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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
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)
10, rue Antoine Jans
L-1820 Luxembourg
Luxembourg
(Address, including zip code, of registrant's principal executive offices)
(352) 476-867-1
(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 August 10, 1999
829,940 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
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited): Page
----
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
June 30, December 31,
1999 1998
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,531 $ 18,358
Receivables, net of allowances of $2,160 in 1999
and $2,284 in 1998 27,515 24,449
Inventories 25,696 33,195
Prepaid taxes 8,293 5,835
Prepaid expenses and other current assets 3,408 5,648
------------- -------------
Total current assets 77,443 87,485
Property and equipment, net 54,427 56,238
Other assets:
Goodwill, net of accumulated amortization of $2,127 in 1999
and $1,161 in 1998 77,607 77,193
Trademarks, net of accumulated amortization of $1,810 in 1999
and $929 in 1998 53,661 53,234
Deferred financing fees and other, net of accumulated
amortization of $2,205 in 1999 and $1,407 in 1998 13,131 14,484
------------- -------------
TOTAL $ 276,269 $ 288,634
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,000 $ 2,500
Accounts payable 17,763 25,905
Accrued liabilities 30,816 34,183
Income taxes payable 131 1,017
Deferred income taxes - 953
------------- -------------
Total current liabilities 51,710 64,558
Long-term debt 139,450 139,000
Deferred income taxes 12,116 8,202
Other long-term liabilities 1,274 1,433
------------- -------------
Total liabilities 204,550 213,193
------------- -------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Common stock, par value $2.00; 1,020,000 shares authorized;
829,940 shares issued and outstanding 1,660 1,660
Additional paid-in capital 81,275 81,275
Accumulated deficit (9,903) (8,041)
Other comprehensive income (loss) - cumulative foreign
currency translation adjustment (1,313) 547
------------- -------------
Total stockholders' equity 71,719 75,441
------------- -------------
TOTAL $ 276,269 $ 288,634
============= =============
See accompanying notes to consolidated financial statements.
3
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
1999 1998 1999 1998
------------- ------------------------ ------------- ------------------------
Predecessor Predecessor
----------- -----------
Three Months Two Months One Month Six Months Two Months Four Months
Ended Ended Ended Ended Ended Ended
June 30 June 30 April 30 June 30 June 30 April 30
----------- ---------- ---------- ---------- ---------- -----------
Net sales $ 71,630 $ 41,008 $ 20,260 $ 139,590 $ 41,008 $ 77,282
Cost of sales 19,775 12,436 5,940 38,602 12,436 21,682
----------- ---------- ---------- ---------- ---------- -----------
Gross profit 51,855 28,572 14,320 100,988 28,572 55,600
Selling, general and administrative expenses 45,173 24,949 13,819 88,065 24,949 50,159
Restructuring charge 2,719 - - 2,719 - -
----------- ---------- ---------- ---------- ---------- -----------
Income from operations 3,963 3,623 501 10,204 3,623 5,441
Other income (expense):
Exchange gain (loss) 682 (1,297) 106 3,446 (1,297) 1,376
Interest (expense) income, net (4,320) (2,707) (35) (8,222) (2,707) 78
Other, net 71 157 58 89 157 104
----------- ---------- ---------- ---------- ---------- -----------
Income (loss) before income taxes 396 (224) 630 5,517 (224) 6,999
Income tax expense 2,558 357 264 7,379 357 2,899
----------- ---------- ---------- ---------- ---------- -----------
Net income (loss) $ (2,162) $ (581) $ 366 $ (1,862) $ (581) $ 4,100
=========== ========== ========== ========== ========== ===========
See accompanying notes to consolidated financial statements.
4
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
1999 1998
----------- ---------------------------------
Predecessor
--------------
Six Months Two Months Four Months
Ended June 30 Ended June 30 Ended April 30
------------- -------------- --------------
Cash flows from operating activities:
Net income (loss) $ (1,862) $ (581) $ 4,100
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,680 1,009 1,363
Amortization of deferred financing fees 798 274 -
Deferred income taxes 2,961 (1,113) 375
Unrealized foreign exchange gain (3,361) - -
Changes in assets and liabilities:
Receivables, net (1,239) 1,392 (2,063)
Inventories 5,207 766 (512)
Prepaid expenses and other current assets 2,240 (6,139) (7,457)
Other assets 367 (1,326) 3,948
Accounts payable and accrued liabilities (6,497) 8,526 (7,144)
Income taxes payable/prepaid (2,938) 5,419 (247)
Other long-term liabilities (159) (37) (408)
---------- ---------- ---------
Net cash provided by (used in) operating activities (803) 8,190 (8,045)
---------- ---------- ---------
Cash flows from investing activities:
Payments of previously accrued Acquisition fees (1,784) - -
Proceeds from sales of property and equipment - - 8,811
Purchases of property and equipment (2,759) (464) (6,124)
Purchase of Jafra Business, net of cash received of $2,339 - (184,732) -
Withholding taxes on purchase price - (12,929) -
Purchases of marketable securities - - (97)
---------- ---------- ---------
Net cash provided by (used in) investing activities (4,543) (198,125) 2,590
---------- ---------- ---------
Cash flows from financing activities:
Net borrowings under revolving credit facility 2,200 - -
Principal repayments under term loan facility (1,250) - -
Capital contributions by Gillette - - 5,013
Transactions with Gillette and other divisions - - (13,792)
Proceeds from issuance of subordinated debt - 100,000 -
Proceeds from issuance of revolving credit facility - 15,000 -
Proceeds from term loan - 25,000 -
Contribution of equity - 78,722 -
Deferred financing fees - (10,468) -
---------- ---------- ---------
Net cash provided by (used in) financing activities 950 208,254 (8,779)
Effect of exchange rate changes on cash (1,431) (176) (333)
Effect of accounting calendar change on cash - - 6,276
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents (5,827) 18,143 (8,291)
Cash and cash equivalents at beginning of period 18,358 228 10,231
---------- ---------- ---------
Cash and cash equivalents at end of period $ 12,531 $ 18,371 $ 1,940
========== ========== =========
See accompanying notes to consolidated financial statements.
(Continued)
5
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONCLUDED)
Non-cash investing and financing activities:
During the second quarter of 1999, the Company transferred inventory with a
book value of approximately $2.3 million and fixed assets with a net book value
of approximately $3.8 million to a third party contractor in connection with a
manufacturing outsourcing agreement, in exchange for notes receivable with
present values of $2.1 million and $1.5 million, respectively (See Note 8). The
resulting loss of approximately $2.5 million was recorded as a charge against
the restructuring accrual established in connection with the Acquisition.
6
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" or the "Company") and subsidiaries and Jafra Cosmetics
International (the "Predecessor") 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 June 30, 1999, 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 of its operations through its subsidiaries. The Parent
and its subsidiaries are collectively referred to as the "Company." On April 30,
1998, pursuant to an acquisition agreement (the "Acquisition Agreement") between
the Parent, certain of its subsidiaries and Gillette, (i) Jafra Cosmetics
International Inc., a California corporation, merged with and into JCI, with JCI
as the surviving entity, (ii) Jafra S.A. acquired the stock of Grupo Jafra, S.A.
de C.V., a Mexican company ("Grupo Jafra"), which merged with and into Jafra
S.A. following the consummation of the Acquisition, with Jafra S.A. as the
surviving entity, (iii) indirect subsidiaries of the Parent purchased the stock
of Gillette subsidiaries conducting the Jafra Business in Germany, Italy, the
Netherlands and Switzerland; and (iv) indirect subsidiaries of the Parent
acquired from various Gillette subsidiaries certain assets used in the Jafra
Business in Austria, Argentina, Colombia and Venezuela.
The accompanying consolidated financial statements as of and for the three and
six month periods ended June 30, 1999 and for the two months ended June 30, 1998
reflect the operations of the Parent and its subsidiaries. The accompanying
combined financial statements for the one and four month periods ended April 30,
1998 reflect the operations of the Jafra Business prior to the Acquisition and
are referred to as the "Predecessor" operations. All significant intercompany or
interdivisional accounts and transactions between entities comprising the Jafra
Business have been eliminated in consolidation and combination. Certain
previously reported amounts have been reclassified to conform to the current
period presentation.
The combined financial statements of the Predecessor included the following
subsidiaries and divisions of Gillette: Jafra Cosmetics International, Inc., a
California corporation; Jafra Cosmetics GmbH, a German company; Jafra Cosmetics
International B.V., a Netherlands company; Jafra Cosmetics S.p.A., an Italian
company; Jafra Cosmetics A.G., a Swiss company; Grupo Jafra S.A. de C.V., a
Mexican company, and its subsidiaries, together with certain operating assets
and the related operating profit of Gillette Braun used in the Jafra business in
Mexico (the "Braun Assets"); the Jafra-related operations of Gillette affiliates
in Austria, Argentina, Colombia and Venezuela; and the assets related to the
Jafra intellectual property, formerly held by Gillette, that are used in the
Jafra Business.
