================================================================================
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 March 31, 2000
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 333-62989
CDRJ INVESTMENTS (LUX) S.A.
---------------------------
(Exact name of Registrant as specified in its charter)
Luxembourg 98-0185444
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4 Boulevard Royal
L-2449 Luxembourg
Luxembourg
(Address, including zip code, of registrant's principal executive offices)
(352) 226027
(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 3 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 [_]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, par value $2.00 per share, outstanding at May 15, 2000 830,659
shares
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CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
Index to Financial Statements and Exhibits
Filed with the Quarterly Report of the Company on Form 10-Q
For the Three Months Ended March 31, 2000
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited): Page No.
--------
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
Exhibits 22
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
March 31, December 31,
2000 1999
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,961 $ 4,906
Receivables, less allowances for doubtful accounts of
$3,086 in 2000 and $3,087 in 1999 34,165 31,277
Inventories 36,546 30,290
Prepaid income taxes 15,000 13,875
Prepaid expenses and other current assets (including value-added tax
receivables of $6,668 in 2000 and $6,053 in 1999) 9,736 8,608
----------- ------------
Total current assets 99,408 88,956
Property and equipment, net 51,367 50,607
Other assets:
Goodwill, net of accumulated amortization of $3,656 in 2000
and $3,160 in 1999 75,348 75,323
Trademarks, net of accumulated amortization of $2,650 in 2000
and $2,303 in 1999 52,448 51,605
Deferred financing fees and other, net of accumulated
amortization of $2,965 in 2000 and $2,887 in 1999 11,879 11,886
----------- ------------
Total $ 290,450 $ 278,377
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 3,134 $ -
Current portion of long-term debt 3,750 3,500
Accounts payable 12,798 15,005
Accrued liabilities 36,772 33,424
Income taxes payable 1,796 276
Deferred income taxes 2,649 2,587
----------- ------------
Total current liabilities 60,899 54,792
Long-term debt 134,955 130,000
Deferred income taxes 16,109 15,731
Other long-term liabilities 2,324 2,060
----------- ------------
Total liabilities 214,287 202,583
----------- ------------
Commitments and contingencies - -
Stockholders' equity:
Common stock, par value $2.00; authorized, 1,020,000 shares;
issued and outstanding, 830,659 shares in 2000 and 1999 1,661 1,661
Additional paid-in capital 81,381 81,381
Accumulated deficit (4,452) (3,393)
Cumulative foreign currency translation adjustment (2,427) (3,855)
----------- ------------
Total stockholders' equity 76,163 75,794
----------- ------------
Total $ 290,450 $ 278,377
=========== ============
See accompanying notes to consolidated financial statements.
3
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
Three Months Ended
------------------
March 31, March 31,
2000 1999
------- --------
Net sales $ 71,716 $ 67,960
Cost of sales 16,346 20,812
-------- --------
Gross profit 55,370 47,148
Selling, general and administrative expenses 47,141 40,491
Restructuring charges - 416
-------- --------
Income from operations 8,229 6,241
Other income (expense):
Exchange gain (loss) (3,618) 2,764
Interest, net (3,996) (3,902)
Other, net 668 18
-------- --------
Income before income taxes 1,283 5,121
Income tax expense 2,027 4,821
-------- --------
Income (loss) before extraordinary item (744) 300
Extraordinary loss on early extinguishment of debt,
net of income tax benefit of $195 (315) -
-------- --------
Net income (loss) $ (1,059) $ 300
======== ========
See accompanying notes to consolidated financial statements.
4
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
------------------
March 31, March 31,
2000 1999
--------- ---------
Cash flows from operating activities:
Net income (loss) $ (1,059) $ 300
Extraordinary loss on early extinguishment of debt, net of taxes 315 -
-------- --------
Income (loss) before extraordinary item (744) 300
Adjustments to reconcile income (loss) before extraordinary item
to net cash used in operating activities:
Loss on sale of property and equipment - 16
Depreciation and amortization 1,805 2,015
Amortization of deferred financing fees 364 323
Unrealized foreign exchange loss (gain) 3,171 (2,764)
Deferred income taxes - 1,780
Changes in operating assets and liabilities:
Receivables, net (2,888) (4,105)
Inventories (6,256) 4,261
Prepaid expenses and other current assets (1,128) (837)
Other assets (1,022) 121
Accounts payable and accrued liabilities (3,778) (7,069)
Income taxes payable/prepaid 590 2,458
Other long-term liabilities 264 (175)
-------- --------
Net cash used in operating activities (9,622) (3,676)
-------- --------
Cash flows from investing activities:
Payments of previously accrued Acquisition fees - (387)
Purchases of property and equipment (1,236) (1,475)
-------- --------
Net cash used in investing activities (1,236) (1,862)
-------- --------
Cash flows from financing activities:
Repurchase of subordinated debt (10,597) -
Repayments under term loan facility (875) (375)
Net borrowings (repayments) under revolving credit facility 16,900 (2,900)
Net proceeds from short-term bank debt 3,134 -
-------- --------
Net cash provided by (used in) financing activities 8,562 (3,275)
-------- --------
Effect of exchange rate changes on cash 1,351 (1,560)
-------- --------
Net decrease in cash and cash equivalents (945) (10,373)
Cash and cash equivalents at beginning of period 4,906 18,358
-------- --------
Cash and cash equivalents at end of period $ 3,961 $ 7,985
======== ========
See accompanying notes to consolidated financial statements.
5
CDRJ INVESTMENTS(LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The unaudited interim consolidated financial statements of CDRJ Investments
(Lux) S.A. (the "Parent") and subsidiaries have been prepared in accordance with
Article 10 of the Securities and Exchange Commission's Regulation S-X. In the
opinion of management, the accompanying interim financial statements contain all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the Company's financial statements as of March 31, 2000 and for all the
interim periods presented.
The Parent, a Luxembourg societe anonyme, Jafra Cosmetics International,
Inc., a Delaware corporation (''JCI''), Jafra Cosmetics International, S.A. de
C.V., a sociedad anonima de capital variable organized under the laws of the
United Mexican States (''Jafra S.A.'') and certain other subsidiaries of the
Parent were organized by Clayton, Dubilier & Rice Fund V Limited Partnership, a
Cayman Islands exempted limited partnership managed by Clayton, Dubilier & Rice,
Inc. (''CD&R'') to acquire (the ''Acquisition'') the worldwide Jafra Cosmetics
business (the ''Jafra Business'') of The Gillette Company (''Gillette''). JCI
and Jafra S.A. are indirect, wholly owned subsidiaries of the Parent. The Parent
is a holding company that conducts all its operations through its subsidiaries.
The Parent and its subsidiaries are collectively referred to as the "Company."
