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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 SEPTEMBER 30, 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 September 30,
2000 834,609 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 and Nine Months Ended September 30, 2000
PART I - FINANCIAL INFORMATION
Page No.
--------
Item 1. Financial Statements (Unaudited):
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 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
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
Exhibits 27
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 4,708 $ 4,906
Receivables, less allowances for doubtful accounts of
$3,585 in 2000 and $3,087 in 1999 32,860 31,277
Inventories 44,201 30,290
Prepaid income taxes 4,174 13,875
Prepaid expenses and other current assets (including value-added tax
receivables of $5,493 in 2000 and $6,053 in 1999) 9,413 8,608
--------- ---------
Total current assets 95,356 88,956
Property and equipment, net 50,579 50,607
Other assets:
Goodwill, net of accumulated amortization of $4,713 in 2000
and $3,160 in 1999 73,155 75,323
Trademarks, net of accumulated amortization of $3,369 in 2000
and $2,303 in 1999 50,747 51,605
Deferred financing fees and other, net of accumulated
amortization of $3,677 in 2000 and $2,887 in 1999 11,941 11,886
--------- ---------
Total $ 281,778 $ 278,377
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 5,319 $ --
Current portion of long-term debt 4,250 3,500
Accounts payable 14,024 15,005
Accrued liabilities 40,830 33,424
Income taxes payable 6,076 276
Deferred income taxes 2,597 2,587
--------- ---------
Total current liabilities 73,096 54,792
Long-term debt 114,296 130,000
Deferred income taxes 15,793 15,731
Other long-term liabilities 2,530 2,060
--------- ---------
Total liabilities 205,715 202,583
--------- ---------
Commitments and contingencies -- --
Stockholders' equity:
Common stock, par value $2.00; authorized, 1,020,000 shares;
issued and outstanding, 834,609 shares in 2000 and 830,659 in 1999 1,669 1,661
Additional paid-in capital 82,194 81,381
Accumulated deficit (3,268) (3,393)
Accumulated other comprehensive loss (4,532) (3,855)
--------- ---------
Total stockholders' equity 76,063 75,794
--------- ---------
Total $ 281,778 $ 278,377
========= =========
See accompanying notes to consolidated financial statements.
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4
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
--------- --------- --------- ---------
Net sales $ 76,569 $ 67,139 $ 225,148 $ 206,729
Cost of sales 17,741 17,980 51,954 59,357
--------- --------- --------- ---------
Gross profit 58,828 49,159 173,194 147,372
Selling, general and administrative expenses 47,277 42,737 142,749 127,611
Restructuring and impairment charges 2,009 -- 3,117 3,135
--------- --------- --------- ---------
Income from operations 9,542 6,422 27,328 16,626
Other income (expense):
Exchange gain (loss) (4,364) 279 (9,713) 3,725
Interest, net (3,870) (4,237) (11,890) (12,459)
Other, net 148 (117) 1,379 (28)
--------- --------- --------- ---------
Income before income taxes and extraordinary item 1,456 2,347 7,104 7,864
Income tax expense 1,301 2,945 6,664 10,324
--------- --------- --------- ---------
Income (loss) before extraordinary item 155 (598) 440 (2,460)
Extraordinary loss on early extinguishment of debt,
net of income tax benefit of $195 -- -- (315) --
--------- --------- --------- ---------
Net income (loss) $ 155 $ (598) $ 125 $ (2,460)
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
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5
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
NINE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
-------- --------
Cash flows from operating activities:
Net income (loss) $ 125 $ (2,460)
Extraordinary loss on early extinguishment of debt, net of taxes 315 --
-------- --------
Income (loss) before extraordinary item 440 (2,460)
Adjustments to reconcile income (loss) before extraordinary item
to net cash provided by (used in) operating activities:
Depreciation and amortization 5,665 5,393
Amortization of deferred financing fees 1,076 1,175
Asset impairment charge 1,019 --
Unrealized foreign exchange loss (gain) 5,430 (3,725)
Deferred income taxes -- 1,403
Changes in operating assets and liabilities:
Receivables, net (1,397) (2,928)
Inventories (14,099) 2,325
Prepaid expenses and other current assets (996) 1,472
Other assets (1,444) (693)
Accounts payable and accrued liabilities 1,344 (5,166)
Income taxes payable/prepaid 15,745 (3,457)
Other long-term liabilities 470 30
-------- --------
Net cash provided by (used in) operating activities 13,253 (6,631)
-------- --------
Cash flows from investing activities:
Payments of previously accrued Acquisition fees -- (1,830)
Purchases of property and equipment (4,742) (3,958)
Other (120) --
-------- --------
Net cash used in investing activities (4,862) (5,788)
-------- --------
Cash flows from financing activities:
Repurchase of subordinated debt (10,597) --
Repayments under term loan facility (2,625) (1,875)
Repayments under revolving credit facility (1,500) 1,900
Net proceeds from short-term bank debt 5,319 --
Issuance of common stock 821 --
-------- --------
Net cash provided by (used in) financing activities (8,582) 25
-------- --------
Effect of exchange rate changes on cash (7) (1,396)
-------- --------
Net decrease in cash and cash equivalents (198) (13,790)
Cash and cash equivalents at beginning of period 4,906 18,358
-------- --------
Cash and cash equivalents at end of period $ 4,708 $ 4,568
======== ========
See accompanying notes to consolidated financial statements.
