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 September 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 (I.R.S. Employer
incorporation or organization) 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 September 30, 2006, 381,450,845 shares of Class A Common Stock and 31,250,000 shares of Class B Common Stock were outstanding. 217,444,170 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.




REVLON, INC. AND SUBSIDIARIES

INDEX


PART I – Financial Information    
Item 1. Financial Statements    
  Consolidated Balance Sheets as of September 30, 2006 (Unaudited) and December 31, 2005 2  
  Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2006 and 2005 3  
  Unaudited Consolidated Statements of Stockholders' Deficiency and Comprehensive Loss for the Nine Months Ended September 30, 2006 4  
  Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 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 19  
Item 3. Quantitative and Qualitative Disclosures About Market Risk 36  
Item 4. Controls and Procedures 37  
PART II – Other Information    
Item 1A. Risk Factors 43  
Item 6. Exhibits 43  
  Signatures 44  



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)


  September 30,
2006
December 31,
2005
  (Unaudited)  
ASSETS        
Current assets:        
Cash and cash equivalents $ 23.9   $ 32.5  
Trade receivables, less allowances of $14.4 and $18.9 as of September 30, 2006 and December 31, 2005, respectively 166.9   282.2  
Inventories 206.9   220.6  
Prepaid expenses and other 56.5   56.7  
Total current assets 454.2   592.0  
Property, plant and equipment, net 119.1   119.7  
Other assets 165.2   146.0  
Goodwill, net 186.1   186.0  
Total assets $ 924.6   $ 1,043.7  
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY        
Current liabilities:        
Short-term borrowings $ 10.2   $ 9.0  
Current portion of long-term debt 8.1    
Accounts payable 99.8   133.1  
Accrued expenses and other 343.7   328.4  
Total current liabilities 461.8   470.5  
Long-term debt 1,446.8   1,413.4  
Other long-term liabilities 241.0   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 September 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 383,665,513 and 344,472,735 shares issued as of September 30, 2006 and December 31, 2005, respectively 3.8   3.4  
Additional paid-in capital 883.5   764.8  
Treasury stock, at cost; 429,666 and 236,315 shares of Class A Common Stock as of September 30, 2006 and December 31, 2005, respectively (1.4 )  (0.8 ) 
Accumulated deficit (1,987.7 )  (1,741.9 ) 
Accumulated other comprehensive loss (123.5 )  (121.7 ) 
Total stockholders’ deficiency (1,225.0 )  (1,095.9 ) 
Total liabilities and stockholders’ deficiency $ 924.6   $ 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
September 30,
Nine Months Ended
September 30,
  2006 2005 2006 2005
Net sales $ 305.9   $ 275.3   $ 952.5   $ 894.5  
Cost of sales 148.9   117.0   404.2   350.1  
Gross profit 157.0   158.3   548.3   544.4  
Selling, general and administrative expenses 200.4   190.6   645.3   577.6  
Restructuring costs and other, net 13.8     23.3   1.5  
Operating loss (57.2 )  (32.3 )  (120.3 )  (34.7 ) 
Other expenses (income):                
Interest expense 38.3   33.2   109.4   94.7  
Interest income (0.2 )  (1.4 )  (1.0 )  (4.8 ) 
Amortization of debt issuance costs 2.0   1.8   5.6   5.1  
Foreign currency gains, net (0.2 )  (2.7 )  (1.4 )  (1.4 ) 
Loss on early extinguishment of debt     0.4   9.0  
Miscellaneous, net 0.1   (0.1 )  0.5   1.5  
Other expenses, net 40.0   30.8   113.5   104.1  
Loss before income taxes (97.2 )  (63.1 )  (233.8 )  (138.8 ) 
Provision for income taxes 3.3   2.3   12.0   9.2  
Net loss $ (100.5 )  $ (65.4 )  $ (245.8 )  $ (148.0 ) 
Basic and diluted loss per common share $ (0.24 )  $ (0.17 )  $ (0.61 )  $ (0.40 ) 
Weighted average number of common shares outstanding:                
Basic and diluted 412,642,997   374,396,137   401,260,132   373,876,139  

