BUSINESS COMBINATIONS

The Colomer Acquisition

On October 9, 2013 (the "Acquisition Date"), Products Corporation completed its acquisition of The Colomer Group Participations, S.L. ("Colomer" and the "Colomer Acquisition"), a Spanish company which primarily manufactures, markets and sells professional products to hair and nail salons and other professional channels under brands such as Revlon Professional, CND, including CND Shellac, and American Crew, as well as retail and multi-cultural products lines, pursuant to a share sale and purchase agreement (the "Purchase Agreement") which Products Corporation entered into on August 3, 2013. The cash purchase price was $664.5 million, which Products Corporation financed with proceeds from the Acquisition Term Loan under the Amended Term Loan Facility (both as hereinafter defined). The Colomer Acquisition provides the Company with broad brand, geographic and channel diversification and substantially expands the Company's business, providing both distribution into new channels and cost synergy opportunities.

The results of operations of the Colomer business are included in the Company’s Consolidated Financial Statements commencing on the Acquisition Date. For the net sales and segment profit related to Colomer's operations for the period from the Acquisition Date through December 31, 2013, refer to the Professional segment disclosure in Note 23, "Segment Data and Related Information".

For the year ended December 31, 2013, the Company incurred $25.4 million of acquisition and integration costs in the Consolidated Statements of Income and Comprehensive Income, which consist of $12.9 million of acquisition costs and $12.5 million of integration costs related to the Colomer Acquisition. The acquisition costs primarily include legal and consulting fees to complete the Colomer Acquisition. The integration costs consist of non-restructuring costs related to the Company's plans to integrate Colomer's operations into the Company's business, and for 2013 primarily includes an impairment of in-progress capitalized software development costs and employee-related costs related to management changes.

Purchase Price

The components of the $664.5 million purchase price are as follows:



	As of October 9, 2013
Share purchase price⁽¹⁾	$	545.6
Leakages⁽²⁾	(3.8		)
Shareholder loans⁽³⁾	122.7
Total purchase price	$	664.5

⁽¹⁾ All of Colomer’s 10,227 shares outstanding on the Acquisition Date were purchased for a total of $538.4 million. In addition, interest on the share price from the locked box date of June 30, 2013 through the Acquisition Date totaled $7.2 million, for a total share purchase price of $545.6 million.


⁽²⁾	According to the Purchase Agreement, certain leakages, such as certain fees and other items incurred by Colomer between June 30, 2013 and the Acquisition Date, were reductions to the purchase price.


⁽³⁾	The purchase price included the payment of Colomer’s shareholder loans for $122.7 million, which included the principal and accrued interest owed as of the Acquisition Date. As such, this liability was settled on the Acquisition Date.

Purchase Price Allocation

The Company accounted for the Colomer Acquisition as a business combination during the fourth quarter of 2013 and, accordingly, the total consideration of $664.5 million has been recorded based on the respective estimated fair values of the net assets acquired on the Acquisition Date with resulting goodwill, as follows:



	Fair Values at October 9, 2013
Cash and cash equivalents	$	36.9
Trade receivables	83.9
Inventories	75.1
Prepaid expenses and other	31.3
Property, plant and equipment	96.7
Intangible assets	292.7
Goodwill	255.7
Deferred tax asset - non-current	53.1
Other assets	1.9
Total assets acquired	927.3
Accounts payable	48.0
Accrued expenses and other	65.6
Long-term debt	0.9
Long-term pension and other benefit plan liabilities	4.5
Deferred tax liability	123.3
Other long-term liabilities	20.5
Total liabilities assumed	262.8
Total consideration	$	664.5

The fair values of the net assets acquired in the Colomer Acquisition were based on management’s preliminary estimate of the respective fair values. The estimated fair values of net assets and resulting goodwill are subject to the Company finalizing its analysis of the fair value of Colomer’s assets and liabilities as of the Acquisition Date and may be adjusted upon completion of such analysis. In addition, information unknown at the time of the Colomer Acquisition could result in adjustments to the respective fair values and resulting goodwill within the year following the Colomer Acquisition.

