance brand and the re-stage of the Almay brand. Under the 2004 Credit Agreement, EBITDA is used in the determination of Products Corporation's senior secured leverage ratio and the consolidated fixed charge coverage ratio. (See also ‘‘Subsequent Events’’, Note 12 for a description of a second amendment to the 2004 Credit Agreement).

Products Corporation’s 2004 Credit Agreement originally provided up to $960.0 million, which consisted of a term loan facility of $800.0 million (the ‘‘Term Loan Facility’’) and a $160.0 million asset-based, multi-currency revolving credit facility (the ‘‘Multi-Currency Facility’’ and, together with the Term Loan Facility, the ‘‘2004 Credit Facilities’’). Availability under the Multi-Currency Facility varies based upon the borrowing base that is determined by the value of eligible accounts receivable, eligible inventory and eligible real property and equipment in the U.S. and the U.K. from time to time. In March 2005, the Term Loan Facility was reduced to $700.0 million following Products Corporation’s March 2005 prepayment of $100.0 million and in July 2006, as described in ‘‘Subsequent Events’’ in Note 12 to the Unaudited Consolidated Financial Statements, the Term Loan Facility was increased to $800 million as a result of the $100 million Term Loan Add-on (as hereinafter defined). Products Corporation may request the Multi-Currency Facility to be increased from time to time in an aggregate principal amount not to exceed $50.0 million subject to certain exceptions and subject to the lenders’ agreement.

The Multi-Currency Facility will terminate on July 9, 2009 and the loans under the Term Loan Facility will mature on July 9, 2010; provided that the 2004 Credit Agreement will terminate on October 30, 2007, if Products Corporation’s 8 5/8% Senior Subordinated Notes (as hereinafter defined) are not redeemed, repurchased, defeased or repaid on or before such date such that not more than $25.0 million in aggregate principal amount of the 8 5/8% Senior Subordinated Notes remain outstanding.

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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except per share amounts)

Redemption of 8 5/8% Senior Subordinated Notes

In March 2006, Revlon, Inc. completed its $110 million Rights Offering and promptly transferred the proceeds from the Rights Offering (as hereinafter defined) to Products Corporation which it used in April 2006, together with available cash, to complete the redemption of $109.7 million aggregate principal amount of its 8 5/8% Senior Subordinated Notes due 2008 (the ‘‘8 5/8% Senior Subordinated Notes’’) in satisfaction of the applicable requirements under its 2004 Credit Agreement, at an aggregate redemption price of $111.8 million, including $2.1 million of accrued and unpaid interest up to, but not including, the redemption date. Following such redemption there remained outstanding $217.4 million in aggregate principal amount of the 8 5/8% Senior Subordinated Notes.

(11) Rights Offering

In March 2006, Revlon, Inc. completed the $110 million rights offering (including the private placement to MacAndrews & Forbes, the ‘‘Rights Offering’’) that it launched in February 2006 which allowed stockholders to purchase additional shares of Class A Common Stock. The subscription price for each share of Class A Common Stock purchased in the Rights Offering, including shares purchased in the private placement by MacAndrews & Forbes, was $2.80 per share. Upon completing the Rights Offering, Revlon, Inc. promptly transferred the proceeds to Products Corporation, which it used as described under Note 10 – ‘‘Redemption of 8 5/8% Senior Subordinated Notes’’.

In completing the Rights Offering, Revlon, Inc. issued an additional 39,285,714 shares of its Class A Common Stock, including 15,885,662 shares subscribed for by public shareholders (other than MacAndrews & Forbes) and 23,400,052 shares issued to MacAndrews & Forbes in a private placement directly from Revlon, Inc. The shares issued to MacAndrews & Forbes represented the number of shares of Revlon, Inc.'s Class A Common Stock that MacAndrews & Forbes would otherwise have been entitled to purchase pursuant to its basic subscription privilege in the Rights Offering (which was approximately 60% of the shares of Revlon, Inc.'s Class A Common Stock offered in the Rights Offering).