See Accompanying Notes to Unaudited Consolidated Financial Statements

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Table of Contents

REVLON, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS 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     6.5               6.5  
Exercise of stock options for common stock     0.2               0.2  
Amortization of deferred compensation for restricted stock     5.2               5.2  
Comprehensive loss:                        
Net loss             (245.8 )      (245.8 ) 
Revaluation of foreign currency forward exchange contracts                 0.8   0.8  
Currency translation adjustment                 (2.6 )  (2.6 ) 
Total comprehensive loss                     (247.6 ) 
Balance, September 30, 2006 $ 4.1   $ 883.5   $ (1.4 )  $ (1,987.7 )  $ (123.5 )  $ (1,225.0 ) 
(1) Amount relates to 193,351 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)


  Nine Months Ended
September 30,
  2006 2005
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss $ (245.8 )  $ (148.0 ) 
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and amortization 84.2   75.3  
Amortization of debt discount 0.4   0.1  
Stock compensation amortization 11.7   4.4  
Loss on early extinguishment of debt 0.4   9.0  
Change in assets and liabilities:        
Decrease in trade receivables 115.5   38.4  
Decrease (increase) in inventories 14.1   (74.6 ) 
Decrease (increase) in prepaid expenses and other current assets 1.2   (3.1 ) 
Increase (decrease) in accounts payable (26.0 )  6.5  
Decrease in accrued expenses and other current liabilities (24.3 )  (3.1 ) 
Purchase of permanent displays (81.4 )  (38.7 ) 
Other, net 25.2   17.9  
Net cash used in operating activities (124.8 )  (115.9 ) 
CASH FLOWS FROM INVESTING ACTIVITIES:        
Capital expenditures (15.5 )  (16.0 ) 
Investment in debt defeasance trust   (197.9 ) 
Liquidation of investment in debt defeasance trust   197.9  
Net cash used in investing activities (15.5 )  (16.0 ) 
CASH FLOWS FROM FINANCING ACTIVITIES:        
Net (decrease) increase in short-term borrowings and overdraft (6.3 )  15.8  
Borrowings under the Multi-Currency Facility, net 50.7    
Borrowings under the Term Loan Facility 100.0    
Proceeds from the issuance of long-term debt   386.2  
Repayment of long-term debt, including prepayment fee and premiums (109.7 )  (297.9 ) 
Payment of financing costs (9.4 )  (12.0 ) 
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 132.7   92.1  
Effect of exchange rate changes on cash and cash equivalents (1.0 )  (3.3 ) 
Net decrease in cash and cash equivalents (8.6 )  (43.1 ) 
Cash and cash equivalents at beginning of period 32.5   120.8  
Cash and cash equivalents at end of period $ 23.9   $ 77.7  
Supplemental schedule of cash flow information:        
Cash paid during the period for:        
Interest $ 104.0   $ 92.2  
Income taxes, net of refunds $ 9.1   $ 9.1  
Supplemental schedule of non-cash investing and financing activities:        
Treasury stock received to satisfy minimum tax withholding liabilities $ 0.6   $ 0.8  

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 operates in a single segment and 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 and food 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 business, 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 other than the Company, ‘‘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, restructuring costs, 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, including 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 nine-month periods ended September 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

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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)

under Revlon, Inc.’s Stock Plan (as hereinafter defined) 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 (including the three- and nine-month periods ended September 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 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 and generally recognized over the grantee’s required service period. 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 nine-month period ended September 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 that FIN 48 could have on its results of operations or financial condition.

In September 2006, the FASB issued SFAS No. 157, ‘‘Fair Value Measurements.’’ This statement clarifies the definition of fair value of assets and liabilities, establishes a framework for measuring fair value of assets and liabilities, and expands the disclosures on fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that SFAS No. 157 could have on its results of operations or financial condition.

In September 2006, the FASB issued SFAS No. 158, ‘‘Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statement Nos. 87, 88, 106, and 132(R)’’. This Statement requires an employer to recognize the overfunded or underfunded status of a defined benefit post-retirement plan (other than a multi-employer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through other comprehensive income of a business entity. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit post-retirement plan and to provide the required disclosures as of the end of its fiscal years ending after December 15, 2006. SFAS No. 158 also requires an employer to measure plan assets and benefit

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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)

obligations as of the date of the employer’s fiscal year-end statement of financial position. This requirement is effective for fiscal years ending after December 15, 2008. The Company is currently evaluating the impact that SFAS No. 158 could have on its results of operations or financial condition.