In determining the fair values of net assets acquired and resulting goodwill, the Company considered, among other factors, the analyses of Colomer's historical financial performance and an estimate of the future performance of the acquired business, as well as market participants' intended use of the acquired assets.

The estimated fair value of the acquired trade receivables was determined to be $83.9 million. The gross amount due is $103.1 million and the Company estimates that approximately $19.2 million is uncollectible.

The estimated fair value of acquired inventory was determined using the income approach, specifically, the net realizable value (NRV) approach, which calculates the estimated selling price in the ordinary course of business, less the reasonable costs of completion, disposal and holding. The estimated fair value of acquired property, plant and equipment was determined using the cost approach.

The acquired intangible assets based on the estimate of the fair values of the identifiable intangible assets are as follows:



	Fair Values at October 9, 2013		Weighted Average Remaining Useful Life (in years)
Trade names, indefinite-lived	$	108.6	Indefinite
Trade names, finite-lived	109.4		5 - 20
Customer relationships	57.0		10 - 15
License agreement	4.1		10
Internally-developed IP	13.6		10
Total acquired intangible assets	$	292.7

The estimate of the fair values of acquired indefinite-lived and finite-lived trade names and internally-developed IP was determined using a risk-adjusted discounted cash flow approach, specifically the relief-from-royalty method. The relief-from-royalty method requires identifying the hypothetical cash flows generated by an assumed royalty rate that a third party would pay to license the trade names and IP, and discounting them back to the Acquisition Date. The royalty rate used in such valuation was based on a consideration of market rates for similar categories of assets. The indefinite-lived trade names include Revlon Professional and American Crew. The finite-lived trade names include, among others, CND Shellac, CND Vinylux and The Colomer Group. The Company reacquired the Revlon Professional trade name, which had previously provided Colomer with an exclusive right to manufacture, market and sell Revlon Professional products for an initial term and automatic-renewals that aggregate 200 years. Based on the terms and conditions of the existing license agreements and other factors, the Revlon Professional trade name was assigned an indefinite-life and, therefore, will not be amortized.

The estimate of the fair value of the acquired customer relationships were determined using a risk-adjusted discounted cash flow model, specifically, the excess earnings method which considers the use of other assets in the generation of the projected cash flows of a specific asset to isolate the economic benefit generated by the customer relationship asset. The contribution of other assets, such as fixed assets, working capital, workforce and other intangible assets, to overall cash flows was estimated through contributory asset capital charges. Therefore, the value of the acquired customer relationship asset is the present value of the attributed post-tax cash flows, net of the return on fair value attributed to tangible and other intangible assets.

There are significant judgments inherent in a discounted cash flow approach, including, the selection of appropriate discount rates, hypothetical royalty rates, contributory asset capital charges, estimating the amount and timing of estimated future cash flows and identification of appropriate terminal growth rate assumptions. The discount rates used in the discounted cash flow analyses are intended to reflect the risk inherent in the projected future cash flows generated by the respective intangible assets.

A $120.2 million deferred tax liability has been recorded related to the $292.7 million acquired intangible assets outlined in the above table. The deferred tax liability represents the tax effect of the difference between the estimated assigned fair value of the intangible assets ($292.7 million) and the tax basis ($0) of such assets.

Goodwill of $255.7 million represents the excess of the purchase price paid by Products Corporation for the Colomer Acquisition over the fair value of the identifiable net assets acquired by Products Corporation in the Colomer Acquisition. Factors contributing to the purchase price resulting in the recognition of goodwill include the estimated annualized cost reductions that the Company expects to be achieved by the end of 2015. See Note 24, "Subsequent Events - Integration Program" for a discussion of the Company's integration plans in connection with the Colomer Acquisition. The Company also acquired Colomer’s research and development capabilities and any future unidentified IP that results from such activities would contribute to the value of goodwill. Goodwill is not expected to be deductible for tax purposes.