The accompanying consolidated financial statements as of and for the three
months ended March 31, 2000 and 1999 reflect the operations of the Parent and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation. Certain sales promotional and other expenses
which were previously reported as selling, general and administrative expenses
have been reclassified to cost of sales to conform to the current period
presentation. Total amounts that have been reclassified are $1,985,000 for the
three months ended March 31, 1999. In addition, restructuring charges, which
were previously included in selling, general and administrative expenses, have
been separately disclosed in the accompanying consolidated statements of
operations for the three months ended March 31, 1999.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement, as amended,
establishes accounting and reporting standards for derivative instruments and
for hedging activities and will be effective for the Company on January 1, 2001.
The Company is currently analyzing the impact on the financial statements of
adopting this standard.
(2) Inventories
Inventories consist of the following (in thousands):
March 31, December 31,
2000 1999
----------- ------------
Raw materials and supplies $11,074 $ 7,905
Finished goods 25,472 22,385
----------- ------------
Total inventories $36,546 $30,290
=========== ============
6
CDRJ INVESTMENTS(LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) Property and Equipment
Property and equipment consist of the following (in thousands):
March 31, December 31,
2000 1999
-------------- -----------------
Land $17,688 $17,418
Buildings 17,043 16,777
Machinery and equipment 22,642 21,511
-------------- -----------------
57,373 55,706
Less accumulated depreciation 6,006 5,099
-------------- -----------------
Property and equipment, net $51,367 $50,607
============== =================
(4) Debt
In the first quarter of 2000, the Company repurchased and retired a portion
of the 11.75% Subordinated Notes due 2008 (the "Notes") of JCI and Jafra S.A. a
portion of, with a face value of $6.5 million and $4.3 million, respectively.
In connection with the repurchase of the Notes, the related portion of the
unamortized deferred financing costs of $733,000 was written off and included in
the determination of the extraordinary loss on early extinguishment of debt. The
repurchase of the Notes resulted in an extraordinary loss of $315,000, which is
net of an income tax benefit of $195,000.
In March 2000, Jafra S.A. entered into a short-term bank loan of $3.1
million in connection with the settlement of foreign currency forward contracts.
The interest rate on the loan was 18.5% per annum.
(5) Income Taxes
The actual income tax rate differs from the "expected" income tax rate
(computed by applying the U.S. federal corporate rate of 35% to income before
income taxes) for the three months ended March 31, 2000 principally as a result
of a higher effective tax rate in the Mexico entity, Jafra S.A., due to certain
inflation-related income tax adjustments, and valuation allowances provided
against certain operating losses in Europe and South America in 1999 and 2000
(and the U.S. in 2000) and foreign tax credits in the U.S. in 2000.
(6) Comprehensive Income (Loss)
Comprehensive income (loss) is summarized as follows:
Three Months Ended
---------------------------
March 31, March 31,
2000 1999
---------- ----------
Net income (loss) $ (1,059) $ 300
Foreign currency translation adjustment 1,428 (1,663)
---------- ----------
Comprehensive income (loss) $ 369 $ (1,363)
========== ==========
(7) Financial Reporting for Business Segments
The Company's business is comprised of one industry segment, direct
selling, with worldwide operations. The Company is organized into geographical
business units that each sell the full line of Jafra cosmetics, skin care, body
care, fragrances, and other products. Jafra has three reportable business
segments: the U.S. (JCI), Mexico (Jafra S.A.), and Europe.
7
CDRJ INVESTMENTS(LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JCI and Jafra S.A. have each guaranteed the obligations under the Notes
which were issued in conjunction with the Acquisition on April 30, 1998. The
following consolidating financial statement data segregate between those
entities that guarantee the Notes ("Guarantor entities") and those entities that
do not guarantee the Notes ("Nonguarantor entities"); in addition, European
business segment information is separately disclosed. The Nonguarantor entities
are the Parent's indirect European subsidiaries in Germany, the Netherlands,
Switzerland, Italy, Austria and Poland and its indirect South American
subsidiaries in Colombia, Argentina, Chile, Venezuela and Brazil. The Company's
subsidiary in Chile did not begin operations until the third quarter of 1999.
The accounting policies of the business segments are the same as those
described in the summary of significant accounting policies included in the
Company's audited consolidated financial statements as of and for the year ended
December 31, 1999 on Form 10-K, except that the disaggregated financial results
have been prepared using a management approach, which is consistent with the
basis and manner in which the Company's management internally disaggregates
financial information for the purposes of assisting in making internal operating
decisions. The Company evaluates performance based on stand alone business
segment operating results, including allocations of corporate expenses based
upon revenues, which differs from the legal and statutory allocations. Such
differences in the allocation of corporate expenses have not been tax effected.
Additionally, the Company accounts for intersegment sales as inventory
transfers.
Consolidating condensed statements of operations data for the three months
ended March 31, 2000 and 1999 is summarized as follows (in thousands):
Three months ended March 31, 2000
-------------------------------------------------------------------------------------------------------
Guarantor Entities Nonguarantor Entities
---------------------------------------- ------------------------
JCI Jafra S.A. Total
(U.S.) (Mexico) Total Europe Other Eliminations Consolidated
------------- ------------ --------- ---------- ---------- -------------- -------------
Net sales $16,736 $44,396 $61,132 $ 6,532 $ 4,052 $ - $71,716
Cost of sales 3,524 9,917 13,441 1,562 1,226 117 16,346
------------- ------------- ------- ---------- ---------- -------------- -------------
Gross profit 13,212 34,479 47,691 4,970 2,826 (117) 55,370
Selling, general and
administrative expenses:
Business segment 13,238 20,060 33,298 5,501 3,768 - 42,567
Allocated corporate
expenses 1,067 2,832 3,899 417 258 - 4,574
------------- ------------- ------- ---------- ---------- -------------- -------------
Income (loss) from
operations (1,093) 11,587 10,494 (948) (1,200) (117) 8,229
Other expense (income):
Interest, net 1,447 2,178 3,625 343 28 - 3,996
Royalty (3,301) 3,283 (18) 18 - - -
Other, net 3 3,055 3,058 (25) (83) - 2,950
------------- ------------- ------- ---------- ---------- -------------- -------------
Income (loss) before
income taxes 758 3,071 3,829 (1,284) (1,145) (117) 1,283
Income tax expense (benefit) 120 1,946 2,066 24 (63) - 2,027
------------- ------------- ------- ---------- ---------- -------------- -------------
Income (loss) before
extraordinary item 638 1,125 1,763 (1,308) (1,082) (117) (744)
Extraordinary loss on early
extinguishment of debt,
net of income tax
benefit of $195 (205) (110) (315) - - - (315)
------------- ------------- ------- ---------- ---------- -------------- -------------
Net income (loss) $ 433 $ 1,015 $ 1,448 $(1,308) $(1,082) $(117) $(1,059)
============= ============= ======= ========== ========== ============== =============
In the first quarter of 2000, JCI charged Jafra S.A a royalty fee of $3.6
million in connection with Jafra S.A's use of the marketing and distribution
systems and other know-how owned by JCI, and Jafra S.A. charged JCI $0.3 million
for use of the Jafra trademark. These charges are included in royalty expense
(income).