(12) Subsequent Events

On July 28, 2006, Revlon, Inc. announced that Products Corporation had secured an amendment to its 2004 Credit Agreement to, among other things, add an additional $100 million to the 2004 Credit Agreement's Term Loan Facility (the ‘‘Term Loan Add-on’’). While not required, the amendment also reset the Senior Secured Leverage Ratio covenant to 5.5 to 1.0 through June 30, 2007, stepping down to 5.0 to 1.0 for the remainder of the term of the 2004 Credit Agreement. The amendment also amended the EBITDA definition to enable Products Corporation to exclude up to $25 million related to restructuring charges (in addition to the restructuring charges permitted to be added back pursuant to the first amendment to the 2004 Credit Agreement – See Note 10) and charges for certain product returns and/or product discontinuances. The Company used the net proceeds from the Term Loan Add-on to repay amounts outstanding under the Multi-Currency Facility, without any reduction in the commitment under that facility.

In July 2006, Revlon, Inc. also reiterated that it currently intends to conduct a further $75 million equity issuance in late 2006 or early 2007, the net proceeds of which are intended to be used to reduce Products Corporation's indebtedness. As previously disclosed, the backstop obligations of MacAndrews & Forbes under the 2004 Investment Agreement between Revlon, Inc. and MacAndrews & Forbes will remain in effect to ensure that Revlon, Inc. issues an additional $75 million of equity by March 31, 2007. The existing $87 million line of credit from MacAndrews & Forbes, which was undrawn as of June 30, 2006, will remain available to Products Corporation through the completion of the $75 million equity issuance.

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REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except per share amounts)

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

        Overview of the Business

The Company is providing this overview in accordance with the SEC's December 2003 interpretive guidance regarding Management's Discussion and Analysis of Financial Condition and Results of Operations.

Revlon, Inc. (and together with its subsidiaries, the ‘‘Company’’) conducts its business exclusively through its direct wholly-owned operating subsidiary, Revlon Consumer Products Corporation and its subsidiaries (‘‘Products Corporation’’). Revlon, Inc. is an indirect majority-owned subsidiary of MacAndrews & Forbes Holdings Inc. (‘‘MacAndrews & Forbes Holdings’’ and, together with its affiliates, ‘‘MacAndrews & Forbes’’), a corporation wholly-owned by Ronald O. Perelman.

The Company operates in a single segment and manufactures, markets and sells an extensive array of cosmetics, skincare, fragrances, beauty tools, hair color, anti-perspirants/deodorants and other personal care products. The Company's principal customers include large mass volume retailers and chain drug and food stores, as well as certain department stores and other specialty stores, such as perfumeries. The Company also sells beauty products to U.S. military exchanges and commissaries and has a licensing group, pursuant to which the Company licenses certain of its key brand names to third parties for complementary beauty-related products and accessories.

Revlon is one of the world's leading mass-market beauty brands. Revlon believes that its global brand name recognition, product quality and marketing experience have enabled it to create one of the strongest consumer brand franchises in the world. The Company's products are sold worldwide and marketed under such brand names as Revlon, ColorStay, Fabulash, Super Lustrous and Revlon Age Defying makeup with Botafirm, as well as the re-staged Almay brand, including the Company’s Almay Intense i-Color collection, and the Company’s latest brand, Vital Radiance, in cosmetics; Almay, Ultima II and Gatineau in skincare; Charlie and Jean Naté in fragrances; Revlon and Expert Effect in beauty tools; Colorsilk and Custom Effects in hair color; and Mitchum, Flex and Bozzano in personal care products.

The Company’s objective is to increase revenues and achieve profitability over the long-term, capitalizing on actions taken during the earlier phases of its plan. The Company intends to assess and take appropriate actions toward this objective in response to marketplace conditions, including competitive activities. These actions include optimizing the effectiveness of all of its brands, including the Revlon brand across the various product categories in which it competes, including color cosmetics, women’s hair color, beauty tools and fragrances, as well as its newly-restaged Almay brand and its new Vital Radiance brand.