Because of the debt financing incurred in connection with the Acquisition, the
exclusion of certain assets and liabilities not acquired, and the adjustments
made to allocate the excess of the aggregate purchase price over the historical
value of the net assets acquired, the accompanying consolidated financial
statements of the Company are not directly comparable to those of the
Predecessor.
The purchase price of the Jafra Business was $212.3 million (consisting of the
$202.5 million cash purchase price, $2.5 million of which was determined and
paid subsequent to the Acquisition date, and $9.8 million of Acquisition fees).
During 1999, the final amount of fees related to the Acquisition and the
concurrent issuance of debt was determined to be $21.7 million. $9.8 million of
such fees were allocated as Acquisition fees, and were accounted for as goodwill
in the purchase price allocation. $11.9 million of such fees were capitalized
as deferred financing fees, which are being amortized over the term of the
related debt.
In 1998, the Predecessor changed the reporting period for its foreign
operations from a fiscal year ending November 30 to a calendar year ending
December 31. The line item denoted "Effect of accounting calendar change on
cash" in the combined statements of cash flows represents the change in the
cash balance of the Predecessor's foreign operations from November 30, 1997 to
December 31, 1997.
7
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following unaudited pro forma financial information for the Company
gives effect to the Acquisition, including its impact upon depreciation and
amortization expense, CD&R management fees, executive compensation, insurance
expense, interest expense on Acquisition debt, and the related income tax effect
of the foregoing adjustments as if the transaction had occurred as of January 1,
1998 (in thousands):
Six Months
Ended
June 30,
1998
-----------
Net sales $ 118,290
Net loss $ (1,081)
The pro forma results have been prepared for comparative purposes only and
do not purport to represent what the Company's actual results of operations
would have been had the transaction occurred as of the beginning of the periods
presented and are not intended to be a projection of future results or trends.
Throughout 1998, Jafra S.A.'s functional currency was the U.S. dollar
because Mexico was considered to be a hyperinflationary economy. As of January
1, 1999, Mexico is no longer considered a hyperinflationary economy, and the
Company now accounts for its Mexican operations using the peso as its functional
currency. Approximately $2.0 million of deferred income tax liabilities
associated with temporary income tax differences that arose from the change in
functional currency have been reflected as an adjustment to the cumulative
translation component of stockholders' equity.
In June 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement establishes accounting and reporting standards for derivative
instruments and for hedging activities and will be effective 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):
June 30, December 31,
1999 1998
-------- ------------
Raw materials and supplies $ 7,398 $ 7,553
Finished goods 18,298 25,642
-------- ------------
Total inventories $ 25,696 $ 33,195
======== ============
8
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):
June 30, December 31,
1999 1998
-------- ------------
Land $ 20,780 $ 20,126
Buildings 17,206 16,608
Machinery and equipment 20,022 22,256
-------- --------
58,008 58,990
Less accumulated depreciation 3,581 2,752
-------- --------
Property and equipment, net $ 54,427 $ 56,238
======== ========
(4) 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 and six month periods ended June 30, 1999
principally as a result of valuation allowances applied to losses by the U.S.
entity, JCI, and certain foreign subsidiaries, and a higher effective tax rate
in the Mexico entity, Jafra S.A., due to certain inflation-related income tax
adjustments.
(5) Comprehensive Income (Loss)
Comprehensive income (loss) is summarized as follows (in thousands):
1999 1998 1999 1998
-------- ----------------------- -------- -----------------------
Predecessor Predecessor
----------- -----------
Three Months Two Months One Month Six Months Two Months Four Months
Ended Ended Ended Ended Ended Ended
June 30 June 30 April 30 June 30 June 30 April 30
------------ ---------- --------- ---------- ---------- -----------
Net income (loss) $ (2,162) $ (581) $ 366 $ (1,862) $ (581) $ 4,100
Foreign currency translation adjustment (197) (176) (63) (1,860) (176) (333)
-------- -------- ------- --------- -------- ---------
Comprehensive income (loss) $ (2,359) $ (757) $ 303 $ (3,722) $ (757) $ 3,767
======== ======== ======= ========= ======== =========
(6) Commitments and Contingencies
The Company is involved from time to time in routine legal matters
incidental to its business. The Company believes that the resolution of such
matters will not have a material adverse effect on the Company's business,
financial condition or results of operations.
(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.
JCI and Jafra S.A. have each guaranteed the obligations under the 11 3/4%
Subordinated Notes due 2008 (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. Prior to the Acquisition, JCI and Jafra S.A. were Jafra
Cosmetics International, Inc., a California corporation, and Grupo Jafra,
respectively, as defined below. The Nonguarantor entities are the
9
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Parent's indirect European subsidiaries in Germany, the Netherlands,
Switzerland, Italy, Austria and Poland and its indirect South American
subsidiaries in Colombia, Argentina, Venezuela and Brazil. The Company's
subsidiaries in Poland and Brazil did not begin incurring costs until the third
quarter of 1998.
The accounting policies of the business segments are the same as those
described in the summary of significant accounting policies 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. Additionally, the Company accounts for intersegment
sales as inventory transfers.
Consolidating condensed statement of operations data for the three months
ended June 30, 1999 and the two months ended June 30, 1998 and combining
condensed statement of operations data for the one month ended April 30, 1998
are summarized as follows (in thousands):
Three months ended June 30, 1999
------------------------------------------------------------------
Guarantor Entities Nonguarantor
--------------------------------- Entities
JCI Jafra S.A. ------------------ Total
(U.S.) (Mexico) Total Europe Other Consolidated
-------- ---------- --------- --------- ------- ------------
Net sales $17,764 $41,390 $59,154 $ 8,203 $4,273 $71,630
Cost of sales 5,145 11,202 16,347 2,052 1,376 19,775
------- ------- ------- ------- ------ -------
Gross profit 12,619 30,188 42,807 6,151 2,897 51,855
Selling, general and administrative expenses:
Business segment 11,389 19,665 31,054 6,320 3,276 40,650
Allocated corporate expenses 1,121 2,614 3,735 518 270 4,523
Restructuring charge 2,719 - 2,719 - - 2,719
------- ------- ------- ------- ------ -------
Income (loss) from operations (2,610) 7,909 5,299 (687) (649) 3,963
Other expense (income) 2,442 880 3,322 264 (19) 3,567
------- ------- ------- ------- ------ -------
Income (loss) before income taxes (5,052) 7,029 1,977 (951) (630) 396
Income taxes 1 2,532 2,533 17 8 2,558
------- ------- ------- ------- ------ -------
Net income (loss) $(5,053) $ 4,497 $ (556) $ (968) $ (638) $(2,162)
======= ======= ======= ======= ====== =======
Two months ended June 30, 1998
------------------------------------------------------------------
Guarantor Entities Nonguarantor
-------------------------------- Entities
JCI Jafra S.A. ------------------- Total
(U.S.) (Mexico) Total Europe Other Consolidated
-------- ---------- ---------- --------- --------- ------------
Net sales $12,962 $18,951 $31,913 $ 6,583 $2,512 $41,008
Cost of sales 4,077 6,058 10,135 1,693 608 12,436
------- ------- ------- ------- ------ -------
Gross profit 8,885 12,893 21,778 4,890 1,904 28,572
Selling, general and administrative expenses:
Business segment 7,431 7,677 15,108 5,439 2,042 22,589
Allocated corporate expenses 745 1,091 1,836 379 145 2,360
------- ------- ------- ------- ------ -------
Income (loss) from operations 709 4,125 4,834 (928) (283) 3,623
Other expense (income) 1,017 3,287 4,304 (460) 3 3,847
------- ------- ------- ------- ------ -------
Income (loss) before income taxes (308) 838 530 (468) (286) (224)
Income taxes - 357 357 - - 357
------- ------- ------- ------- ------ -------
Net income (loss) $ (308) $ 481 $ 173 $ (468) $ (286) $ (581)
======= ======= ======= ======= ====== =======
10
CDJR INVESTMENTS (LUX) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
One Month ended April 30, 1998
--------------------------------------------------------------------------
Guarantor Entities
---------------------------- Nonguarantor
JCI Grupo Jafra Entities Other Total
(U.S.) (Mexico) Total (Europe) Regions Eliminations Combined