8
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three months ended March 31, 1999
--------------------------------------------------------------------------------------
Guarantor Entities Nonguarantor Entities
---------------------------------- -----------------------
JCI Jafra S.A. Total
(U.S.) (Mexico) Total Europe Other Eliminations Consolidated
----------- ------------ --------- ------------ ---------- ------------- -------------
Net sales $17,289 $39,265 $56,554 $ 8,217 $ 3,189 $ - $67,960
Cost of sales 5,460 12,386 17,846 1,960 1,006 - 20,812
----------- ------------ --------- ------------ ---------- ------------- -------------
Gross profit 11,829 26,879 38,708 6,257 2,183 - 47,148
Selling, general and
administrative expenses:
Business segment 10,226 16,258 26,484 6,861 3,095 - 36,440
Allocated corporate
expenses 1,031 2,341 3,372 490 189 - 4,051
Restructuring charges 54 172 226 190 - 416
----------- ------------ --------- ------------ ---------- ------------- -------------
Income (loss) from operations 518 8,108 8,626 (1,284) (1,101) - 6,241
Other expense (income):
Interest, net 2,161 1,484 3,645 359 (102) - 3,902
Other, net (110) (3,071) (3,181) 416 (17) - (2,782)
----------- ------------ --------- ------------ ---------- ------------- -------------
Income (loss) before
income taxes (1,533) 9,695 8,162 (2,059) (982) - 5,121
Income tax expense 45 4,748 4,793 11 17 - 4,821
----------- ------------ --------- ------------ ---------- ------------- -------------
Net income (loss) $(1,578) $ 4,947 $ 3,369 $(2,070) $ (999) $ - $ 300
=========== ============ ========= ============ ========== ============= =============
Consolidating condensed balance sheet data as of March 31, 2000 is
summarized as follows (in thousands):
As of March 31, 2000
-------------------------------------------------------------------------------------------------
Guarantor Entities Nonguarantor Entities
--------------------------------------------- -----------------------
JCI Jafra S.A. Total
ASSETS (U.S.) (Mexico) Parent Total Europe Other Eliminations Consolidated
----------- ------------ ---------- --------- ------------ ---------- ------------ -------------
Current assets:
Receivables $ 3,964 $ 25,418 $ - $ 29,382 $ 2,697 $ 2,086 $ - $ 34,165
Inventories 5,451 25,447 - 30,898 2,233 3,945 (530) 36,546
Other current assets 13,605 24,181 108 37,894 3,426 2,174 (14,797) 28,697
----------- ------------ ---------- --------- ------------ ---------- ------------ -------------
Total current
assets 23,020 75,046 108 98,174 8,356 8,205 (15,327) 99,408
Property and equipment, net 17,933 30,824 - 48,757 1,809 801 - 51,367
Other assets:
Goodwill, net 33,738 33,533 186 67,457 6,779 1,112 - 75,348
Trademarks, net - 52,170 191 52,361 205 258 (376) 52,448
Other (1) 53,687 4,511 76,584 134,782 4,425 2,200 (129,528) 11,879
----------- ------------ ---------- --------- ------------ ---------- ------------ -------------
Total $128,378 $196,084 $77,069 $401,531 $21,574 $12,576 $(145,231) $290,450
=========== ============ ========== ========= ============ ========== ============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses $ 13,567 $ 29,336 $ - $ 42,903 $ 5,145 $ 1,762 $ (240) $ 49,570
Other current liabilities 3,816 15,498 - 19,314 2,246 4,343 (14,574) 11,329
----------- ------------ ---------- --------- ------------ ---------- ------------- -------------
Total current
liabilities 17,383 44,834 - 62,217 7,391 6,105 (14,814) 60,899
Total long term debt 89,883 45,072 - 134,955 - - - 134,955
Other liabilities 1,012 52,635 - 53,647 18,970 3,530 (57,714) 18,433
----------- ------------ ---------- --------- ------------ ---------- ------------- -------------
Total liabilities 108,278 142,541 - 250,819 26,361 9,635 (72,528) 214,287
Stockholders' equity 20,100 53,543 77,069 150,712 (4,787) 2,941 (72,703) 76,163
----------- ------------ ---------- --------- ------------ ---------- ------------- -------------
Total $128,378 $196,084 $77,069 $401,531 $21,574 $12,576 $(145,231) $290,450
=========== ============ ========== ========= ============ ========== ============= =============
9
CDRJ INVESTMENTS(LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- -------------
(1) Other assets include long-term intercompany notes receivable, JCI's and
Parent's investment in subsidiaries, and other miscellaneous assets.
Consolidating condensed statement of cash flows data for the three months
ended March 31, 2000 and 1999 is summarized as follows (in thousands):
Three months ended March 31, 2000
------------------------------------------------------------------------------------------------
Guarantor Entities Nonguarantor
---------------------------------------- Entities
JCI Jafra S.A. ----------------- Total
(U.S.) (Mexico) Parent Total Europe Other Eliminations Consolidated
------- ---------- ------ ------- ------- ------- ------------ ------------
Net cash provided by
(used in)
Operating activities $(4,238) $(2,180) $(275) $(6,693) $(2,648) $ (281) $ - $(9,622)
Investing activities (972) (56) - (1,028) (14) (194) - (1,236)
Financing activities 5,271 1,540 - 6,811 961 790 - 8,562
Effect of exchange rate
changes on cash - 693 - 693 771 (113) - 1,351
Cash at beginning of period 73 3 378 454 3,012 1,440 - 4,906
------- ------- ----- ------- ------- ------ ------- -------
Cash at end of period $ 134 $ - $ 103 $ 237 $ 2,082 $1,642 $ - $ 3,961
======= ======= ===== ======= ======= ====== ======= =======
Three months ended March 31, 2000
------------------------------------------------------------------------------------------------
Guarantor Entities Nonguarantor
---------------------------------------- Entities
JCI Jafra S.A. ----------------- Total
(U.S.) (Mexico) Parent Total Europe Other Eliminations Consolidated
------- ---------- ------ ------- ------- ------- ------------ ------------
Net cash provided by
(used in)
Operating activities $ (627) $(1,444) $ - $(2,071) $(1,541) $ (64) $ - $(3,676)
Investing activities (832) (693) - (1,525) (74) (263) - (1,862)
Financing activities 1,975 (5,250) - (3,275) - - - (3,275)
Effect of exchange rate
changes on cash - (1,483) - (1,483) 11 (88) - (1,560)
Cash at beginning of period 353 12,045 10 12,408 3,924 2,026 - 18,358
------- ------- ----- ------- ------- ------ ------- -------
Cash at end of period $ 869 $ 3,175 $ 10 $ 4,054 $ 2,320 $1,611 $ - $ 7,985
======= ======= ===== ======= ======= ====== ======= =======
(8) Restructuring Charges and Related Accruals
In 1999, the Company recorded approximately $3.7 million of restructuring
charges, of which $0.4 million was charged to income from operations in the
accompanying consolidated statements of operations for the three months ended
March 31, 1999. During the first quarter of 2000, payments of approximately $0.7
million have been charged against this accrual. As of March 31, 2000, the
remaining restructuring liability was $0.4 million.