In July 2006, the Company announced that the performance of its Vital Radiance brand in large format mass retailers has been well below the Company’s expectations. In response, the Company is seeking to optimize the Vital Radiance brand in the categories and retail formats in which it has been most successful. Given the underperformance in certain stores, the Company announced that it expects a reduction of some of the retail space it gained for Vital Radiance. The Company’s plan moving forward for Vital Radiance is to focus resources on its revised retail footprint, its most effective marketing drivers and the most productive products in the line. As a result of the Company’s modified approach to Vital Radiance, the Company recorded charges in the second quarter of 2006 of approximately $25 million comprised of $11.2 million for returns and allowances associated with the Vital Radiance retail space reduction, approximately $6 million for returns and allowances related to the modification to the Vital Radiance brand for 2007 in connection with new product offerings, approximately $4.3 million of

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REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except per share amounts)

inventory obsolescence related to estimated excess inventory, and approximately $3.5 million for the acceleration of amortization and write-off of certain permanent displays, as well as the write-off of certain excess marketing and promotional materials.

In July 2006, the Company also indicated that the restage of its Almay brand, while tracking behind the Company's expectations, is contributing to consumption growth at retail in the first half of 2006, following the strong year the brand achieved in 2005. As a result of the less than expected performance of Almay, the Company recognized approximately $6.1 million of obsolescence charges in the second quarter of 2006 related to estimated excess inventory. The Company believes that Almay, with its restaged position in the marketplace, provides an important platform for future growth.

The Company has delayed the launch of its new fragrance for 2007 and it is currently evaluating various options for this launch. As a result of this delay, the Company recorded charges of approximately $1 million in the second quarter of 2006 primarily due to the write-off of certain marketing and promotional material.

The Company intends to continue to focus on the opportunities that the Company believes exist to increase its operating profit margin over time, with key areas of focus being actions intended to improve results in the areas of cost of goods sold and returns, as well as overhead and administrative expenses. The Company’s cost savings initiatives include, among other things, actions intended to improve product life cycle management, improve in-store merchandising, improve on cost of goods sold (through, among other things, value analysis, package rationalization and strategic sourcing), improve the effectiveness and efficiency of trade promotions, focus on savings from strategic procurement in general and administrative costs, optimize the Company’s international supply chain and optimize the Company's overall cost structure. In February 2006, Revlon, Inc. announced an organizational realignment largely involving the consolidation of certain functions within the Company’s U.S. sales, marketing and creative groups, as well as certain headquarters functions. These changes are designed to streamline internal processes to enable the Company to continue to be more effective and efficient in meeting the needs of its consumers and retail customers. The Company estimates that ongoing annualized savings associated with this realignment should be approximately $15 million, most of which the Company expects to realize in 2006. (See Note 7 to the Unaudited Consolidated Financial Statements).

Certain prior year amounts have been reclassified to conform to the current period's presentation, due to the transfer, during the second quarter of 2006, of management responsibility for the Company's Canadian operations from the Company’s North American operations to the European region of its international operations.

Overview of Net Sales and Earnings Results

Net sales in the second quarter of 2006 increased $2.8 million, or 0.9%, to $321.1 million, as compared with $318.3 million in the second quarter of 2005, driven by approximately $38 million of higher shipments and favorable foreign currency translation, partially offset by approximately $34 million of higher returns and allowances. Net sales for the first half of 2006 increased $27.4 million, or 4.4%, to $646.6 million, as compared with $619.2 million for the first half of 2005, driven by approximately $67 million of higher shipments and favorable foreign currency translation, partially offset by approximately $38 million of higher returns and allowances.

In the U.S., net sales for the second quarter of 2006 decreased $1.2 million, or 0.7%, to $180.0 million, from $181.2 million in the second quarter of 2005. In the first half of 2006, net sales increased $17.8 million, or 4.9%, to $378.3 million from $360.5 million in the first half of 2005. The decrease in net sales in the second quarter of 2006 was primarily due to approximately $17.3 million of higher returns and allowances related to the reduction of Vital Radiance retail distribution and modification to the offerings of Vital Radiance-branded products for 2007 new products and higher allowances and discounts primarily related

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REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except per share amounts)

to the Almay and Vital Radiance brands, partially offset by the higher dollar value of shipments of Revlon-branded cosmetics, Vital Radiance-branded cosmetics and key beauty care products, including hair color and beauty tools. The increase in net sales for the first half of 2006 was primarily due to the higher dollar value of shipments of color cosmetics, stemming from the Company’s re-stage of the Almay brand, and the launch of the Vital Radiance brand, and the higher dollar value of shipments of other key beauty care products, partially offset by the aforementioned approximately $17.3 million of higher returns and allowances related to Vital Radiance-branded products and higher allowances and discounts primarily related to the launch of the Almay and Vital Radiance brand initiatives.