In September 2006, the SEC issued Staff Accounting Bulletin (‘‘SAB’’) No. 108, ‘‘Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,’’ which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The SEC staff believes that registrants must quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB No. 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006, with earlier application encouraged for any interim period of the first fiscal year ending after November 15, 2006, filed after the publication of SAB No. 108 (September 13, 2006). The Company is currently evaluating the impact that SAB No. 108 could have on its results of operations or financial condition.

(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 affiliates, 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 nine-month periods ended September 30, 2006 was $2.0 million and $6.5 million (including, in each case, $1.4 million in relation to the departure of Jack Stahl, the Company’s former President and Chief Executive Officer, in September 2006), or $0.01 and $0.02, respectively, for both basic and diluted earnings per share. As of September 30, 2006, the total unrecognized stock option compensation expense related to unvested stock options in the aggregate was $4.1 million (which includes the write-off of unrecognized stock option compensation related to stock options that will be forfeited as a result of terminations of employment after September 30, 2006 primarily related to restructuring events under the September 2006 Program (as hereinafter defined)).

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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)

A summary of the status of stock option grants under the Stock Plan as of September 30, 2006 and changes during the nine-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  
Granted    
Exercised    
Forfeited and expired (a) (2,427.1 )  3.02  
Outstanding at September 30, 2006 28,623.0   4.38  
(a) Includes approximately 2,427,100 shares that were forfeited during the three-month period ended September 30, 2006 primarily in connection with the September 2006 Program and excludes the forfeiture (resulting from terminations of employment after September 30, 2006) of approximately 1,400,000 shares primarily related to restructuring events under the September 2006 Program.

The weighted average grant date fair value of options granted during the nine-month periods ended September 30, 2006 and 2005 approximated $1.30 and $1.38, respectively, and was estimated using the Black-Scholes option valuation model with the following weighted-average assumptions:


  Nine Months Ended
September 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 nine-month periods ended September 30, 2006 and 2005, 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)

The following table summarizes information about the Stock Plan's options outstanding at September 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 25,414.9   4.83   $ 2.99   13,131.8   $ 3.07  
  3.82 to   6.88 1,397.6   5.11   4.83   997.6   5.24  
  7.06 to 15.00 988.5   3.13   10.62   988.5   10.62  
18.50 to 50.00 822.0   1.19   38.88   822.0   38.88  
  1.46 to 50.00 28,623.0           15,939.9      

Restricted stock awards

The Stock Plan allows for awards of restricted stock to employees and directors of Revlon, Inc. and its affiliates, including Products Corporation. The restricted stock awards outstanding at September 30, 2006 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 September 30, 2006 and changes during the nine-month period then ended is presented below:


  Shares
(000’s)
Outstanding at January 1, 2006 3,810.0  
Granted  
Vested (a) (300.0 ) 
Forfeited and expired  
Outstanding at March 31, 2006 3,510.0  
Granted  
Vested (a)(b) (1,421.7 ) 
Forfeited and expired (63.3 ) 
Outstanding at June 30, 2006 2,025.0  
Granted  
Vested (a)(b)(c) (150.0 ) 
Forfeited and expired (d) (90.0 ) 
Outstanding at September 30, 2006 1,785.0  
(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).
(c) Of the amount vested during the three- and nine-month periods ended September 30, 2006,

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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)

18,900 and 193,351 shares, respectively, were withheld by the Company to satisfy certain grantees’ minimum withholding tax requirements. (See discussion under ‘‘Treasury Stock’’ below).
(d) Includes 90,002 shares that were forfeited in connection with the September 2006 Program and excludes the forfeiture (resulting from terminations of employment after September 30, 2006) of 163,334 shares primarily related to restructuring events under the September 2006 Program.