(9) Foreign Currency Forward Contracts
The Company has entered into foreign exchange forward contracts in Mexican
pesos to reduce the effect of adverse exchange rate fluctuations in Mexico. The
outstanding foreign currency forward contracts at March 31, 2000 had a notional
value of $106,978,000 and mature at various dates extending to February 2001.
Notional amounts do not quantify market or credit exposure or represent assets
or liabilities of the Company, but are used in the calculation of cash
settlements under the contracts. The table below describes the forward contracts
that were outstanding at March 31, 2000 (in thousands):
10
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Forward Weighted
Position in Maturity Average Fair
Foreign Currecy US Dollars (1) Date Contract Rate Value (1)
- -------------------------------- -------------- ---------- ------------- ------------
Buy US Dollar/sell Mexican Peso 12,160 04/28/2000 9.79 11,593
Buy US Dollar/sell Mexican Peso 5,850 05/31/2000 9.91 5,564
Buy US Dollar/sell Mexican Peso 13,391 06/30/2000 10.01 12,747
Buy US Dollar/sell Mexican Peso 6,316 07/31/2000 10.13 5,999
Buy US Dollar/sell Mexican Peso 6,734 08/31/2000 10.25 6,396
Buy US Dollar/sell Mexican Peso 10,364 09/29/2000 10.32 9,850
Buy US Dollar/sell Mexican Peso 7,275 10/31/2000 10.45 6,912
Buy US Dollar/sell Mexican Peso 10,534 11/30/2000 10.54 10,001
Buy US Dollar/sell Mexican Peso 19,874 12/29/2000 10.67 18,760
Buy US Dollar/sell Mexican Peso 6,980 01/26/2001 10.12 6,966
Buy US Dollar/sell Mexican Peso 7,500 02/26/2001 10.20 7,485
-------- --------
$106,978 $102,273
======== ========
- -------------
(1) The "Forward Position in US Dollars" and the "Fair Value" presented above
represent notional amounts. The net of these two amounts, $4,705, 000,
represents the fair value of the forward contracts and has been recorded as
an accrued liability in the accompanying consolidated balance sheet as of
March 31, 2000, and as an exchange loss of $4,919,000 in the accompanying
consolidated statement of operations for the three months ended March 31,
2000.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
CDRJ Investments (Lux) S.A., a Luxembourg societe anonyme ("Parent") is a
holding company that conducts all of its operations through its subsidiaries. On
April 30, 1998, the Parent completed the Acquisition of Jafra from Gillette.
The Parent was organized to effect the Acquisition. The Acquisition was
sponsored by Clayton, Dubilier & Rice, Inc. ("CD&R"), a private investment firm
specializing in acquisitions that involve management participation. As part of
the financing for the Acquisition, Clayton, Dubilier & Rice Fund V Limited
Partnership ("CD&R Fund V"), certain members of new management, certain new
directors and other persons made an equity investment in the Parent of
approximately $82.9 million in cash. In addition, $100.0 million of 11.75%
Senior Subordinated Notes due 2008 ("Notes") were issued and the Company entered
into a credit agreement (the "Senior Credit Agreement") with certain lenders.
The Senior Credit Agreement provides for senior secured credit facilities,
including a $25.0 million term loan facility (the "Term Loan Facility"), all of
which was drawn at the closing of the Acquisition, and a $65.0 million revolving
credit facility (the "Revolving Credit Facility"). The purchase price for the
Jafra Business was approximately $212.4 million (excluding $12.0 million of
financing fees and expenses), consisting of $202.5 million in cash and $9.9
million of Acquisition fees.
General
The following discussion of the results of operations, financial condition
and liquidity of the Company should be read in conjunction with the accompanying
consolidated financial statements and notes thereto and with the Company's
audited consolidated financial statements as of and for the year ended December
31, 1999, included in the Company's Annual Report on Form 10-K. The results of
operations for the three months ended March 31, 2000 are not necessarily
indicative of results that may be expected for future periods.
Results of Operations
The following table represents selected components of the Company's results
of operations, in millions of dollars and as percentages of net sales. The table
reflects the operations of the Company for the three months ended March 31, 2000
and 1999.
Three Months Ended March 31,
---------------------------------------------------
2000 1999 (1)
---------------------------------------------------
(in millions)
Net sales $ 71.7 100.0% $ 68.0 100.0%
Cost of sales 16.3 22.8 20.8 30.6
---------------------------------------------------
Gross profit 55.4 77.2 47.2 69.4
Selling, general & administrative expenses 47.1 65.7 40.6 59.6
Restructuring charges - - 0.4 0.6
---------------------------------------------------
Income from operations 8.3 11.5 6.2 9.2
Exchange gain (loss) (3.6) (5.0) 2.8 4.1
Interest, net (4.0) (5.6) (3.9) (5.8)
Other, net 0.6 0.8 - -
---------------------------------------------------
Income before income taxes 1.3 1.7 5.1 7.5
Income tax expense 2.0 2.8 4.8 7.1
---------------------------------------------------
Net income (loss) before extraordinary item (0.7) (1.1) 0.3 0.4
Extraordinary loss on early extinguishment
of debt, net of income tax benefit of $0.2 (0.4) (0.4) - -
---------------------------------------------------
Net income (loss) ($1.1) (1.5) $0.3 0.4%
===================================================
12
- -------------
(1) Certain sales promotional and other expenses which were previously reported
as selling, general and administrative expenses have been reclassified to cost
of sales to conform to the current period presentation. Total amounts that have
been reclassified are approximately $2.0 million for the three months ended
March 31, 1999. In addition, restructuring charges, which were previously
included in selling, general and administrative expenses, have been separately
disclosed in the accompanying consolidated statements of operations for the
three months ended March 31, 1999.