In the Company’s international operations, net sales for the second quarter of 2006 increased $4.0 million, or 2.9%, to $141.1 million from $137.1 million in the second quarter of 2005. In the first half of 2006, net sales increased $9.6 million, or 3.7%, to $268.3 million from $258.7 million in the first half of 2005. The increase in net sales in the second quarter and first half of 2006, as compared with the second quarter and first half of 2005, was due primarily to the higher dollar value of shipments, partially offset by higher returns and allowances.

Net loss for the second quarter of 2006 increased $51.3 million to $87.1 million, as compared with a net loss of $35.8 million in the second quarter of 2005. In the first half of 2006 net loss increased $62.7 million to $145.3 million, as compared with a net loss of $82.6 million in the first half of 2005. The increase in net loss for the second quarter reflected the higher dollar value of shipments and lower compensation and other general and administrative expenses, which was more than offset by higher returns and allowances, increased inventory obsolescence charges, primarily related to estimated excess inventory of Almay and Vital Radiance-branded products, and higher selling, general and administrative expenses (‘‘SG&A’’), primarily related to higher advertising and promotion in support of the Almay and Vital Radiance brand initiatives. The increase in net loss for the first half of 2006 reflected the higher dollar value of shipments, which was more than offset by higher returns and allowances, inventory obsolescence charges primarily related to the aforementioned Almay and Vital Radiance-branded products, higher SG&A primarily related to advertising and promotion expense incurred to support the launch of the Almay and Vital Radiance brand initiatives, higher restructuring expense and higher interest expense.

Overview of U.S. Market Share Data

In terms of U.S. marketplace performance, the U.S. color cosmetics category for the second quarter of 2006 increased approximately 4.2% versus the second quarter of 2005 and 4.4% for the first half of 2006 versus the first half of 2005. Combined U.S. mass-market share for the Revlon, Almay and Vital Radiance brands totaled 22.0% for the second quarter of 2006, compared with 22.2% for the second quarter of 2005, with the Revlon brand registering a share of 14.2% for the second quarter of 2006, compared to 15.7% for the second quarter of 2005; the Almay brand registering a share of 6.4% for the second quarter of 2006, compared to 6.5% for the second quarter of 2005; and the newly-launched Vital Radiance brand registering a share of 1.4% for the second quarter of 2006, compared to nil for the 2005 period. Combined U.S. mass-market share for the Revlon, Almay, and Vital Radiance brands totaled 21.8% for the first half of 2006, compared with 22.2% for the first half of 2005, with the Revlon brand registering a share of 14.4% for the first half of 2006, compared to 15.6% for the first half of 2005; the Almay brand registering a share of 6.4% for the first half of 2006, compared to 6.5% for the first half of 2005; and the newly-launched Vital Radiance brand registering a share of 1.0% for the first half of 2006, compared to nil for the 2005 period. In women’s hair color and beauty tools, the Company gained market share in the second quarter of 2006, compared with the second quarter of 2005, increasing respectively, from a 8.5% market share for the second quarter of 2005 to 9.0% for the second quarter of 2006 and 25.6% market share for the second quarter of 2005 to 27.0% for the second quarter of 2006. Market share for anti-perspirants/deodorants was essentially even, at 6.4% in the second quarter of 2006, as compared to 6.3% in the second quarter of 2005.

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REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except per share amounts)

In women’s hair color and beauty tools, the Company gained market share in the first half of 2006, compared with the first half of 2005, increasing respectively, from a 8.4% market share for the first half of 2005 to 8.9% for the first half of 2006 and 25.1% market share for the first half of 2005 to 26.7% for the first half of 2006. Market share for anti-perspirants/deodorants was even, at 6.2% in the first half of 2006, as compared to 6.2% in the first half of 2005.