------ ----------- ------- ---------- --------- ------------ --------
Net sales $ 6,680 $ 8,762 $15,442 $3,412 $ 1,406 $ - $ 20,260
Cost of sales 2,845 1,952 4,797 659 385 99 5,940
------- ------- ------- ------ ------- ------- --------
Gross Profit 3,835 6,810 10,645 2,753 1,021 (99) 14,320
Selling, general and administrative expenses:
Business segment 3,503 5,212 8,715 2,686 1,321 - 12,722
Allocated corporate expenses 362 474 836 185 76 - 1,097
------- ------- ------- ------ ------- ------- --------
Income (loss) from operations (30) 1,124 1,094 (118) (376) (99) 501
Other expense (income) 680 (1,139) (459) 314 16 - (129)
------- ------- ------- ------ ------- ------- --------
Income (loss) before income taxes (710) 2,263 1,553 (432) (392) (99) 630
Income taxes 1 604 605 (341) - - 264
------- ------- ------- ------ ------- ------- --------
Net income (loss) $ (711) $ 1,659 $ 948 $ (91) $ (392) $ (99) $ 366
======= ======= ======= ====== ====== ====== ========
Consolidated condensed statement of operations data for the six months ended
June 30, 1999 and the two months ended June 30, 1998 and combining condensed
statement of operations data for the four months ended April 30, 1998 are
summarized as follows (in thousands):
Six months ended June 30, 1999
----------------------------------------------------------------
Guarantor Entities
----------------------------- Nonguarantor Entities
JCI Jafra S.A. --------------------- Total
(U.S.) (Mexico) Total Europe Other Consolidated
------- ----------- ------- ---------- --------- ------------
Net sales $35,053 $80,655 $115,708 $16,420 $ 7,462 $139,590
Cost of sales 10,932 21,434 32,366 3,903 2,333 38,602
-------- ------- -------- ------- -------- --------
Gross profit 24,121 59,221 83,342 12,517 5,129 100,988
Selling, general and administrative expenses:
Business segment 21,391 38,198 59,589 13,580 6,322 79,491
Allocated corporate expenses 2,153 4,954 7,107 1,006 461 8,574
Restructuring charge 2,719 - 2,719 - - 2,719
-------- ------- -------- ------- -------- --------
Income (loss) from operations (2,142) 16,069 13,927 (2,069) (1,654) 10,204
Other expense (income) 4,493 (707) 3,786 1,039 (138) 4,687
-------- ------- -------- ------- -------- --------
Income (loss) before income taxes (6,635) 16,776 10,141 (3,108) (1,516) 5,517
Income taxes 46 7,280 7,326 28 25 7,379
-------- ------- -------- ------- -------- --------
Net income (loss) $ (6,681) $ 9,496 $ 2,815 $(3,136) $ (1,541) $ (1,862)
======== ======= ======== ======= ======== ========
Two months ended June 30, 1998
----------------------------------------------------------------
Guarantor Entities
----------------------------- Nonguarantor Entities
JCI Jafra S.A. --------------------- Total
(U.S.) (Mexico) Total Europe Other Consolidated
------- ----------- ------- ---------- --------- ------------
Net sales $ 12,962 $ 18,951 $ 31,913 $ 6,583 $ 2,512 $ 41,008
Cost of sales 4,077 6,058 10,135 1,693 608 12,436
------- -------- -------- ------- -------- --------
Gross profit 8,885 12,893 21,778 4,890 1,904 28,572
Selling, general and administrative expenses:
Business segment 7,431 7,677 15,108 5,439 2,042 22,589
Allocated corporate expenses 745 1,091 1,836 379 145 2,360
------- -------- -------- ------- -------- --------
Income (loss) from operations 709 4,125 4,834 (928) (283) 3,623
Other expense (income) 1,017 3,287 4,304 (460) 3 3,847
------- -------- -------- ------- -------- --------
Income (loss) before income taxes (308) 838 530 (468) (286) (224)
Income taxes - 357 357 - - 357
------- -------- -------- ------- -------- --------
Net income (loss) $ (308) $ 481 $ 173 $ (468) $ (286) $ (581)
======= ======== ======== ======= ======== ========
11
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Four months ended April 30, 1998
-----------------------------------------------------------------------------------
Guarantor Entities
--------------------------------- Nonguarantor
JCI Grupo Jafra Entities Other Total
(U.S.) (Mexico) Total (Europe) Regions Eliminations Combined
--------- ---------- -------- ------------ ------- ------------ --------
Net sales $ 23,611 $ 35,722 $ 59,333 $ 13,047 $4,902 $ - $ 77,282
Cost of sales 7,775 9,984 17,759 2,962 1,238 (277) 21,682
-------- -------- -------- -------- ------ ------- --------
Gross profit 15,836 25,738 41,574 10,085 3,664 277 55,600
Selling, general and administrative expenses:
Business segment 14,367 18,276 32,643 9,779 3,792 - 46,214
Allocated corporate expenses 1,206 1,823 3,029 666 250 - 3,945
-------- -------- -------- -------- ------ ------- --------
Income (loss) from operations 263 5,639 5,902 (360) (378) 277 5,441
Other expense (income) 864 (2,791) (1,927) 353 16 - (1,558)
-------- -------- -------- -------- ------ ------- --------
Income (loss) before income taxes (601) 8,430 7,829 (713) (394) 277 6,999
Income taxes 1 2,524 2,525 374 - - 2,899
-------- -------- -------- -------- ------ ------- --------
Net income (loss) $ (602) $ 5,906 $ 5,304 $ (1,087) $ (394) $ 277 $ 4,100
======== ======== ======== ======== ====== ======= ========
Consolidating condensed balance sheet data as of June 30, 1999 is summarized as
follows (in thousands):
As of June 30, 1999
--------------------------------------------------------------------------------------------
Guarantor Entities
------------------------------------------ Nonguarantor Entities
JCI Jafra S.A. ---------------------- Total
(U.S.) (Mexico) Parent Total Europe Other Eliminations Consolidated
-------- ----------- -------- -------- --------- ------- ------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 1,009 $ 8,165 $ 10 $ 9,184 $ 1,862 $ 1,485 $ - $ 12,531
Receivables 5,140 17,074 - 22,214 3,345 1,956 - 27,515
Inventories 5,024 14,333 - 19,357 3,459 3,482 (602) 25,696
Other current assets 29,796 10,082 7 39,885 2,305 601 (31,090) 11,701
-------- -------- ------- -------- ------- ------- -------- --------
Total current assets 40,969 49,654 17 90,640 10,971 7,524 (31,692) 77,443
Property and equipment 21,117 30,511 - 51,628 2,172 627 - 54,427
Other assets:
Goodwill, net 34,404 34,334 187 68,925 7,884 798 - 77,607
Trademarks 20,388 27,816 194 48,398 4,827 436 - 53,661
Other 8,521 4,347 71,923 84,791 1,183 9 (72,852) 13,131
-------- -------- ------- -------- ------- ------- -------- --------
Total $125,399 $146,662 $72,321 $344,382 $27,037 $ 9,394 $(104,544) $276,269
======== ======== ======= ======== ======= ======= ========= ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued
expenses $ 16,753 $ 23,726 $ - $ 40,479 $ 6,234 $2,088 $ (222) $ 48,579
Other current liabilities 2,727 11,124 - 13,851 18,600 1,548 (30,868) 3,131
-------- -------- ------- -------- ------- ------- -------- --------
Total current liabilities 19,480 34,850 - 54,330 24,834 3,636 (31,090) 51,710
Total long term debt 90,700 48,750 - 139,450 - - - 139,450
Other liabilities - 12,116 - 12,116 1,274 - - 13,390
-------- -------- ----- -------- ------- ------- -------- --------
Total liabilities 110,180 95,716 - 205,896 26,108 3,636 (31,090) 204,550
Stockholders' equity 15,219 50,946 72,321 138,486 929 5,758 (73,454) 71,719
-------- -------- ------- -------- ------- ------- --------- --------
Total $125,399 $146,662 $72,321 $344,382 $27,037 $9,394 $(104,544) $276,269
======== ======== ======= ======== ======= ======= ========= ========
12
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Consolidated condensed statement of cash flows data for the six months ended
June 30, 1999 and the two months ended June 30, 1998, and combining condensed
statement of cash flows data for the four months ended April 30, 1998 is
summarized as follows (in thousands):
Six months ended June 30, 1999
----------------------------------------------------------------------------------------
Guarantor Entities Nonguarantor
--------------------------------------------------- Entities
JCI Jafra S.A. -------------------- Total
(U.S.) (Mexico) Parent Total Europe Other Consolidated
------------ ------------ ------------ -------- ---------- ------- ------------
Net cash provided by (used in)
Operating activities $ (2,826) $ 3,489 $ - $ 663 ($2,080) $ 614 $ (803)
Investing activities (2,468) (1,323) - (3,791) (176) (576) (4,543)
Financing activities 5,950 (5,000) - 950 - - 950
Effect of exchange rate changes on cash - (1,046) - (1,046) 194 (579) (1,431)
Cash at beginning of period 353 12,045 10 12,408 3,924 2,026 18,358
-------- ------- ------ ------- ------ ------ -------
Cash at end of period $1,009 $ 8,165 $ 10 $ 9,184 $1,862 $1,485 $12,531
======== ======= ====== ======= ====== ====== =======
Two months ended June 30, 1998
------------------------------------------------------------------------------
Guarantor Entities Nonguarantor
----------------------------------------- Entities
JCI Jafra S.A. -------------------- Total
(U.S.) (Mexico) Total Europe Other Consolidated
------------ ------------ ------------ ---------- ------- ------------
Net cash provided by (used in)
Operating activities $ 246 $ 6,032 $ 6,278 $ 252 $ 1,660 $ 8,190