Three months ended March 31, 2000 compared to the three months ended March 31,
1999
Net sales. Net sales for the first quarter of 2000 increased to $71.7
million from $68.0 million in the first quarter of 1999, an increase of $3.7
million, or 5.4%. The consolidated impact of foreign currency exchange rate
fluctuations on net sales for the quarter was not material because the
devaluations of currencies in Europe and South American markets were
substantially offset by the strengthening of the Mexican peso when measured
against the U.S. dollar in 2000 relative to 1999. The Company's average number
of consultants (who perform the duties of sales representatives) worldwide for
the first quarter increased to approximately 296,000, or 16.2% over the 1999
average. The Company's consultant productivity increased 5.2% in the first
quarter of 2000. The Company defines consultant productivity as resale sales
(sales to consultants for resale to the ultimate consumers) in U.S. dollars per
active consultant. In general, consultants are considered to be active if they
place one order within four months.
In Mexico, net sales for the first quarter of 2000 increased to $44.4
million from $39.3 million in the first quarter of 1999, an increase of $5.1
million, or 13.0%. Sales in Mexico in local currency increased by 7.6% over the
comparable 1999 period. The year to year increase was the result of an increased
consultant base, greater productivity of consultants and price increases,
partially offset by a lower activity (ordering) level. In Mexico, the average
number of consultants for the first quarter of 2000 increased to approximately
194,000, or 18.5% over the 1999 average. Consultant productivity in Mexico
increased 19.0% in the first quarter of 2000, but the percentage of active,
ordering consultants decreased by 8.8%.
In the U.S., net sales decreased to $16.7 million for the first quarter of
2000 from $17.3 million in the first quarter of 1999, a decrease of $0.6
million, or 3.5%. U.S. net sales in the first quarter of 1999 included
approximately $0.8 million of certain low margin sales to a third party
manufacturer. Excluding the impact of these sales, net sales in the U.S. for the
first quarter of 2000 increased 1.2%, due primarily to an increased consultant
base and greater activity level, partially offset by lower consultant
productivity. In the U.S., the average number of consultants for the first
quarter of 2000 increased to 56,000, or 1.6% over the 1999 average. Consultant
productivity in the U.S. decreased by 12.1% in the first quarter of 2000,
primarily due to some promotional programs that stimulated ordering activity,
but at lower order sizes. The percentage of active, ordering consultants
increased by 6.6%.
In Europe, net sales decreased to $6.5 million in the first quarter of 2000
from $8.2 million in the first quarter of 1999, a decrease of $1.7 million, or
20.7%. Contributing to the sales decline was an unfavorable exchange rate impact
on sales of $1.0 million. Excluding the exchange rate impact, net sales
decreased 8.5%, due primarily to decreases in the number of consultants. In
Europe, the average number of consultants for the first quarter of 2000
decreased to approximately 17,000, or 8.2% below the 1999 average.
Gross profit. Gross profit in the first quarter of 2000 increased to $55.4
million from $47.2 million in the comparable prior year period, an increase of
$8.2 million, or 17.4%. Gross profit as a percentage of sales (gross margin)
increased to 77.2% from 69.4%.
In Mexico, gross profit in the first quarter of 2000 increased to $34.5
million from $26.9 million in 1999, an increase of $7.6 million, or 28.3%.
Gross margin increased to 77.7% from 68.5%, due to sales price increases, a more
favorable product mix, reduced product costs, and manufacturing cost
efficiencies related to increased volume. The more favorable product mix
consisted of a higher percentage of resale items as compared to non-resale
items, and among the promotional items, there was a lower level of discounting
compared to the prior year. The reduced product costs included foreign exchange
gains from purchasing inventory and components in dollar-denominated
transactions with stronger pesos, as well as cost reductions on skin and body
products that were
13
not achieved until the beginning of the third quarter of 1999, after the U.S.
manufacturing of these products was outsourced.
In the U.S., gross profit in the first quarter of 2000 increased to $13.2
million from $11.8 million in 1999, an increase of $1.4 million, or 11.9%. Low
margin third party sales in 1999 were $0.8 million. Gross margin, excluding the
impact of third party sales in 1999, increased to 78.9% from 71.7%, due to a
more favorable product mix and reduced product costs. The more favorable
product mix was the result of a lower level of discounting of promotional items
in 2000 compared to 1999. The reduced product costs in the U.S. included cost
reductions on skin and body products that were not achieved until the beginning
of the third quarter of 1999, after the U.S. manufacturing of these products was
outsourced.
In Europe, gross profit in the first quarter of 2000 decreased to $5.0
million from $6.3 million in 1999, a decrease of $1.3 million, or 20.6%. Gross
margin was 76.1% for both periods. Slight favorability in the product mix was
offset by foreign exchange losses on product purchases.
Selling, general and administrative expenses. SG&A expenses in the first
quarter of 2000 increased to $47.1 million from $40.6 million in the first
quarter of 1999, an increase of $6.5 million, or 16.0%. SG&A as a percentage of
net sales increased in the first quarter of 2000 to 65.7% from 59.6% for the
same period in 1999.
In Mexico, SG&A expenses in the first quarter of 2000 increased to $20.1
million from $16.3 million in the comparable prior year period, an increase of
$3.8 million, or 23.3%. The increased SG&A in Mexico related primarily to
commissions and administrative expenses incurred to support growing sales. In
the U.S., SG&A expenses in the first quarter of 2000 increased to $13.2 million
from $10.2 million in the comparable prior year period, an increase of $3.0
million, or 29.4%. During the first quarter of 2000, the U.S. market incurred
$1.3 million of expenses related to a major promotional event that was held to
launch a new skin care line and concurrently announce the rollout of the e-
commerce program, and there was no similar event held during 1999. Excluding
this item, SG&A in the U.S. increased 16.7%, due primarily to a change in the
lineage program which resulted in higher commissions. Corporate expenses in the
first quarter of 2000 increased to $4.6 million from $4.1 million, an increase
of $0.5 million, or 12.2%, primarily as a result of costs incurred in connection
with the development of the Company's e-commerce business.
Restructuring charges. In the first quarter of 1999, the Company recorded
approximately $0.4 million of restructuring charges relating to certain
restructuring activities in the U.S., Europe and Mexico. Substantially all of
the charges related to severance costs.
Interest expense. Net interest expense (including amortization of deferred
financing fees) in the first quarter of 2000 increased to $4.0 million from $3.9
million in 1999, an increase of $0.1 million, or 2.6%. During the latter part
of 1999 and the first quarter of 2000, the Company repurchased and retired $24.8
million of its Notes and replaced them with lower cost debt under the Revolving
Credit Facility. These debt restructuring activities resulted in interest
savings of approximately $0.2 million for the quarter, which were offset by $0.3
million of additional interest expense due to slightly higher average net debt
balances, combined with higher interest rates on the Term Loan and Revolving
Credit Facility in 2000.