All U.S. market share and market position data herein for the Company's brands are based upon retail dollar sales, which are derived from ACNielsen data. ACNielsen measures retail sales volume of products sold in the U.S. mass-market distribution channel. Such data represent ACNielsen's estimates based upon data gathered by ACNielsen from market samples and are therefore subject to some degree of variance. ACNielsen's data does not reflect sales volume from Wal-Mart, Inc., which is the Company’s largest customer, representing approximately 24% of the Company's 2005 worldwide net sales. From time to time, ACNielsen adjusts its methodology for data collection and reporting, which may result in adjustments to the categories and market shares tracked by ACNielsen for both current and prior periods. The category and market share data contained herein has been updated to reflect ACNielsen's July 2005 adjustments.

Overview of Financing Activities

The Company’s plan includes actions intended to, among other things, strengthen the Company's balance sheet and capital structure. Many of these actions were accomplished during 2004, 2005 and the first half of 2006, including most recently the Rights Offering (as hereinafter defined) completed in March 2006 and the related redemption of approximately $110 million of Products Corporation's 8 5/8% Senior Subordinated Notes due 2008 (the ‘‘8 5/8% Senior Subordinated Notes’’) completed in April 2006. (See ‘‘Financial Condition, Liquidity and Capital Resources – 2006 Refinancing Transactions’’).

In March 2006, Revlon, Inc. completed its $110 million rights offering (including the private placement to MacAndrews & Forbes, the ‘‘Rights Offering’’) and issued an additional 39,285,714 shares of its Class A common stock, par value of $0.01 per share (the ‘‘Class A Common Stock’’), including 15,885,662 shares subscribed for by public shareholders and 23,400,052 shares issued to MacAndrews & Forbes in a private placement directly from Revlon, Inc. Revlon, Inc. promptly transferred the net proceeds of such Rights Offering to Products Corporation which it used in April 2006, together with available cash, to redeem $109.7 million in aggregate outstanding principal amount of its 8 5/8% Senior Subordinated Notes (See ‘‘Financial Condition, Liquidity and Capital Resources – 2006 Refinancing Transactions’’).

Recent Developments

On July 28, 2006, Revlon, Inc. announced that Products Corporation had secured an amendment to its 2004 Credit Agreement (as hereinafter defined) to, among other things, add an additional $100 million to the 2004 Credit Agreement's Term Loan Facility (as hereinafter defined) (the ‘‘Term Loan Add-on’’). While not required, the amendment also reset the Senior Secured Leverage Ratio covenant to 5.5 to 1.0 through June 30, 2007, stepping down to 5.0 to 1.0 for the remainder of the term of the 2004 Credit Agreement. The amendment also amended the EBITDA definition to enable Products Corporation to exclude up to $25 million related to restructuring charges (in addition to the restructuring charges permitted to be added back pursuant to the first amendment to the 2004 Credit Agreement – See Note 10 to the Unaudited Consolidated Financial Statements) and charges for certain product returns and/or product discontinuances. The Company used the net proceeds from the Term Loan Add-on to repay amounts outstanding under the Multi-Currency Facility (as hereinafter defined), without any reduction in the commitment under that facility.

In July 2006, Revlon, Inc. also reiterated that it currently intends to conduct a further $75 million equity issuance in late 2006 or early 2007, the net proceeds of which are intended to be used to reduce

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REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except per share amounts)

Products Corporation's indebtedness. As previously disclosed, the backstop obligations of MacAndrews & Forbes under the 2004 Investment Agreement between Revlon, Inc. and MacAndrews & Forbes will remain in effect to ensure that Revlon, Inc. issues an additional $75 million of equity by March 31, 2007. The existing $87 million line of credit from MacAndrews & Forbes, which was undrawn on June 30, 2006, will remain available to Products Corporation through the completion of the $75 million equity issuance.