Investing activities (83,832) (90,556) (174,388) (19,376) (4,361) (198,125)
Financing activities 89,422 92,247 181,669 21,264 5,321 208,254
Effect of exchange rate changes on cash - - - (171) (5) (176)
Cash at beginning of period - - - - 228 228
------- -------- --------- -------- ------- ---------
Cash at end of period $ 5,836 $ 7,723 $ 13,559 $ 1,969 $ 2,843 $ 18,371
======= ======== ========= ======== ======= =========
Four months ended April 30, 1998
--------------------------------------------------------------------------------
Guarantor Entities
---------------------------------------- Nonguarantor
JCI Grupo Jafra Entities Other Total
(U.S.) (Mexico) Total (Europe) Regions Conbined
------------ ------------ ------------ ------------ --------- -----------
Net cash provided by (used in)
Operating activities $ 1,361 $ (7,425) $ (6,064) $ (7,860) $ 5,879 $ (8,045)
Investing activities (528) 546 18 (242) 2,814 2,590
Financing activities (1,138) (6,232) (7,370) 7,276 (8,685) (8,779)
Effect of exchange rate changes on cash - (181) (181) 364 (516) (333)
Effect of accounting calendar change
on cash (Note 1) - 6,358 6,358 (82) - 6,276
Cash at beginning of period 759 7,458 8,217 1,370 644 10,231
------- --------- -------- ------- ------- --------
Cash at end of period $ 454 $ 524 $ 978 $ 826 $ 136 $ 1,940
======= ========= ======== ======= ======= ========
13
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(8) Restructuring Charges and Related Accruals
In connection with the Acquisition, the Company initially recorded a $4.0
million accrual for restructuring and rationalization costs (the "Acquisition
Accrual"). This accrual related to the planned realignment of the Company's
operations subsequent to the Acquisition. As of the consummation of the
Acquisition, senior management began formulating a plan to close certain
distribution facilities and involuntarily terminate certain employees.
Prior to April 30, 1999 (the one year anniversary of the Acquisition), the
Company finalized plans related to the closure of certain worldwide facilities,
principally the closure and outsourcing of the U.S. product manufacturing
functions. These restructuring plans included the transfer of certain inventory
and the sale of fixed assets at a loss to a third party contractor (the
"Contractor") and the termination of certain employees. As a result of these
restructuring plans, the total cost of the Acquisition Accrual is now estimated
to be approximately $4.6 million, resulting in a net increase to goodwill of
approximately $0.6 million. As of June 30, 1999, the remaining liability for
the Acquisition Accrual was approximately $0.3 million.
The components of the Acquisition Accrual are summarized as follows (in
thousands):
Disposal of fixed assets $ 2,336
Severance 1,724
Lease termination costs 397
Other 150
---------
$ 4,607
=========
In June 1999, the Company announced certain employee terminations related to
outsourcing the U.S. product manufacturing functions. The related estimated
cost of approximately $2.7 million was charged to income from operations in the
accompanying consolidated statements of operations. At June 30, 1999, the
remaining liability for such charges was approximately $2.4 million.
The fixed assets and inventory sold to the Contractor were paid for with
secured promissory notes. The promissory note for the fixed assets of
approximately $1.5 million bears interest at an annual rate of 8%, and is
payable in monthly installments over three years, commencing January 1, 2000.
The promissory note for inventory of approximately $2.3 million is non-interest
bearing, and is payable in monthly installments over one year, commencing
October 1, 1999. At June 30, 1999, approximately $1.8 million of notes from the
Contractor (reflected at fair value, net of discount), as well as approximately
$0.3 million of unsecured accounts receivable, were included in receivables and
approximately $1.8 million of additional notes from the Contractor were included
in other assets in the accompanying consolidated balance sheets.
In connection with the sale of the fixed assets and inventory, the Company
and the Contractor entered into a manufacturing agreement (the "Manufacturing
Agreement"). Pursuant to the Manufacturing Agreement, and subject to the terms
and conditions set forth therein, the Contractor has agreed to manufacture all
of the Company's requirements for certain cosmetic and skin care products for an
initial term of five years. Following the expiration of the initial five-year
term, the Manufacturing Agreement will be automatically extended for additional
one-year terms unless terminated by six months' prior written notice by either
party. The Manufacturing Agreement provides for price renegotiations by the
Contractor if the Company's quarterly or annual purchase volume falls below
specified minimums. In addition, the Company is obligated to purchase materials
acquired by the Contractor based upon product forecasts provided by the Company
if the Contractor is unable to sell such materials to another party. The
Contractor is solely responsible for obtaining the inventory, manufacturing the
inventory at its current location in Chino, California, complying with
applicable laws and regulations, and performing quality assurance functions.
14
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.
Prior to the consummation of the acquisition (the "Acquisition") by the Parent
of the Jafra Business (as defined) from The Gillette Company ("Gillette"), the
terms "Company" and "Jafra" refer to the various subsidiaries and divisions of
Gillette conducting the worldwide Jafra cosmetics business (the "Jafra
Business"), and, following the consummation of the Acquisition of Jafra,
collectively to the Parent and 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 3/4% Senior Subordinated Notes due 2008 (the
"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 $212.3 million (excluding $11.9 million of financing fees and
expenses), consisting of $202.5 million in cash ($2.5 million of which was
determined and paid subsequent to the Acquisition date) and $9.8 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 period ended
December 31, 1998, included in the Company's Annual Report on Form 10-K. The
results of operations for the three and six months ended June 30, 1999 are not
necessarily indicative of results that may be expected for future periods.
Business Trends and Initiatives
The markets in which the Company competes are highly competitive. Price,
quality, 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 markets than in others, may impact future quarterly results.
The Company has experienced significant sales growth in Mexico over the last
six quarters, due in large part to an increase in the number of sales
consultants. The Company's Mexican subsidiary generated 57.8% of the Company's
consolidated net sales for the first six months of 1999, compared to 47.7% for
the full year in 1998. The year to year sales growth for the six months ended
June 30,1999 was 47.5% in U.S. dollars and 69.6% in local currency. The Company
expects 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.
In the U.S., net sales for the first six months of 1999 declined 4.2%
primarily due to reduced productivity of sales consultants. During the second
quarter of 1999, the Company implemented a change in its compensation structure
for its U.S. sales consultants that is expected to stimulate productivity and
generate modest growth for the remainder of the year, and the Company expects
full year U.S. 1999 sales to be at or slightly above 1998 sales.
The Company's European sales for the first six months of 1999 declined at a
rate of approximately 16.4% from the comparable period of the prior year,
primarily due to declines in both the number and productivity of sales
consultants. The Company expects to continue to show comparative period
declines in sales in Europe for the remainder of the year, although promotional
programs planned for the summer are expected to reduce the rate of decline for
the remainder of 1999.
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
for the near term.
15
Restructuring Charges
In connection with the Acquisition, the Company initially recorded a $4.0
million accrual for restructuring and rationalization costs (the "Acquisition
Accrual"). This accrual related to the planned realignment of the Company's
operations subsequent to the Acquisition. Prior to April 30, 1999 (the one
year anniversary of the Acquisition), the Company finalized plans related to the
closure of certain worldwide facilities, principally the closure and outsourcing
of the U.S. product manufacturing functions. These restructuring plans included
the transfer of certain inventory and the sale of fixed assets at a loss to a
third party contractor (the "Contractor") and the termination of certain
employees. As a result of these restructuring plans, the total cost of the
Acquisition Accrual is now estimated to be approximately $4.6 million, resulting
in an increase to goodwill of approximately $0.6 million.