Other income (expense). Other income in the first quarter of 2000 was $0.6
million, which consisted primarily of $0.5 million related to a recovery of the
effect of inflation upon an account receivable due from the Mexican government.
Other income (expense) in the first quarter of 1999 was nominal.
Exchange gain (loss). The Company's foreign exchange loss was $3.6 million
in the first quarter of 2000, compared to a foreign exchange gain of $2.8
million in the prior year, a net change of $6.4 million. The net foreign
exchange loss for 2000 has three elements: unrealized losses on forward
contracts, unrealized gains on the remeasurement of U.S. dollar-denominated debt
as the peso strengthened against the dollar, and realized gains or losses on
transactions denominated in foreign currencies. During the latter part of 1999,
the Company initiated a hedging program to protect against potential devaluation
of the Mexican peso, and established forward contracts selling Mexican pesos and
buying U.S. dollars based upon forward exchange rates. These contracts are
marked-to-market each month and the fair value of the contracts is included in
current assets and liabilities, with the offsetting gain and loss included in
exchange gain (loss) in the accompanying consolidated statements of operations.
During the first quarter of 2000, the Company had outstanding positions in
forward contracts which resulted in a $4.9 million unrealized exchange loss,
resulting from the strengthening of the Mexican peso against
14
the U.S. dollar. The strengthening of the exchange rate also benefited the
Company as revenues and net income were translated into the U.S. dollar at a
more favorable exchange rate. The remeasurement of U.S. dollar-denominated debt
resulted in an unrealized exchange gain of $1.8 million, and net realized losses
on other foreign currency transactions were $0.5 million. During the first
quarter of 1999, there were no forward contracts in place and the $2.8 million
gain was primarily the result of remeasurement of U.S. dollar-denominated debt.
Income tax expense. Income tax expense decreased to $2.0 million in the
first quarter of 2000 from $4.8 million in the comparable 1999 period, a
decrease of $2.8 million. The decrease is due to lower taxable income generated
by the Company's Mexican subsidiary in 2000 as compared to 1999. The Company's
effective income tax rate for the first quarter of 2000 was 158.0%, compared to
94.2% for the comparable period of 1999. The unusually high effective rate for
2000 is due to valuation allowances against certain foreign tax credits and net
operating losses in the U.S., Europe and South America which have the impact of
significantly increasing the effective tax rate.
Net income (loss). Net income (loss) decreased $1.4 million to a net loss
of $1.1 million in the first quarter of 2000, compared to a net income of $0.3
million in 1999. The change was primarily due to a $6.4 million negative
fluctuation in foreign exchange gain (loss) and a $6.5 million increase in SG&A
expenses, partially offset by a $8.2 million increase in gross profit, a $2.8
million decrease in income tax expenses, and the absence of $0.4 million of
restructuring charges incurred in 1999.
Liquidity and Capital Resources
The Acquisition was consummated on April 30, 1998. As part of the financing
for the Acquisition, $100.0 million of Notes were issued, $41.5 million of
borrowings were initially drawn down under the Senior Credit Agreement ($25.0
million under the Term Loan Facility and $16.5 million under the Revolving
Credit Facility), and $82.9 million of cash was contributed as an equity
investment by CD&R Fund V, certain members of management, certain directors and
other persons. The purchase price for the Jafra Business, after final
adjustments determined in 1999, was approximately $212.4 million (excluding
$12.0 million of financing fees and expenses), consisting of $202.5 million in
cash and $9.9 million of Acquisition fees.
The Company's liquidity needs arise primarily from principal and interest
payments under the Notes, the Term Loan Facility and the Revolving Credit
Facility. The Notes represent several obligations of Jafra Cosmetics
International, Inc. ("JCI") and Jafra Cosmetics International, S.A. de C.V.
("Jafra S.A.") in the amount of $60 million and $40 million (subsequently
reduced in 1999 and 2000 by the repurchases described below), respectively, with
each participating on a pro rata basis upon redemption. The Notes mature in 2008
and bear a fixed interest rate of 11.75% payable semi-annually.
Borrowings under the Senior Credit Agreement are payable in quarterly
installments of principal and interest over six years through April 30, 2004.
Scheduled term loan principal payments under the Term Loan Facility will be
approximately $3.5 million, $4.5 million, $5.5 million, $6.5 million, and $2.5
million for each of the years from 2000 through 2004, respectively. Borrowings
under the Revolving Credit Facility ($41.9 million as of March 31, 2000) mature
on April 30, 2004. Borrowings under the Senior Credit Agreement bear interest
at an annual rate of LIBOR plus a margin not to exceed 1.625% or an alternate
base rate (the higher of the prime rate or federal funds rate plus 1%, plus an
applicable margin not to exceed 0.625%). The interest rate in effect at March
31, 2000 was approximately 7.8% for the LIBOR-based borrowings, and the rate for
the prime-based borrowings was approximately 9.6%. Borrowings under the senior
Credit Agreement are secured by substantially all of the assets of JCI and Jafra
S. A. During the first quarter of 2000, cash paid for interest was approximately
$1.7 million.
Both the indenture (the "Indenture"), dated as of April 30, 1998, under
which the Notes were issued, and the Senior Credit Agreement contain certain
covenants that limit the Company's ability to incur additional indebtedness, pay
cash dividends and make certain other payments. The Indenture and the Senior
Credit Agreement also require the Company to maintain certain financial ratios
including a minimum EBITDA to cash interest expense coverage ratio and a maximum
debt to EBITDA ratio. The Company has one letter of credit outstanding as of
March 31, 2000 under the Revolving Credit Facility, in the amount of $1.35
million.
The Notes are unsecured and are generally non-callable for five years.
Thereafter, the Notes will be callable at premiums declining to par in the
eighth year. Prior to May 1, 2001, JCI and Jafra S.A. at their option may
15
concurrently redeem the Notes on a pro rata basis in an aggregate principal
amount equal to up to 35% of the original aggregate principal amount of the
Notes not exceeding the aggregate cash proceeds of one or more equity offerings,
at a redemption price of 111.75% plus accrued interest; provided, however, that
an aggregate principal amount of the Notes equal to at least 65% of the original
aggregate principal amount of the Notes must remain outstanding after each such
redemption.