In 2002, Revlon, Inc. adopted the Revlon, Inc. 2002 Supplemental Stock Plan (the ‘‘Supplemental Stock Plan’’), the purpose of which was to provide Mr. Stahl, the sole eligible participant under the Supplemental Stock Plan, with inducement awards to entice him to join the Company. 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 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 September 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.

In connection with the departure of Mr. Stahl from the Company, pursuant to the terms of his separation agreement, the Company incurred charges of $3.2 million in the third quarter of 2006 within selling, general and administrative expenses (‘‘SG&A’’) for the accelerated amortization of his unvested stock options and unvested restricted stock. In addition, as a result of Mr. Stahl’s departure, pursuant to the terms of his employment agreement $6.2 million of other severance charges were also recorded within SG&A.

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 $5.2 million and $4.2 million during the nine-month periods ended September 30, 2006 and 2005, respectively. The deferred stock-based compensation related to restricted stock awards is $0.3 million at September 30, 2006 (which includes the write off of deferred stock-based compensation related to restricted share awards that will be forfeited as a result of terminations of employment after September 30, 2006 primarily related to restructuring events under the September 2006 Program). At September 30, 2006, there were 1,785,002 shares of unvested restricted stock under the Stock Plan and the Supplemental Stock Plan.

Treasury stock

In the first, second and third 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, 156,857 and 18,900 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, $3.16 and $1.28 per share, respectively, the market price on the respective vesting dates, for a total of approximately $0.1 million, $0.5 million and nil, 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)

Pro forma net loss

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 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).

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
September 30, 2005
Nine Months Ended
September 30, 2005
Net loss as reported $ (65.4 )  $ (148.0 ) 
Add: Stock-based employee compensation
expense included in reported net loss
1.3   4.4  
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards (5.7 )  (16.6 ) 
Pro forma net loss $ (69.8 )  $ (160.2 ) 
Basic and diluted loss per common share:        
As reported $ (0.17 )  $ (0.40 ) 
Pro forma $ (0.19 )  $ (0.43 ) 

(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 $31.4 million to its pension plans and approximately $1.0 million to other post-retirement plans in 2006.

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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)

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


  Three Months Ended
September 30,
  Pension Plans Other
Post-retirement
Benefit Plans
  2006 2005 2006 2005
Service cost $ 2.6   $ 2.4   $   $ 0.1  
Interest cost 7.9   7.7   0.3   0.2  
Expected return on plan assets (7.9 )  (7.1 )     
Amortization of prior service cost   (0.1 )     
Amortization of actuarial loss 1.6   1.8      
Curtailment gain (0.7 )       
  3.5   4.7   0.3   0.3  
Portion allocated to Revlon Holdings LLC        
Net periodic benefit cost $ 3.5   $ 4.7   $ 0.3   $ 0.3  

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


  Nine Months Ended
September 30,
  Pension Plans Other
Post-retirement
Benefit Plans
  2006 2005 2006 2005
Service cost $ 7.8   $ 7.6   $ 0.1   $ (0.1 ) 
Interest cost 23.7   23.3   0.7   0.5  
Expected return on plan assets (23.7 )  (21.3 )     
Amortization of prior service cost (0.2 )  (0.3 )     
Amortization of actuarial loss 5.0   5.8      
Curtailment gain (0.7 )       
  11.9   15.1   0.8   0.4  
Portion allocated to Revlon Holdings LLC (0.1 )  (0.1 )     
Net periodic benefit cost $ 11.8   $ 15.0   $ 0.8   $ 0.4  

(4) Inventories


  September 30,
2006
December 31,
2005
Raw materials and supplies $ 60.0   $ 60.7  
Work-in-process 18.1   17.6  
Finished goods 128.8   142.3  
  $ 206.9   $ 220.6  