In June 1999, the Company announced certain employee terminations related to
outsourcing the U.S. product manufacturing functions. The related estimated
cost of approximately $2.7 million was charged to income from operations in the
accompanying consolidated statements of operations. At June 30, 1999, the
remaining liability for such charges was approximately $2.4 million. Based upon
anticipated production volumes, the Company believes, but no assurance can be
given, that, beginning in the third quarter of 1999, it will realize annualized
cost savings of approximately $2.5 to $3.0 million as a result of this
outsourcing.
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 consolidated operations of the Company for the three and six month
periods ended June 30, 1999 and 1998, respectively.
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- ----------------------------------
1999 1998 (1) 1999 1998 (1)
---------------- -------------- --------------- ---------------
(in millions) (in millions)
Net sales $71.6 100.0 % $61.3 100.0 % $139.6 100.0 % $118.3 100.0 %
Cost of sales 19.7 27.5 18.4 30.0 38.6 27.7 34.1 28.8
----- ----- ----- ----- ------ ----- ------ -----
Gross profit 51.9 72.5 42.9 70.0 101.0 72.3 84.2 71.2
Selling, general & administrative expenses 45.2 63.1 38.8 63.3 88.1 63.1 75.1 63.5
Restructuring charge 2.7 3.8 - 0.0 2.7 1.9 - 0.0
----- ----- ----- ----- ------ ----- ------ -----
Income from operations 4.0 5.6 4.1 6.7 10.2 7.3 9.1 7.7
Exchange gain (loss) 0.7 1.0 (1.2) (1.9) 3.4 2.5 0.1 0.1
Interest income (expense), net (4.3) (6.0) (2.7) (4.5) (8.2) (5.9) (2.6) (2.2)
Other income (expense), net - 0.0 0.2 0.4 0.1 0.1 0.2 0.2
----- ----- ----- ----- ------ ----- ------ -----
Income before income taxes 0.4 0.6 0.4 0.7 5.5 4.0 6.8 5.8
Income tax expense 2.6 3.6 0.6 1.0 7.4 5.3 3.3 2.8
----- ----- ----- ----- ------ ----- ------ -----
Net income (loss) $(2.2) (3.0)% $(0.2) (0.3)% $ (1.9) (1.3)% $ 3.5 3.0 %
===== ===== ====== ===== ====== ===== ====== =====
(1) Pursuant to the terms of the Acquisition Agreement, the Company was acquired
by Parent on April 30, 1998. Accordingly, for purposes of Management's
Discussion and Analysis of Financial Conditions and Results of Operations, the
results of operations for the three and six month periods ended June 30, 1998
are a combination of the historical results of the predecessor for the one and
four month periods ended April 30, 1998 and the Company's results of operations
for the two month period ended June 30, 1998.
Three months ended June 30, 1999 compared to the three months ended June 30,
1998
Net sales. Net sales for the second quarter of 1999 increased to $71.6
million from $61.3 million in the second quarter of 1998, an increase of $10.3
million, or 16.8%. Sales in local currencies for the second quarter of 1999
increased by 25.9% over the comparable prior year period. The Company's number
of sales consultants worldwide increased to approximately 284,000, or 20.8%,
over the June 30, 1998 total.
In Mexico, net sales increased to $41.4 million for the second quarter of 1999
from $27.7 million in the second quarter of 1998, an increase of $13.7 million,
or 49.4%, while the number of sales consultants increased to approximately
185,000, or 37.0%. Sales in Mexico in local currency increased by 66.3% over
the comparable prior year period. The significant year to year increase was
driven by the larger sales consultant base, product price increases and the
introduction of new products.
In the U.S., net sales declined to $17.8 million for the second quarter of
1999 from $19.6 million in the second quarter of 1998, a decrease of $1.8
million, or 9.2%, while the number of sales consultants decreased to
16
approximately 60,000, or 3.2% from June 30, 1998. The decrease in net sales and
productivity of sales consultants is due primarily to a change in the
qualification period of a major promotional program in 1999, in addition to
reduced volume of promotional products. Net sales related to promotional
activities, which tend to increase the productivity of sales consultants, but
typically at a lower margin, decreased by $0.8 million from period to period.
In Europe, net sales declined to $8.2 million in the second quarter of 1999
from $10.0 million in the second quarter of 1998, a decrease of $1.8 million, or
18.0%. The decrease in net sales is primarily due to a decline in both the
number and productivity of sales consultants. The number of sales consultants
in Europe decreased to approximately 18,000, or 7.7%, from June 30, 1998. The
Company's European management team implemented certain new promotional
activities in the second quarter of 1999 that are intended to increase the net
sales level and sponsoring of new sales consultants during the latter part of
1999.
Gross profit. Gross profit in the second quarter of 1999 increased to $51.9
million from $42.9 million in the comparable prior year period, an increase of
$9.0 million, or 21.0%. Gross profit as a percentage of sales (gross margin)
increased to 72.4% from 70.0%. Cost of sales for 1998 included $0.8 million
relating to the sale of certain inventories that were revalued in conjunction
with the Acquisition. Excluding the effect of this item, the adjusted gross
margin for the second quarter of 1998 would have been 71.3%. The increased
sales volumes in Mexico during the second quarter of 1999 enabled the Company to
take advantage of manufacturing efficiencies, which more than offset a less
favorable product mix consisting of higher promotional sales than in the
comparable period of 1998. In the U.S., the reduced level of promotional sales
in the second quarter of 1999, along with fewer promotional discounts, resulted
in a more favorable sales mix. European margins declined slightly due to
unfavorable exchange impacts on product costs.
Selling, general and administrative expenses. SG&A expenses in the second
quarter of 1999 increased to $45.2 million from $38.8 million for the second
quarter of 1998, an increase of $6.4 million, or 16.5%. SG&A as a percentage of
net sales in the second quarter of 1999 of 63.1% was slightly below 63.3% for
the same period in 1998. Excluding the effect of start up markets in Brazil and
Poland on SG&A expenses in 1999, SG&A as a percentage of net sales would have
been 62.3%, or an improvement of 100 basis points from the comparable prior
period. The increased SG&A expenses related primarily to sales promotions,
commissions and administrative expenses in Mexico, in conjunction with growing
sales in that region. In the U.S. market, SG&A expenses in the second quarter
of 1999 were $0.5 million higher than in the second quarter of 1998, primarily
due to a lower than normal rate of administrative expenses incurred by the
Predecessor for the month of April 1998. Additionally, U.S. market selling
expenses decreased proportionately less than sales due to changes in the lineage
programs that resulted in a higher percentage of commission overrides as a
percentage of sales. SG&A expenses in Europe declined proportionately with
sales, primarily as a result of cost containment activities. Corporate SG&A
expenses increased by $1.1 million in the second quarter of 1999, relative to
the same period of 1998, primarily as a result of $0.5 million of increased
personnel costs related to the new post-Acquisition management team and $0.4
million of increased costs incurred by the worldwide marketing group to enhance
the Company's product lines and stimulate awareness of the Company's branded
products.
Restructuring charge. In June 1999, the Company announced certain employee
terminations related to outsourcing the U.S. product manufacturing functions.
The related estimated cost of approximately $2.7 million was charged to income
from operations in the accompanying consolidated statements of operations.
Interest expense. During the second quarter of 1999, the Company incurred
$4.3 million of net interest expense (including amortization of certain
financing fees) related to the debt incurred in connection with the Acquisition.
In 1998, net interest expense in the amount of $2.7 million was incurred in May
and June.
Exchange gain (loss). The Company's foreign exchange gain increased by $1.9
million to a $0.7 million exchange gain for the second quarter of 1999 from an
exchange loss of $1.2 million in the comparable prior year period. The second
quarter 1999 gain relates primarily to the remeasurement in Mexico of U.S.
dollar-denominated debt to the peso, as the peso strengthened against the U.S.
dollar.
Income tax expense. Income tax expense for the second quarter of 1999
increased $2.0 million to $2.6 million in 1999 from $0.6 million in the
comparable 1998 period. The Company's effective income tax rate differs from
the federal statutory rate primarily due to the valuation allowances recorded
against operating losses in the U.S. and Europe. The increased income tax
expense for the second quarter of 1999 is primarily the result of higher taxable
income generated by the Company's Mexican subsidiary in 1999 as compared to
1998.
Net loss. Income from operations for the second quarter of 1999 was $4.0
million, a $0.1 million decrease
17
from the comparable 1998 period. The decrease resulted from the $2.7 million
restructuring charge in the second quarter of 1999 and increased SG&A expenses
of $6.4 million, partially offset by increased net sales of $10.3 million and
resulting increase in gross profit of $9.0 million. Excluding the aforementioned
restructuring charge, net income from operations would have been $6.7 million, a
$2.6 million increase over the comparable 1998 period. Net loss increased to
$2.2 million in the second quarter of 1999 from a net loss of $0.2 million in
the comparable 1998 period, due to the $0.1 million decrease in income from
operations, a $1.6 million increase in net interest expense resulting from the
Acquisition, a $0.2 million decrease in other income and a $2.0 million increase
in income taxes, partially offset by a $1.9 million increase in exchange gains.