A Consent and Waiver, dated November 19, 1999, to the Senior Credit
Agreement allows the Company to repurchase the Notes in the open market from
time to time, with the aggregate purchase price for all such Notes repurchased
not to exceed $25.0 million. During the first quarter of year 2000 the Company
repurchased and retired Notes with a face value of $10.8 million, and aggregate
repurchases as of March 31, 2000 were $24.8 million. The repurchased debt has
been replaced with debt under the Revolving Credit Facility, which currently has
lower effective interest rates.
In March 2000, Jafra S. A. entered into a short-term bank loan of $3.1
million in connection with the settlement of foreign currency forward contracts.
The interest rate on the loan was 18.5% per annum and the loan was repaid in
April 2000.
In April 2000, Jafra S.A. received an income tax refund of $4.7 million
from the Mexican government.
The Company believes, but no assurance can be given, that its existing
cash, cash flow from operations and availability under the Senior Credit
Agreement will provide sufficient liquidity to meet the Company's cash
requirements and working capital needs over the next twelve months.
Cash Flows
Net cash used in operating activities was $9.6 million for the first
quarter of 2000, compared to $3.7 million for the comparable 1999 period. The
$5.9 million decrease in cash flow from operations in 2000 compared to 1999 is
attributable to a decrease in the change of working capital items of $8.9
million, primarily related to an increase in inventories to support anticipated
sales growth, partially offset by a $3.0 million increase in net income (loss)
adjusted for depreciation, amortization and other non-cash items included in net
income (loss).
Net cash used in investing activities was $1.2 million for the first
quarter of 2000, which was used for capital expenditures, consisting primarily
of information system upgrades, facilities costs and production equipment.
Capital expenditures in 2000 are budgeted at approximately $12.0 million.
Net cash provided by financing activities was $8.6 million for the first
quarter of 2000, consisting primarily of net borrowings under the revolving
credit facilities of $16.9 million and net proceeds from short-term bank debt of
$3.1 million, partially offset by payments of $10.6 million for the repurchase
of subordinated debt with a face value of $10.8 million and repayments of $0.8
million under term loan facility.
The effect of exchange rate changes on cash was $1.4 million for the first
quarter of 2000, relating primarily to fluctuations in the exchange rates in
Europe and Mexico.
Foreign Operations
Sales outside of the United States aggregated approximately 77% and 75% of
the Company's total net sales for the first quarter of 2000 and 1999,
respectively. In addition, as of March 31, 2000, international subsidiaries
comprised approximately 77% of the Company's consolidated total assets.
Accordingly, the Company has experienced and continues to be exposed to foreign
exchange risk. In 2000, the Company entered into foreign currency forward
contracts in Mexican pesos to reduce the effect of potentially adverse exchange
rate fluctuations in Mexico.
The Company's subsidiary in Mexico, Jafra S.A., generated approximately
61.9% of the Company's net sales for the first quarter of 2000, compared to
57.8% for the comparable 1999 period, substantially all of which were
denominated in Mexican pesos. Jafra S.A. had $46.7 million of U.S. dollar-
denominated third party debt and $36.5 million of U.S. dollar-denominated
intercompany debt as of March 31, 2000. Gains and losses from remeasuring such
debt to the U.S. dollar from the peso are included as a component of net income.
During the first quarter of
16
2000, Jafra S. A. recognized an unrealized gain of $1.8 million on remeasurment
of these U.S. dollar-denominated debt, an unrealized loss of $4.9 million on
outstanding foreign currency forward contracts and a realized loss of $0.5
million on settlement of these contracts.
Year 2000 issue
The Company has completed all phases of its year 2000 compliance project.
As of the filing date, the Company has experienced no significant disruptions to
its business resulting from failures of the Company's internal computer system
or its critical suppliers' processes or systems as a result of the year 2000
issue. Although the Company believes that it has successfully avoided any
significant disruptions, it will continue to monitor all critical systems for
the appearance of delayed complications or disruptions, most particularly to any
month-end, quarter-end and year-end processing that has yet to be executed in a
production environment. The costs associated with the year 2000 compliance
problem as of March 31, 2000 have not been material to the Company.
European Economic and Monetary Union
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and the euro. The participating countries adopted the euro as their
common legal currency on that day. The euro will trade on currency exchanges and
be available for non-cash transactions during the transition period between
January 1, 1999 and January 1, 2002. During this transition period, the existing
currencies are scheduled to remain legal tender in the participating countries
as denominations of the euro and public and private parties may pay for goods
and services using either the euro or the participating countries' existing
currencies.
During the transition period, the Company will continue to utilize the
respective country's existing currency as the functional currency. Use of the
euro by the Company or its consultants is not expected to be significant
and will be converted and recorded in the Company's accounting records in the
existing functional currency.
The Company intends to adopt the euro as its functional currency when the
majority of its transactions in the member countries are conducted in the euro.
The Company is currently identifying the impact the euro will have on its
information systems throughout Europe. The Company has identified that its
European commercial system will not support the euro, and is looking into
various alternatives either to update or replace the system. The Company does
not expect the introduction of the euro to materially adversely affect its
business, financial condition, or results of operations.
Business Trends and Initiatives
The markets in which the Company competes are highly competitive. Price,
quality, sales consultants and a broad range of product offerings are the
dominant competitive factors in the cosmetics direct selling industry. The
Company intends to respond to competitive pressures in each major geographic
marketplace in which it participates. The timing of these responses, which may
occur sooner in certain geographies and later in others, may impact future
quarterly results.
The Company has experienced significant sales growth in Mexico over the
last nine quarters, due in large part to an increase in the number of
consultants. The Company's Mexican subsidiary generated 61.9% of the Company's
consolidated net sales for the first quarter of 2000, compared to 59.1% for the
full year in 1999. The year to year sales growth in Mexico for the first quarter
of 2000 was approximately 13% in U.S. dollars and 8% in local currency. Given a
continued stable economic environment, the Company intends to continue to grow
its revenues and consultant base in Mexico, but no assurance can be given that
sales in Mexico will continue to increase at these rates.
Excluding the impact of low margin sales to a third party manufacturer, net
sales in the U.S. in the first quarter of 2000 increased 1.2% compared to the
prior year. The U.S. plans to implement a number of strategies in the
remainder of 2000 which, along with the initiation of doing business via e-
commerce and an increased focus
17
on sponsoring new consultants through enhanced training programs, are intended
to stimulate sales growth in the range of 10-15% over 1999 levels.
Net sales in Europe have been on a downward trend for the last two years.
In the first quarter of 2000, excluding the impact of exchange rates, net sales
decreased 8.5% from 1999, primarily due to a decline in the number of
consultants. Sales in Europe for the year 2000 are expected to be at 1999
levels. The Company continues to evaluate opportunities to streamline its
operations to enhance the profitability achieved by these markets.
As a result of these differential growth rates, the Company expects, but no
assurance can be given, that its percentage of net sales in Mexico will increase
slightly, and its percentage of net sales in Europe will decrease slightly for
the near term.