(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

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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)

unvested restricted stock and outstanding stock options using the treasury stock method, if dilutive. Options to purchase 28,622,957 and 33,349,079 shares of Class A Common Stock with weighted average exercise prices of $4.38 and $4.24, respectively, were outstanding at September 30, 2006 and 2005, respectively. Additionally, 1,785,002 and 3,810,002 shares of unvested restricted stock were outstanding as of September 30, 2006 and 2005, respectively. As the Company incurred losses for the three- and nine-month periods ended September 30, 2006 and 2005, respectively, these shares are excluded from the calculation of diluted loss per common share as their effect would be antidilutive. 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. As a result of the consummation of the Rights Offering (See Note 11) in March 2006, Revlon, Inc. issued a total of 39,285,714 shares of its Class A Common Stock. As of September 30, 2006, Revlon, Inc. had issued and outstanding 381,450,845 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 412,700,845 shares of Common Stock. MacAndrews & Forbes beneficially owned as of such date approximately 57% 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 nine-month periods ended September 30, 2005, to reflect a stock dividend of 2,931,273 and 2,927,202 shares, respectively, of Revlon, Inc.’s Class A Common Stock.

(6) Comprehensive Loss

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


  Three Months Ended
September 30,
Nine Months Ended
September 30,
  2006 2005 2006 2005
Net loss $ (100.5 )  $ (65.4 )  $ (245.8 )  $ (148.0 ) 
Other comprehensive (loss) income:                
Revaluation of foreign currency forward exchange contracts 0.2   (0.4 )  0.8   2.2  
Currency translation adjustment (2.7 )  (1.5 )  (2.6 )  (6.5 ) 
Other comprehensive (loss) income (2.5 )  (1.9 )  (1.8 )  (4.3 ) 
Comprehensive loss $ (103.0 )  $ (67.3 )  $ (247.6 )  $ (152.3 ) 

(7) Restructuring Costs and Other, Net

During the nine-month period ended September 30, 2006, the Company recorded total restructuring charges of approximately $23.3 million, of which $13.5 million was associated with the restructuring announced in September 2006 (the ‘‘September 2006 Program’’), primarily for employee severance and other employee-related termination costs, and approximately $10.0 million was associated with the restructuring announced in February 2006 (the ‘‘February 2006 Program’’), primarily for employee severance and other employee-related termination costs.

The September 2006 Program is designed to reduce costs and improve the Company’s profit margins, largely through a broad organizational streamlining that involved consolidating responsibilities in certain

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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)

related functions and reducing layers of management to increase accountability and effectiveness; streamlining support functions to reflect the new organization structure; eliminating certain senior executive positions; and consolidating various facilities.

The February 2006 Program 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.

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


      Utilized, Net Balance
as of
September 30,
2006
  Balance
as of
January 1, 2006
Expenses,
Net
Cash Noncash
Employee severance and other personnel benefits:                    
2003 programs $ 1.2   $   $ (0.8 )  $   $ 0.4  
2004 programs 2.4     (2.2 )    0.2  
February 2006 Program   10.0   (5.1 )    4.9  
September 2006 Program   13.5       13.5  
  3.6   23.5   (8.1 )    19.0  
Lease obligations 0.6   (0.2 )  0.2   (0.2 )  0.4  
  $ 4.2   $ 23.3   $ (7.9 )  $ (0.2 )  $ 19.4  

As of September 30, 2006, the unpaid balance of the restructuring costs and other are included in ‘‘Accrued expenses and other’’ and ‘‘Other long-term liabilities’’ in the Company's Consolidated Balance Sheets. The remaining balance at September 30, 2006 for employee severance and other personnel benefits is $19.4 million, of which $6.1 million is expected to be paid by the end of 2006 and the remaining obligations of $13.3 million are expected to be paid through 2008.

(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, including 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
September 30,
Nine Months Ended
September 30,
  2006 2005 2006 2005
Geographic area:                
Net sales:                
United States $ 159.5   $ 141.5   $ 537.8   $ 502.0  
International 146.4   133.8   414.7   392.5  
  $ 305.9   $ 275.3   $ 952.5   $ 894.5  

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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)


  September 30,
2006
December 31,
2005
Long-lived assets:        
United States $ 380.5   $ 366.9  
International 89.9   84.8  
  $ 470.4   $ 451.7  

  Three Months Ended
September 30,
Nine Months Ended
September 30,
  2006 2005 2006 2005
Classes of similar products:                
Net sales:                
Cosmetics, skin care and fragrances $ 180.7   $ 180.0   $ 594.8   $ 589.8  
Personal care 125.2   95.3   357.7   304.7  
  $ 305.9   $ 275.3   $ 952.5   $ 894.5  

(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 September 30, 2006 and December 31, 2005 was $28.9 million and $31.9 million, respectively. The fair value of the foreign currency forward exchange contracts outstanding at September 30, 2006 and December 31, 2005 was $0.6 million and $(0.2) million, respectively.