Six months ended June 30, 1999 compared to the six months ended June 30, 1998
Net sales. Net sales for the six months ended June 30, 1999 increased to
$139.6 million from $118.3 million in the comparable prior year period, an
increase of $21.3 million, or 18.0%. Sales in local currencies for the six
months ended June 30, 1999 increased by 27.3% over the comparable prior year
period. The Company's average number of sales consultants worldwide increased
to approximately 268,000, or 21.8%, over the June 1998 average.
In Mexico, net sales increased to $80.7 million for the six months ended June
30, 1999 from $54.7 million for the comparable prior year period, an increase of
$26.0 million, or 47.5%, while the average number of sales consultants increased
to approximately 174,000, or 34.8% , over the June 1998 average. Sales in
Mexico in local currency increased by 69.6% over the prior year. The
significant year to year increase was driven by the larger sales consultant
base, product price increases and the introduction of new products.
In the U.S., net sales decreased to $35.1 million for the six months ended
June 30, 1999 from $36.6 million in the comparable prior year period, a decrease
of $1.5 million, or 4.1%, while the average number of sales consultants
increased to approximately 58,000 or 5.3% over the June 1998 average. Net sales
related to promotional activities, which tend to increase the productivity of
sales consultants, decreased by $1.6 million from period to period.
In Europe, net sales declined to $16.4 million in the six months ended June
30, 1999 from $19.6 million in the comparable prior year period, a decrease of
$3.2 million, or 16.3%, while the average number of sales consultants decreased
to approximately 18,000 or 9.2% under the June 1998 average.
Gross profit. Gross profit for the six months ended June 30, 1999 increased
to $101.0 million from $84.2 million in the comparable prior year period, an
increase of $16.8 million, or 20.0%. Gross profit as a percentage of sales
(gross margin) increased to 72.4% from 71.2%. Cost of sales for 1998 included
$0.8 million relating to the sale of certain inventories that were revalued in
conjunction with the Acquisition. Excluding the effect of this item, the
adjusted gross margin for the six months ended June 30, 1998 would have been
71.8%. The increased sales volumes in Mexico during the first six months of 1999
enabled the Company to take advantage of manufacturing efficiencies, which more
than offset a less favorable product mix consisting of higher promotional sales
than in the comparable period of 1998. In the U.S., the reduced level of
promotional sales in the first six months of 1999 resulted in a more favorable
sales mix than in the comparable period of 1998. European margins for the six
months ended June 30, 1999 were virtually unchanged from those of the
corresponding prior period.
Selling, general and administrative expenses. SG&A expenses for the six
months ended June 30, 1999 increased to $88.1 million from $75.1 million for the
comparable prior year period, an increase of $13.0 million, or 17.3%. SG&A as a
percentage of net sales decreased slightly in the 1999 period to 63.1% from
63.5% for the comparable period in 1998. Excluding the effect of start up
markets in Brazil and Poland from SG&A expenses in 1999, SG&A as a percentage of
net sales would have been 62.3%, or an improvement of 120 basis points from the
comparable prior period. The increased SG&A expenses related primarily to sales
promotions, commissions and administrative expenses in Mexico, in conjunction
with growing sales in Mexico. In the U.S. market, SG&A expenses for the first
six months of 1999 decreased $0.4 million, or 1.8%, from the comparable period
of 1998, primarily due to lower sales. Corporate expenses for the first six
months of 1999 increased by $2.3 million over the 1998 period as a result of
personnel costs related to the post-Acquisition management team. Additionally,
as a result of the Acquisition, 1999 SG&A expenses included $1.3 million of
incremental expenses for amortization of goodwill and trademarks that were not
incurred by the Predecessor for the first four months of 1998.
Restructuring charge. In June 1999, the Company announced certain employee
terminations related to outsourcing the U.S. product manufacturing functions.
The related estimated cost of approximately $2.7 million was charged to income
from operations in the accompanying consolidated statements of operations.
Interest expense. During the six months ended June 30, 1999, the Company
incurred $8.2 million of net
18
interest expense (including amortization of certain financing costs) related to
the debt incurred in connection with the Acquisition. The comparable prior year
period included only two months of Acquisition-related interest expense in the
amount of $2.7 million.
Exchange gain. The Company's foreign exchange gain for the six months ended
June 30, 1999 increased $3.3 million to $3.4 million from $0.1 million in the
comparable prior year period. The 1999 gain relates primarily to the
remeasurement in Mexico of U.S. dollar-denominated debt to the peso as the peso
strengthened against the dollar. The 1998 gain related to remeasurement of
peso-denominated assets and liabilities, as the functional currency of Jafra
S.A. in 1998 was the U.S. dollar.
Income tax expense. Income tax expense increased $4.1 million to $7.4
million for the six months ended June 30, 1999 from $3.3 million in the
comparable prior year period. The Company's effective income tax rate differs
from the federal statutory rate primarily due to the valuation allowances
recorded against operating losses in the U.S. and Europe. The increased income
tax expense for the six months ended June 30, 1999 is primarily the result of
higher taxable income generated by the Company's Mexican subsidiary in 1999 as
compared to 1998.
Net income (loss). Income from operations for the six months ended June 30,
1999 was $10.2 million, a $1.1 million increase from the comparable prior year
period. The increase resulted from increased net sales of $21.3 million and
resulting increase in gross profit of $16.8 million, partially offset by the
$2.7 million restructuring charge incurred in the second quarter of 1999 and a
$13.0 million increase in SG&A expenses (including $1.3 million of incremental
amortization expense resulting from the Acquisition). Excluding the
aforementioned restructuring charge, income from operations would have been
$12.9 million, resulting in a $3.8 million increase from the comparable 1998
period. Net income (loss) decreased to a net loss of $1.9 million in the six
months ended June 30, 1999 from net income of $3.5 million in the comparable
1998 period, due to a $4.1 million increase in income taxes, a $5.6 million
increase in net interest expense resulting from the Acquisition, and a $0.1
million decrease in other income, partially offset by a $1.1 million increase in
income from operations and a $3.3 million increase in exchange gains.
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, $41.1 million of
borrowings were initially drawn down under the Senior Credit Agreement ($25.0
million under the Term Loan Facility and $16.1 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 was approximately
$212.3 million (excluding $11.9 million of financing fees and expenses),
consisting of $202.5 million in cash ($2.5 million of which was determined and
paid subsequent to the Acquisition date) and $9.8 million of Acquisition fees.
The $11.9 million of financing fees and expenses are being amortized over the
term of the related debt, while the $9.8 million of Acquisition fees were
reflected as additional goodwill.
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 the 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, 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. Scheduled term loan
principal payments under the Term Loan Facility will be approximately $2.5
million, $3.5 million, $4.5 million, $5.5 million, $6.5 million, and $2.5
million for each of the years 1999 through 2004, respectively. Borrowings under
the Revolving Credit Facility 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 2.625% or an alternate base rate (the higher of the prime rate or
federal funds rate plus 1%, plus an applicable margin not to exceed 1.625%). The
interest rates in effect at June 30, 1999 were approximately 7.8% for the LIBOR-
based borrowings, and the rate for the prime-based borrowings was approximately
9.4%. Interest expense in 1999 is expected to be approximately $16.0 to $17.0
million, including approximately $1.6 million of non-cash amortization of
deferred debt issuance costs. During the six months ended June 30, 1999, cash
paid for interest was approximately $8.3 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,
19
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. At June 30, 1999, the Company was in compliance with the
financial covenants in the Indenture and Senior Credit Agreement. The Company
has one letter of credit outstanding under the Revolving Credit Facility in the
amount of $0.3 million.
Outsourcing of Manufacturing
In connection with the Acquisition, the Company initially recorded a $4.0
million accrual for restructuring and rationalization costs (the "Acquisition
Accrual"). This accrual related to the planned realignment of the Company's
operations subsequent to the Acquisition. Prior to April 30, 1999 (the one
year anniversary of the Acquisition), the Company finalized plans related to the
closure of certain worldwide facilities, principally the closure and outsourcing
of the U.S. product manufacturing functions. These restructuring plans included
the transfer of certain inventory and the sale of fixed assets at a loss to a
third party contractor (the "Contractor") and the termination of certain
employees. The total cost of the Acquisition-related restructuring accrual is
now estimated to be approximately $4.6 million, an increase of approximately
$0.6 million over the initial estimate, resulting in an increase to goodwill of
approximately $0.6 million.