Discussion of Critical Accounting Policies

Stock-Based Compensation

Prior to January 1, 2006 (including the fiscal quarter ended June 30, 2005), the Company applied the intrinsic value method as outlined in Accounting Principles Board (‘‘APB’’) Opinion No. 25, ‘‘Accounting for Stock Issued to Employees,’’ (‘‘APB No. 25’’) and related interpretations in accounting for stock options granted under the Company's Amended and Restated Revlon, Inc. Stock Plan (the ‘‘Stock Plan’’), which provides for the issuance of awards in the form of stock options, stock appreciation rights and restricted or unrestricted stock to eligible employees and directors of Revlon, Inc. and its subsidiaries, including Products Corporation. Under the intrinsic value method, no compensation expense was recognized in fiscal periods ended prior to January 1, 2006 if the exercise price of the Company’s employee stock options equaled the market price of Revlon, Inc.’s Class A Common Stock on the date of the grant. Since all options granted under Revlon, Inc.’s Stock Plan had an exercise price equal to the market value of the underlying Class A Common Stock on the date of grant, no compensation expense was recognized in the accompanying consolidated statements of operations for the fiscal periods ended on or before December 31, 2005 on stock options granted to employees.

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (‘‘SFAS’’) No. 123(R), ‘‘Share-Based Payment’’ (‘‘SFAS No. 123(R)’’). This statement, which replaces SFAS No. 123, ‘‘Accounting for Stock-Based Compensation’’ (‘‘SFAS No. 123’’) and supersedes APB No. 25. SFAS No. 123(R), requires that effective for fiscal periods ending after December 31, 2005 all stock-based compensation be recognized as an expense, net of the effect of expected forfeitures, in the financial statements and that such expense be measured at the fair value of the Company’s stock based awards. The Company uses the modified prospective method of application, which requires recognition of compensation expense on a prospective basis. Therefore, the Company’s financial statements for fiscal periods ended on or before December 31, 2005 have not been restated to reflect compensation expense in respect of awards of stock options under the Stock Plan. Under this method, in addition to reflecting compensation expense for new share-based awards granted on or after January 1, 2006, expense is also recognized to reflect the remaining service period (generally, the vesting period of the award) of awards that had been included in the Company's pro forma disclosures in fiscal periods ended on or before December 31, 2005. SFAS No. 123(R) also requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows. For the six-month period ended June 30, 2006, no adjustments have been made to the cash flow statement, as any excess tax benefits that would have been realized have been fully provided for, given the Company’s historical losses and deferred tax valuation allowance.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model based on the weighted-average assumptions listed in Note 2 to the Unaudited Consolidated Financial Statements. Expected volatilities are based on the daily historical volatility of the NYSE closing stock price of the Company’s Class A Common Stock, over the expected life of the option. The expected life of the options represents the period of time that options granted are expected to be outstanding, which the Company calculated using a formula based on the vesting term and the contractual life of the respective option. The risk-free interest rate for periods during the expected life of the option is based upon the rate in effect at the time of the grant on a zero coupon U.S. Treasury bill for periods

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Table of Contents

REVLON, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(all tabular amounts in millions, except per share amounts)

approximating the expected life of the option. If factors change and the Company employs different assumptions in the application of SFAS 123(R) in future periods, the compensation expense that the Company records under SFAS 123(R) may differ significantly from what has been recorded in the current period. In addition, judgment is also required in estimating the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, stock-based compensation expense and the Company’s results of operations could be materially impacted.

For a discussion of the Company’s other critical accounting policies, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Results of Operations

In the tables, numbers in parenthesis ( ) denote unfavorable variances. Certain prior year amounts have been reclassified to conform to the current period's presentation, due to the transfer, during the second quarter of 2006, of management responsibility for the Company's Canadian operations from the Company’s North American operations to the European region of its international operations.

Net sales:

Net sales in the second quarter of 2006 increased $2.8 million, or 0.9%, to $321.1 million, as compared with $318.3 million in the second quarter of 2005, driven by approximately $38 million of higher shipments and favorable foreign currency translation, partially offset by approximately $34 million of higher returns and allowances. Net sales for the first half of 2006 increased $27.4 million, or 4.4%, to $646.6 million, as compared with $619.2 million for the first half of 2005, driven by approximately $67 million of higher shipments and favorable foreign currency translation, partially offset by approximately $38 million of higher returns and allowances.


  Three Months Ended
June 30,
Change
  2006 2005 $ %
United States $ 180.0
$ 181.2
$ (1.2
)
(0.7
)
International 141.1
137.1
4.0
2.9
(1)
  $ 321.1
$ 318.3
$ 2.8
0.9
(2)