(10) Long-term Debt


  September 30,
2006
December 31,
2005
2004 Credit Agreement:        
Term Loan Facility due 2010 $ 800.0   $ 700.0  
Multi-Currency Facility due 2009 50.7    
8 5/8% Senior Subordinated Notes due 2008 (a) 217.4   327.0  
9½% Senior Notes due 2011, net of discounts 386.8   386.4  
2004 Consolidated MacAndrews & Forbes Line of Credit    
  1,454.9   1,413.4  
Less current portion (8.1 )   
  $ 1,446.8   $ 1,413.4  
(a) While the 8 5/8% Senior Subordinated Notes are due in February 2008, under the 2004 Credit Agreement, Products Corporation must refinance such notes by October 30, 2007, such that not more than $25.0 million of such 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)

2004 Credit Agreement and Amendments

In July 2004, Products Corporation and certain of its subsidiaries entered into a bank credit agreement with a syndicate of lenders and Citicorp USA, Inc., as multi-currency administrative agent, term loan administrative agent and collateral agent (as amended, the ‘‘2004 Credit Agreement’’). The 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’’). 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, the Term Loan Facility was increased back to $800.0 million as a result of the $100.0 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 an incremental $50.0 million subject to certain conditions 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.

In February 2006, Products Corporation secured an amendment to the 2004 Credit Agreement (the ‘‘first amendment’’), which excludes from various financial covenants certain charges in connection with the February 2006 Program described in Note 7 above, as well as some start-up costs incurred by the Company in 2005 related to the Vital Radiance brand and the complete re-stage of the Almay brand. Specifically, the first amendment provides for the add-back to the 2004 Credit Agreement's definition of ‘‘EBITDA’’ the lesser of (i) $50 million; or (ii) the cumulative one-time charges associated with (a) the February 2006 Program described in Note 7 and (b) the non-recurring costs in the third and fourth quarters of 2005 associated with the Vital Radiance brand and the complete 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.

On July 28, 2006, Products Corporation secured a further amendment (the ‘‘second amendment’’) to its 2004 Credit Agreement to, among other things, add an additional $100.0 million to the 2004 Credit Agreement's Term Loan Facility (the ‘‘Term Loan Add-on’’). The second amendment also reset the 2004 Credit Agreement’s 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 second amendment also enables Products Corporation to add back to the 2004 Credit Agreement’s definition of ‘‘EBITDA’’ 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) and charges for certain product returns and/or product discontinuances. Products Corporation 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.

On September 29, 2006, Products Corporation secured an additional amendment (the ‘‘third amendment’’) to its 2004 Credit Agreement, which enables Products Corporation to add back to the 2004 Credit Agreement's definition of ‘‘EBITDA’’ up to $75 million of restructuring charges (in addition to the restructuring charges permitted to be added back pursuant to the first and second amendments to the 2004 Credit Agreement), asset impairment charges, inventory write-offs, inventory returns costs and in each case related charges in connection with the previously-announced discontinuance of the Vital Radiance brand, the Company's recent CEO change and the September 2006 Program described in Note 7.

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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 a $110 million Rights Offering (as hereinafter defined) and promptly transferred the proceeds from the Rights Offering 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 February 1, 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 a $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).