In June 1999, the Company announced certain employee terminations related to
outsourcing the U.S. product manufacturing functions. The related estimated
cost of approximately $2.7 million was charged to income from operations in the
accompanying consolidated statements of operations. At June 30, 1999, the
remaining liability for such charges was approximately $2.4 million. At June
30, 1999, the remaining liability for such charges was approximately $2.4
million. The majority of the remaining costs are expected to be paid out in
cash over the next six months, although certain individuals will receive
severance payments that will extend until the second or third quarter of 2000.
The fixed assets and inventory sold to the Contractor were paid for with
secured promissory notes. The promissory note for the fixed assets of
approximately $1.5 million bears interest at an annual rate of 8%, and is
payable in monthly installments over three years, commencing January 1, 2000.
The promissory note for inventory of approximately $2.3 million is non-interest
bearing, and is payable in monthly installments over one year, commencing
October 1, 1999. At June 30, 1999, approximately $1.8 million of notes from the
Contractor (reflected at fair value, net of discount), as well as approximately
$0.3 million of unsecured accounts receivable, were included in receivables and
approximately $1.8 million of additional notes from the Contractor were included
in other assets.
In connection with the sale of the fixed assets and inventory, the Company and
the Contractor entered into a manufacturing agreement (the "Manufacturing
Agreement"). Pursuant to the Manufacturing Agreement, and subject to the terms
and conditions set forth therein, the Contractor has agreed to manufacture all
of the Company's requirements for certain cosmetic and skin care products for an
initial term of five years. Following the expiration of the initial five-year
term, the Manufacturing Agreement will be automatically extended for additional
one-year terms unless terminated by six months' prior written notice by either
party. The Manufacturing Agreement provides for price renegotiations by the
Contractor if the Company's quarterly or annual purchase volume falls below
specified minimums. In addition, the Company is obligated to purchase materials
acquired by the Contractor based upon product forecasts provided by the Company
if the Contractor is unable to sell such materials to another party. The
Contractor is solely responsible for obtaining the inventory, manufacturing the
inventory at its current location in Chino, California, complying with
applicable laws and regulations, and performing quality assurance functions.
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 until the maturity of the Revolving Credit Facility.
Cash Flows
Net cash used in operating activities was $0.8 million for the six months
ended June 30, 1999. Net loss after adding back depreciation and other non-cash
items provided operating cash flow of $2.2 million, and was offset by an
increase in working capital items of $3.0 million. The increased working
capital was primarily due to a $6.5 million reduction in accounts payable and
accrued liabilities, a $2.0 million increase in prepaid taxes and a $1.2 million
increase in accounts receivable, partially offset by reductions in inventories
of $5.2 million and prepaid expenses and other current assets of $2.2 million.
20
Net cash used in investing activities was $4.5 million for the six months
ended June 30, 1999. Capital expenditures were $2.7 million, consisting
primarily of information systems upgrades and manufacturing equipment. Total
capital spending for 1999 is budgeted at approximately $5.0 million, and is
expected to increase to $8.0 million in 2000 due to planned modifications to
information systems. In addition, the Company paid $1.8 million of previously
accrued costs relating to the Acquisition.
Net cash provided by financing activities was $1.0 million for the six months
ended June 30, 1999, consisting of net borrowings under the Revolving Credit
Facility of $2.2 million, offset by $1.2 million in principal repayments under
the Term Loan Facility.
The effect of exchange rates on cash was $1.4 million for the six months ended
June 30, 1999, relating primarily to fluctuations in the exchange rate of the
peso.
Foreign Operations
Sales outside of the United States aggregated approximately 74.9% of the
Company's total net sales for the six months ended June 30, 1999, compared to
approximately 69.1% for the comparable prior year period. In addition, as of
June 30, 1999, international subsidiaries comprised approximately 65.3%
(excluding intercompany balances) of the Company's consolidated total assets.
Accordingly, the Company has experienced and continues to be exposed to foreign
exchange risk. Although the Company historically has not entered into foreign
currency hedging contracts to mitigate this risk, it may do so in the future.
Foreign currency fluctuations can also impact operating results. Had average
exchange rates in the first six months of 1999 remained the same as in the
comparable 1998 period, 1999 net sales would have been approximately $11.7
million higher than reported.
The Company's subsidiary in Mexico, Jafra S.A., generated approximately 57.8%
of the Company's net sales for the six months ended June 30, 1999, compared to
46.2% for the comparable 1998 period, substantially all of which were
denominated in Mexican pesos. The Company manufactures its products in Mexico
and, until the end of the second quarter of 1999, also manufactured its products
in the United States. This allowed the Company to have a significant portion of
its Mexican manufacturing costs denominated in pesos. Jafra S.A. will continue
to buy product manufactured in the United States by the Contractor in U.S.
dollar denominated prices. Although Jafra S.A. buys products manufactured in
the United States in U.S. dollar denominated prices, it also sells a majority of
its manufactured product for export in U.S. dollar denominated prices. These
U.S. dollar denominated sales help to mitigate the currency exposure on U.S.
dollar denominated purchases.
Mexico has experienced periods of high inflation from time to time in the
past. Throughout 1998, Mexico's functional currency was the U.S. dollar because
Mexico was considered to be a hyperinflationary economy. As of January 1, 1999,
Mexico is no longer considered a hyperinflationary economy, and the Company now
accounts for its Mexican operations using the peso as its functional currency.
Jafra S.A. had $50.0 million of U.S. dollar denominated third party debt as of
June 30, 1999. Because the functional currency is no longer the U.S. dollar,
gains and losses of remeasuring such debt to the U.S. dollar from the peso are
now included as a component of net income, and resulted in the Company
recognizing an exchange gain of approximately $3.4 million for the six months
ended June 30, 1999. Because of the significant amount of U.S. dollar
denominated debt owed by Jafra S.A., fluctuations in the peso-to-dollar exchange
rate can have a material impact on the Company's earnings.
Year 2000 Issue
Prior to the Acquisition, the Company established a year 2000 compliance
methodology and schedule based on the Gillette model. This methodology
encompassed six phases: discovery, planning, resolution, testing, implementation
and certification. The scope of the Company's compliance program includes
information technology (computer systems, hardware and operating systems),
facilities (phone systems, plant machinery, elevators and security systems),
embedded software in production equipment and major suppliers of raw materials
and finished goods. The Company has completed the discovery and planning phases
with respect to both its information technology systems and non-information
technology systems. Approximately 25% of the systems addressed were found to
require some level of remediation or replacement. The Company is currently in
the resolution phase with respect to such systems, in which all affected
hardware, software and equipment is being repaired, upgraded or replaced.
The Company expects to complete the resolution phase for all systems
(information technology and non-information technology) by the beginning of
September 1999 and the testing phase for all systems by the end of September
1999. The Company expects to complete the implementation and certification
phases by the end of
21
October 1999. As of August 3, 1999, the Company estimated that its resolution
and testing phase for information technology systems was approximately 80%
complete. The Company has upgraded its main operating systems to a Year 2000
compliant version in Germany, the Netherlands, Austria, and Colombia, and has
also upgraded its financial systems in Italy and the Netherlands. The Company
expects to have the operating and financial systems upgraded in Venezuela and
Argentina by the end of August 1999 and in Switzerland by the end of September
1999. Operating systems are expected to be upgraded in Italy by the end of
September 1999 and financial systems in Germany and Austria are expected to be
upgraded by the end of September 1999.
The two most important information technology systems that are not Year 2000
compliant are the operating and financial systems that are installed in the
United States and Mexico. The Company is currently upgrading these systems and
expects to have the upgrades completed by the end of September 1999.
With respect to its non-information technology systems, the Company estimates
that its resolution and testing phases are virtually complete. Most non-
information technology systems were already Year 2000 compliant, but several
phone systems and one voice mail system required upgrades that are now
completed. The Company has spent approximately $1,350,000 to date on the
discovery, planning, and resolution phases for both information technology and
non-information technology systems.
The Company has budgeted $500,000 to complete the remaining Year 2000
compliance program, and believes it has sufficient cash, cash flow and borrowing
availability to meet its cash needs. Costs incurred to modify existing systems
are being expensed as incurred.