The Company has made plans to develop new business in 2000 through
expansion into new markets, particularly Thailand, and by utilizing the Internet
and electronic commerce to increase its revenue base in existing markets.
Information Concerning Forward-Looking Statements
Certain of the statements contained in this report (other than the
Company's consolidated financial statements and other statements of historical
fact) are forward-looking statements, including, without limitation, (i) the
statements in "--Liquidity and Capital Resources" concerning the Company's
belief that it will have sufficient liquidity to meet its cash requirements and
working capital needs over the next twelve months; (ii) the statement in "--Cash
Flows" that total capital expenditures in 2000 are budgeted at approximately
$12.0 million; (iii) the statements in "--Year 2000 Issue" that the Company
believes it has successfully avoided any significant disruptions; (iv) the
statements in "--European Economic and Monetary Union" concerning the Company's
expectations that (a) use of the euro by the Company or its consultants will not
be significant; and (b) the introduction of the euro will not materially
adversely affect its business, financial condition or results of operations; (v)
the statements in "--Business Trends and Initiatives" that (a) the Company
intends to respond to competitive pressures in each major geographic marketplace
in which it participates; (b) the timing of these responses, which may occur
sooner in certain geographies and later in others, may impact future quarterly
results; (c) given a continued stable economic environment, the Company intends
that it will grow its revenues and consultant base in Mexico; (d) the Company
intends to grow its year 2000 sales in the U.S. market 10-15% due to new
strategies and the initiation of e-commerce business; (e) the Company's
expectation that sales in Europe for the year 2000 will be at 1999 levels; and
(f) the Company's expectation that the percentage of net sales in Mexico will
increase slightly, and that its percentage of net sales in Europe will decrease
slightly for the near term; and (vi) other statements as to management's or the
Company's expectations or beliefs presented in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Forward-looking statements are based upon management's current expectations
and beliefs concerning future developments and their potential effects upon the
Company. There can be no assurance that future developments will be in
accordance with management's expectations or that the effect of future
developments on the Company will be those anticipated by management. The factors
described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999 (including, without limitation, those discussed in "Business--
Strategy," "--International Operations," "--Distribution," "--Manufacturing,"
"--Patents and Trademarks," "--Management Information Systems," "--Environmental
Matters," "Properties," "Legal Proceedings" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations-- Results of
Operations," "--Liquidity and Capital Resources," "--Foreign Operations," "--
Year 2000 Issue," and "European Economic and Monetary Union''), or in other
Securities and Exchange Commission filings, could affect (and in some cases have
affected) the Company's actual results and could cause such results to differ
materially from estimates or expectations reflected in such forward-looking
statements.
While the Company periodically reassesses material trends and uncertainties
affecting the Company's results of operations and financial condition in
connection with its preparation of management's discussion and analysis of
18
results of operations and financial condition contained in its quarterly and
annual reports, the Company does not intend to review or revise any particular
forward-looking statement referenced in this report in light of future events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks arising from transactions in
the normal course of its business, and from debt incurred in connection with the
Acquisition. Such risk is principally associated with interest rate and foreign
exchange fluctuations, as well as changes in the Company's credit standing. See
disclosures under Item 7a, "Quantitative and Qualitative Disclosures About
Market Risks" in the Company's annual report on Form 10-K for the year ended
December 31, 1999. No significant changes have occurred during the first
quarter of 2000 in relation to the interest rate risk.
Foreign Currency Risk
The Company operates globally, with manufacturing facilities in Mexico and
distribution facilities in various locations around the world. All intercompany
product sales are denominated in U.S. dollars. In addition, 77% of the
Company's revenue for first quarter of 2000 was generated in countries with a
functional currency other than the U.S. dollar. As a result, the Compay's
earnings and cash flows for the first quarter of 2000 are exposed to
fluctuations in foreign currency exchange rates.
The Company may reduce its primary market exposures to fluctuations in
foreign exchange rates and hedge contractual foreign currency cash flows or
obligations (including third-party and intercompany foreign currency
transactions) by creating offsetting positions through the use of forward
exchange contracts. The Company regularly monitors its foreign currency
exposures and ensures that contract amounts do not exceed the amounts of the
underlying exposures. The Company does not use derivative financial instruments
for trading or speculative purposes, nor is the Company a party to leveraged
derivatives.
The table below describes the forward contracts that were outstanding at
March 31, 2000 (dollar amounts in thousands). These foreign currency forward
contracts do not qualify as hedging transactions under the current accounting
definitions and, accordingly, have been marked to market through income.
Forward Weighted
Position in Maturity Average Fair
Foreign Currecy US Dollars (1) Date Contract Rate Value (1)
- ------------------------------------- ---------------- ---------- ------------- --------------
Buy US Dollar/sell Mexican Peso 12,160 4/28/00 9.79 11,593
Buy US Dollar/sell Mexican Peso 5,850 5/31/00 9.91 5,564
Buy US Dollar/sell Mexican Peso 13,391 6/30/00 10.01 12,747
Buy US Dollar/sell Mexican Peso 6,316 7/31/00 10.13 5,999
Buy US Dollar/sell Mexican Peso 6,734 8/31/00 10.25 6,396
Buy US Dollar/sell Mexican Peso 10,364 9/29/00 10.32 9,850
Buy US Dollar/sell Mexican Peso 7,275 10/31/00 10.45 6,912
Buy US Dollar/sell Mexican Peso 10,534 11/30/00 10.54 10,001
Buy US Dollar/sell Mexican Peso 19,874 12/29/00 10.67 18,760
Buy US Dollar/sell Mexican Peso 6,980 1/26/01 10.12 6,966
Buy US Dollar/sell Mexican Peso 7,500 2/26/01 10.20 7,485
-------- --------
$106,978 $102,273
======== ========
- -------------
(1) The "Forward Position in US Dollars" and the "Fair Value" presented above
represent notional amounts. The net of these two amounts, $4,705, 000,
represents the fair value of the forward contracts and has been recorded as
an accrued liability in the accompanying consolidated balance sheet as of
March 31, 2000, and as an exchange loss of $4,919,000 in the accompanying
consolidated statement of operations for the three months ended March 31,
2000.
19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See discussion under "Legal Proceedings" in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
The following exhibit is filed herewith or incorporated by reference:
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
During the quarter ended March 31, 2000, the Company filed no reports on
Form 8-K.
20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CDRJ Investments (Lux) S.A.
/s/ MICHAEL DIGREGORIO
-----------------------------------
Michael DiGregorio
Senior Vice President and Chief Financial Officer of the
Advisory Committee (Principal Financial Officer)
May 15, 2000
21
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
22