Revlon, Inc. currently intends to conduct a further $75 million equity issuance in late 2006 or in the first quarter of 2007, the net cash proceeds of which are intended to be used to repay Products Corporation's indebtedness. In connection with such equity issuance, Revlon, Inc. entered into an amendment to its Investment Agreement with MacAndrews & Forbes extending MacAndrews & Forbes’ back-stop obligations through March 31, 2007. Additionally, in February 2006 Products Corporation entered into an amendment to its 2004 Consolidated MacAndrews & Forbes Line of Credit, which was undrawn on September 30, 2006, to ensure that such line of credit remains available to Products Corporation through the completion of Revlon, Inc.’s planned $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 other than the Company, ‘‘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 business, 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 completely re-staged Almay brand, including the Company’s Almay Intense i-Color collection, 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 objectives include:

(1) remaining a leader in the beauty business by continuing to provide innovation and leveraging the Company's strong, established brands, particularly the Revlon brand, around the world and leveraging the Company's improved relationships with its consumers and retail customers,

(2) building the excitement and the glamour of Revlon-branded color cosmetics and other beauty products, through, among other things, innovation in product development, maximizing all elements of marketing and executing the Company’s business plans and new product introductions with excellence,

(3) building upon the Company's leadership in healthy beauty color cosmetics with the Company's completely re-staged Almay brand,

(4) supporting and building the Company's brands globally and investing at appropriate competitive levels, while controlling spending and working capital, and

(5) continuing to capitalize on the significant opportunities the Company has to improve its operating profit margins and cash flow over time.

The Company intends to continue to focus on the opportunities that the Company believes exist to increase its operating profit margin and to improve cash flows over time, with key areas of focus being

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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)

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.

On September 18, 2006, Revlon, Inc. announced that Jack Stahl, the Company’s former President and Chief Executive Officer, was leaving the Company and that its Board of Directors elected David Kennedy as a Director and as President and Chief Executive Officer. Mr. Kennedy previously served as Revlon's Executive Vice President, Chief Financial Officer and Treasurer, and prior to that as the Company’s Executive Vice President and President of Revlon’s international operations.

In connection with Mr. Stahl’s departure from the Company, pursuant to the terms of his separation agreement, the Company incurred charges of $9.4 million in the third quarter of 2006, including $6.2 million for severance and related costs and $3.2 million for the accelerated amortization of his unvested options and unvested restricted stock.

On September 25, 2006, the Company also announced the discontinuance of its Vital Radiance brand. As a result, the Company incurred charges of approximately $49.1 million in the third quarter of 2006, including a provision for estimated returns and allowances of approximately $30.5 million, as well as approximately $15.1 million for the write-off of inventories and selling and promotional materials, and approximately $3.1 million for the write-off and acceleration of amortization of displays.

Certain prior year amounts have been reclassified to conform to the current period's presentation, including 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.

Restructuring Programs

In February 2006, Revlon, Inc. announced an organizational realignment (the ‘‘February 2006 Program’’) and has recorded charges of $10.0 million for the nine-month period ended September 30, 2006, primarily for employee severance and other employee-related termination benefits. The February 2006 Program involved the consolidation of certain functions within the Company’s sales, marketing and creative groups, as well as certain headquarters functions, which changes are 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 Company anticipates that the February 2006 Program will generate ongoing annualized savings of approximately $15 million that will primarily benefit SG&A expenses. (See Note 7 to the Unaudited Consolidated Financial Statements).

On September 25, 2006, Revlon, Inc. announced the September 2006 Program, a restructuring plan designed to reduce costs and improve the Company’s profit margins, largely through a broad organizational streamlining that involved consolidating responsibilities in certain related functions and reducing layers of management to increase accountability and effectiveness; streamlining support functions to reflect the new organization structure; eliminating certain senior executive positions; and consolidating various facilities. The September 2006 Program is expected to result in staffing reductions of approximately 250 employees, primarily in the U.S., or approximately 8% of the Company’s total U.S. workforce, and the exiting of certain leased space, principally at the Company’s headquarters facility in New York City.

The Company expects to incur approximately $29 million of restructuring charges and other costs to implement the September 2006 Program, consisting of approximately $19 million of expected costs 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 employee severance and other employee-related termination costs and approximately $10 million of expected costs related to leases and other asset write-offs. Of the approximately $29 million in expected restructuring charges, the Company incurred approximately $14 million of these charges during the fiscal quarter ended September 30, 2006 and expects to incur approximately $7 million of charges in the fourth quarter of 2006, with the balance of approximately $8 million of these charges expected to be incurred during the first half of fiscal year 2007. Approximately $19 million of these charges are expected to reflect cash charges that the Company expects to pay out over the 2006 to 2008 period. The Company also expects to incur approximately $3.0 million of accelerated amortization charges in SG&A expenses in the fourth quarter of 2006. The Company anticipates that the September 2006 Program will generate ongoing annualized savings of approximately $34 million that will primarily benefit SG&A expenses. (See Note 7 to the Unaudited Consolidated Financial Statements).