As part of its investigation conducted in the discovery phase, the Company
prepared a questionnaire that it distributed to approximately 106 of its major
suppliers, which supply 75% of the raw materials and finished goods purchased by
the Company from third party suppliers. As of August 3, 1999 the Company has
received written responses from 80 of these suppliers. Of these, 77 have
informed the Company that they do not expect that the dating problems associated
with the year 2000 will have a material adverse effect on their ability to
continue to supply the Company in accordance with past practice. Based on these
replies, the Company does not believe that the inability of any of the suppliers
that have not yet responded or have responded unfavorably to the Company's
request for information to continue to supply the Company would have a material
adverse effect on the Company's business, financial condition or results of
operations. The Company intends to seek and identify alternate sources of supply
for the affected raw materials and finished products in the event it has not
received assurance by August 31, 1999 from the remaining companies that they
will be able to supply the Company without material disruption into the year
2000. The Company currently believes there are alternative sources for all such
materials.
In the event the Company does not complete all phases of its year 2000
compliance program by December 31, 1999, the Company's most likely worst case
scenario would be that it would have to consider outsourcing its customer
service and order processing functions. No assurance can be given that the
Company will be able to outsource these functions or that the Company will not
incur significant additional expense in doing so. In the event the Company could
not outsource these functions, the Company would be unable to process orders in
a timely manner or respond to customer inquiries. This could lead to a loss of
revenue and customer satisfaction, which could have a material adverse effect on
the Company's results of operations, liquidity, and financial condition.
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 sales 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 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
22
does not expect the introduction of the euro to materially adversely affect its
business, financial condition, or results of operations.
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 statement in
"Commitments and Contingencies" that the Company believes that the resolution of
the routine legal matters in which it is involved will not have a material
adverse effect on the Company's business, financial condition or results of
operations; (ii) the statements in "--Business Trends and Initiatives"
concerning (a) the Company's intent to respond to competitive pressures in each
major geographic marketplace in which it participates, (b) the Company's
expectation that it will grow its revenues and consultant base in Mexico, (c)
the Company's expectation that the new compensation structure for its U.S. sales
consultants will stimulate productivity and generate modest growth in the
remainder of the year and that full year U.S. sales be at or slightly above 1998
sales and (d) the Company's expectation that it will continue to show
comparative period declines in sales in Europe for the remainder of the year as
well as the expectation that promotional programs planned for the summer will
reduce the rate of decline for the sales in Europe for the remainder of 1999;
and (e) the Company's expectation that the percentage of its net sales
represented by sales in Mexico will increase for the near term; (iii) the
statement in "--Restructuring Charges" concerning the Company's belief that,
beginning in the third quarter of 2000, it will realize annualized cost savings
of approximately $2.5 to $3.0 million as a result of its outsourcing of the U.S.
product manufacturing functions; (iv) the statements in "--Liquidity and Capital
Resources" concerning the Company's expectation that interest expense in 1999
will be approximately $16.0 to $17.0 million; and (b) the Company's belief that
it will have sufficient liquidity to meet its cash requirements and working
capital needs until the maturity of the Revolving Credit Facility; (v) the
statement in "--Outsourcing of Manufacturing" that the majority of the remaining
costs associated with the outsourcing are expected to be paid out in cash over
the next six months, although certain individuals will receive severance
payments that will extend until the second or third quarter of 2000; (vi) the
statement in "--Cash Flows" that total capital spending for 1999 is budgeted at
approximately $5.0 million, and is expected to increase to $8.0 million in 2000
due to planned modifications to information systems; (vii) the statements in
"--Foreign Operations" (a) that the Company may enter into foreign currency
hedging contracts in the future; and (b) that fluctuations in the peso-to-dollar
exchange rate can have a material impact on the Company's earnings; (viii) the
statements in "--Year 2000 Issue" concerning (a) the Company's expectation
that the resolution phase for all systems will be complete by the beginning of
September 1999; (b) the Company's expectation that it will complete the testing
phase for all systems by the end of September 1999 and the implementation and
certification phases by the end of October 1999; (c) the Company's expectation
that its operating and financial systems will be upgraded in Venezuela and
Argentina by the end of August 1999 and in Switzerland by the end of September
1999; (d) the Company's expectation that its operating systems will be upgraded
in Italy by the end of September 1999; (e) the Company's expectation that its
financial systems in Germany and Austria will be upgraded by the end of
September 1999; (f) the Company's expectation that its information technology
upgrades in the United States and Mexico will be completed by the end of
September 1999; (g) the Company's belief that it has sufficient cash, cash flow
and borrowing availability to meet its cash needs; (h) the Company's belief that
the inability of its suppliers to continue to supply the Company would not have
a material adverse effect on the Company's business, financial condition or
results of operations; (i) the Company's intention to identify alternate sources
of supply by August 31, 1999 and its belief that there are alternative sources
for potentially affected raw materials and finished products; (j) the Company's
identification of its most likely worst case scenario; and (ix) the statements
in "--European Economic and Monetary Union" concerning the Company's
expectations that (a) use of the euro by the Company or its sales 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; and (x) 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 period
ended December 31, 1998 (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
23
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
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 market risks which arise during the normal course of
its business from changes in interest rates and foreign currency exchange rates.
The Company has not historically used derivative financial instruments to manage
or hedge these risks. See disclosures under Item 7a, "Quantitative and
Qualitative Disclosures About Market Risks" in the Company's Annual Report on
Form 10-K for the period ended December 31, 1998. No significant changes have
occurred during the six months ended June 30, 1999.
24
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 period ended December 31, 1998 and in footnote six to the
Financial Statements included in Item 1 of this document.
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 exhibits are filed herewith or incorporated by reference:
Exhibit
Number Description of Document
- ------ -----------------------
10.1 Asset Purchase Agreement, dated as of June 10, 1999, as amended by
Amendment No. 1, dated as of June 10, 1999, by and between the Company
and the Contractor; previously filed as Exhibit 10.1 to Form 8-K, filed
on June 10, 1999, and incorporated herein by reference
10.2 Amendment No. 1 to Asset Purchase Agreement, dated as of June 10, 1999;
previously filed as Exhibit 10.2 to Form 8-K, filed on June 10, 1999 and
incorporated herein by reference
10.3 Manufacturing Agreement, dated as of June 10, 1999, by and between the
Company and the Contractor, as amended by Amendment No. 1, dated as of
June 22, 1999; previously filed as Exhibit 10.3 to Form 8-K, filed on
June 10, 1999 and incorporated herein by reference
10.4 Form of Amendment No. 1 to Manufacturing Agreement, dated as of June 10,
1999; previously filed as Exhibit 10.4 to Form 8-K, filed on June 10,
1999 and incorporated herein by reference
10.5 Form of Secured Note for the Assets, dated June 10, 1999, made by the
Contractor in favor of the Company; previously filed as Exhibit 10.5 to
Form 8-K, filed on June 10, 1999 and incorporated herein by reference
10.6 Form of Secured Note for the Inventory, dated June 10, 1999, made by the
Contractor in favor of the Company; previously filed as Exhibit 10.6 to
Form 8-K, filed on June 10, 1999 and incorporated herein by reference
27.1 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
(1) Current report on Form 8-K, filed on June 10, 1999. Item 2 (Acquisition
or Disposition of Assets) and Item 7 (Financial Statements and Exhibits)
25
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
Chief Financial Officer of the Advisory
Committee (Principal Financial Officer)
August 18, 1999
26
EXHIBITS
Exhibit
Number Description of Document
- ------ -----------------------
10.1 Asset Purchase Agreement, dated as of June 10, 1999, as amended by
Amendment No. 1, dated as of June 10, 1999, by and between the Company
and the Contractor; previously filed as Exhibit 10.1 to Form 8-K,
filed on June 10, 1999, and incorporated herein by reference.
10.2 Amendment No. 1 to Asset Purchase Agreement, dated as of June 10,
1999; previously filed as Exhibit 10.2 to Form 8-K, filed on June 10,
1999 and incorporated herein by reference.
10.3 Manufacturing Agreement, dated as of June 10, 1999, by and between the
Company and the Contractor, as amended by Amendment No. 1, dated as of
June 22, 1999; previously filed as Exhibit 10.3 to Form 8-K, filed on
June 10, 1999 and incorporated herein by reference.
10.4 Form of Amendment No. 1 to Manufacturing Agreement, dated as of June
10, 1999; previously filed as Exhibit 10.4 to Form 8-K, filed on June
10, 1999 and incorporated herein by reference.
10.5 Form of Secured Note for the Assets, dated June 10, 1999, made by the
Contractor in favor of the Company; previously filed as Exhibit 10.5
to Form 8-K, filed on June 10, 1999 and incorporated herein by
reference.
10.6 Form of Secured Note for the Inventory, dated June 10, 1999, made by
the Contractor in favor of the Company; previously filed as Exhibit
10.6 to Form 8-K, filed on June 10, 1999 and incorporated herein by
reference.
27.1 Financial Data Schedule
27