Unaudited Pro Forma Results

The following table presents the Company's pro forma consolidated net sales and income from continuing operations, before income taxes for the years ended December 31, 2013 and 2012. The unaudited pro forma results include the historical consolidated statements of operations of the Company and Colomer, giving effect to the Colomer Acquisition and related financing transactions as if they had occurred at the beginning of the earliest period presented. As stated below, the Company also acquired Pure Ice in 2012, however the Company has not included the Pure Ice results prior to its acquisition date in these pro forma results as the impact would not have been material.



	Unaudited Pro Forma Results
	Year Ended December 31,
	2013		2012
Net sales	$	1,908.9	$	1,911.6
Income from continuing operations, before income taxes	125.2		106.0

The pro forma results, prepared in accordance with U.S. GAAP, include the following pro forma adjustments related to the Colomer Acquisition:

(i) as a result of an $11.1 million increase in the fair value of acquired inventory at the Acquisition Date, the Company recognized $8.5 million of the increase in cost of sales in its historical 2013 consolidated financial statements. The pro forma adjustments include an adjustment to reverse the $8.5 million recognized in 2013 cost of sales and recognize the full $11.1 million in 2012 cost of sales;

(ii) the pro forma increase in depreciation and amortization expense based on the fair value adjustments to property, plant and equipment and acquired finite-lived intangible assets recorded in connection with the Colomer Acquisition of $14.3 million and $19.2 million in 2013 and 2012, respectively;

(iii) the elimination of goodwill impairment charges recognized by Colomer in 2013 and 2012 of $9.0 million and $5.3 million, respectively;

(iv) the elimination of acquisition and integration costs recognized by the Company and Colomer in 2013 and 2012 of $25.8 million and $0.8 million, respectively;

(v) the elimination of Colomer's debt facility fees of $3.6 million recognized in 2013, as the debt facility was closed on the Acquisition Date; and

(vi) the pro forma increase in interest expense and amortization of debt issuance costs, resulting from the issuance of the Acquisition Term Loan used by Products Corporation to finance the Colomer Acquisition, for a total combined increase of $19.4 million and $24.4 million in 2013 and 2012, respectively.

The unaudited pro forma results do not include: (1) any revenue or cost reductions that may be achieved through the business combination; or (2) the impact of non-recurring items directly related to the business combination.

The unaudited pro forma results are not necessarily indicative of the operating results that would have occurred if the Colomer Acquisition had been completed as of the date for which the pro forma financial information is presented. In addition, the unaudited pro forma results do not purport to project the future consolidated operating results of the combined company.

Other Acquisitions Completed in 2012 and 2011



	Purchase Price		Total Net Assets Acquired		Purchased Intangible Assets		Goodwill
2012
Pure Ice ⁽¹⁾	$	66.2	$	—	$	43.1	$	23.1

2011
SinfulColors ⁽²⁾	$	39.0	$	4.1	$	22.8	$	12.1

⁽¹⁾

On July 2, 2012, the Company acquired certain assets of Bari Cosmetics, Ltd., including trademarks and other intellectual property related to Pure Ice nail enamel and Bon Bons cosmetics brands (the “Pure Ice Acquisition”). The Company paid $66.2 million of total consideration for the Pure Ice Acquisition in cash, comprised of $45.0 million cash on hand and $21.2 million drawn under Products Corporation’s 2011 Revolving Credit Facility. Both the intangible assets acquired and goodwill are expected to be deductible for income tax purposes.

⁽²⁾ On March 17, 2011, the Company acquired certain assets, including trademarks and other intellectual property, inventory, certain receivables and manufacturing equipment, related to SinfulColors cosmetics, Wild and Crazy cosmetics, freshMinerals cosmetics (which brand was disposed of in August 2012) and freshcover cosmetics, which products are sold principally in the U.S. mass retail channel (the “SinfulColors Acquisition”). The Company also assumed certain liabilities of the acquired business. The Company paid $39.0 million of total consideration for the SinfulColors Acquisition in cash. Both the intangible assets acquired and goodwill are expected to be deductible for income tax purposes.