Overview of Net Sales and Earnings Results

Net sales in the third quarter of 2006 increased $30.6 million, or 11.1%, to $305.9 million, as compared with $275.3 million in the third quarter of 2005 due to higher net sales in the Company’s U.S. and international operations. Net sales for the nine-month period ended September 30, 2006 increased $58.0 million, or 6.5%, to $952.5 million, as compared with $894.5 million for the nine-month period ended September 30, 2005, due to higher net sales in the Company’s U.S. and international operations.

In the U.S., net sales for the third quarter of 2006 increased $18.0 million, or 12.7%, to $159.5 million, from $141.5 million in the third quarter of 2005. In the nine-month period ended September 30, 2006, net sales increased $35.8 million, or 7.1%, to $537.8 million from $502.0 million in the nine-month period ended September 30, 2005. The increase in net sales in the third quarter of 2006 is primarily due to higher shipments of beauty care and Vital Radiance products and lower provisions for returns and allowances. The third quarter of 2006 included approximately $24.4 million of returns and allowances provisions related to the discontinuance of the Vital Radiance brand; and the third quarter of 2005 included approximately $31.8 million of returns and allowances provisions related to the complete re-stage of the Almay brand. The increase in net sales for the nine-month period ended September 30, 2006 is primarily due to higher shipments of beauty care and Vital Radiance products, partially offset by higher provisions for returns and allowances. The nine months ended September 30, 2006 included approximately $41.6 million of returns and allowances provisions related to the Vital Radiance brand; and the nine months ended September 30, 2005 included approximately $31.8 million of returns and allowances provisions related to the complete re-stage of the Almay brand.

In the Company’s international operations, net sales for the third quarter of 2006 increased $12.6 million, or 9.4%, to $146.4 million, from $133.8 million in the third quarter of 2005. In the nine-month period ended September 30, 2006, net sales increased $22.2 million, or 5.7%, to $414.7 million, from $392.5 million in the nine-month period ended September 30, 2005. The increase in net sales in the third quarter and nine-month period ended September 30, 2006, as compared with the third quarter and nine-month period ended September 30, 2005, was due primarily to the increase in net sales in the European and Latin American regions.

Net loss for the third quarter of 2006 increased by $35.1 million to $100.5 million, as compared with a net loss of $65.4 million in the third quarter of 2005. In the nine-month period ended September 30, 2006, net loss increased by $97.8 million to $245.8 million, as compared with a net loss of $148.0 million in the nine-month period ended September 30, 2005. Higher net sales for the third quarter of 2006 were more than offset by higher inventory obsolescence charges, primarily related to estimated excess inventory in connection with the discontinuance of the Vital Radiance brand, higher selling, general and administrative expenses (‘‘SG&A’’), primarily related to higher advertising and promotion in support of the Vital Radiance brand and the complete re-stage of Almay, higher restructuring expense primarily due to the September 2006 Program and higher interest expense. Higher net sales for the nine-month period ended

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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)

September 30, 2006 were more than offset by higher inventory obsolescence charges primarily related to the discontinuance of the Vital Radiance brand and estimated excess inventory related to certain Almay products, higher SG&A primarily related to advertising and promotion expense incurred to support the Vital Radiance brand and the complete re-stage of the Almay brand, higher restructuring expense due to the February 2006 and September 2006 Programs 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 third quarter of 2006 increased approximately 5.7% versus the third quarter of 2005 and 4.8% for the first nine-month period of 2006 versus the first nine-month period of 2005. Combined U.S. mass-market share for the Revlon, Almay and Vital Radiance brands are summarized in the table below:


  $ Share %
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
  2006 2005 Point
Change
2006 2005 Point
Change
Total Revlon Color Cosmetics 22.1 %  21.6 %  0.5   21.9 %  22.0 %  (0.1 ) 
Revlon Brand 14.5   15.3   (0.7 )  14.5