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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 September
30, 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 and nine months ended September 30, 2000 and 1999 reflect the operations
of the Parent and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain 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 $472,000 and $1,047,000 for the
three and nine months ended September 30, 1999, respectively. In addition,
charges of $416,000, which were previously included in selling, general and
administrative expenses, have been reclassified as restructuring charges in the
accompanying consolidated statements of operations for the nine months ended
September 30, 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", which was amended by SFAS No.
137 and SFAS No. 138, and is effective for fiscal years beginning after June 15,
2000. SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. This standard requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company will
adopt the statement on January 1, 2001 and is still in the process of evaluating
the impact that will result from its implementation. Currently, the Company's
forward contracts do not qualify for hedge accounting. The Company expects that
upon adoption of SFAS No. 133, certain of its forward contracts will qualify for
hedge accounting treatment, whereby unrealized gains and losses are deferred and
are recognized as income or loss when the underlying hedged transactions are
recognized.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB 101"), which provides the Staff's view in
applying accounting principles generally accepted in the United States of
America to selected revenue recognition issues. SAB 101, as amended, was
implemented on October 1, 2000 and did not have a material impact on the
Company's consolidated financial statements.
(2) INVENTORIES
Inventories consist of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2000 1999
------- -------
Raw materials and supplies $ 7,495 $ 7,905
Finished goods 36,706 22,385
------- -------
Total inventories $44,201 $30,290
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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):
SEPTEMBER 30, DECEMBER 31,
2000 1999
------- -------
Land $17,462 $17,418
Buildings 17,213 16,777
Machinery and equipment 23,631 21,511
------- -------
58,306 55,706
Less accumulated depreciation 7,727 5,099
------- -------
Property and equipment, net $50,579 $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., 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 September 2000, Jafra S. A. entered into a short-term bank loan of
50.2 million Mexican pesos in connection with the settlement of foreign currency
forward contracts. The interest rate on the peso-denominated loan was 20.1% per
annum (U.S. dollar equivalent of 10.1% based on peso/dollar forward rate pricing
at September 30, 2000) and the loan was repaid in October 2000.
(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 and nine months ended September 30, 2000 due to
certain valuation allowances in Europe, South America and the U.S. in 1999 and
2000, and an effective tax rate in the Mexico entity, Jafra S.A., that exceeds
the U.S. federal tax rate due to certain inflation-related income tax
adjustments.
(6) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is summarized as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------- ------- ------- -------
Net income (loss) $ 155 $ (598) $ 125 $(2,460)
Foreign currency translation adjustment 1,726 339 (677) (1,521)
------- ------- ------- -------
Comprehensive income (loss) $ 1,881 $ (259) $ (552) $(3,981)
======= ======= ======= =======
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CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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, Jafra S.A. and the Parent 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, its indirect South American
subsidiaries in Colombia, Argentina, Chile, Venezuela and Brazil, and its
indirect subsidiaries in the Dominican Republic and Thailand, which started
operations in the second quarter and third quarter of 2000, respectively. 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. However,
the income tax provision reflects the income tax rates and valuation allowances
in the countries where such corporate expenses are expensed for income tax
purposes. Management reallocated certain 1999 product costs between entities
based on usage to conform to the current allocation basis. Additionally, the
Company accounts for intersegment sales as inventory transfers.
Consolidating condensed statements of operations data for the three
months ended September 30, 2000 and 1999 is summarized as follows (in
thousands):
THREE MONTHS ENDED SEPTEMBER 30, 2000
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GUARANTOR ENTITIES NONGUARANTOR ENTITIES
---------------------------------- ---------------------
JCI JAFRA S.A. TOTAL
(U.S.) (MEXICO) TOTAL EUROPE OTHER ELIMINATIONS CONSOLIDATED
-------- -------- -------- -------- -------- ------------ ------------
Net sales $ 16,197 $ 48,916 $ 65,113 $ 5,950 $ 5,506 $ -- $ 76,569
Cost of sales 3,092 11,314 14,406 1,625 1,618 92 17,741
-------- -------- -------- -------- -------- -------- --------
Gross profit 13,105 37,602 50,707 4,325 3,888 (92) 58,828
Selling, general and
administrative expenses:
Business segment 9,807 22,925 32,732 4,999 5,414 -- 43,145
Allocated corporate expenses 850 2,651 3,501 316 315 -- 4,132
Restructuring and impairment charges 679 -- 679 1,330 -- -- 2,009
-------- -------- -------- -------- -------- -------- --------
Income (loss) from operations 1,769 12,026 13,795 (2,320) (1,841) (92) 9,542
Other expense (income):
Interest, net 1,573 1,829 3,402 407 61 -- 3,870
Royalty (3,671) 3,652 (19) 19 -- -- --
Other, net -- 3,828 3,828 304 84 -- 4,216
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes 3,867 2,717 6,584 (3,050) (1,986) (92) 1,456
Income tax expense (benefit) 473 826 1,299 (5) 7 -- 1,301
-------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 3,394 $ 1,891 $ 5,285 $ (3,045) $ (1,993) $ (92) $ 155
======== ======== ======== ======== ======== ======== ========
In the third quarter of 2000, JCI charged Jafra S.A a royalty fee of
$3.9 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
$0.2 million for use of the Jafra trademark. These charges are included in
royalty expense (income) and eliminated in consolidation.
8
9
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 1999
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GUARANTOR ENTITIES NONGUARANTOR ENTITIES
------------------------------------ ----------------------
JCI JAFRA S.A. TOTAL
(U.S.) (MEXICO) TOTAL EUROPE OTHER ELIMINATIONS CONSOLIDATED
-------- -------- -------- -------- -------- ------------ ------------
Net sales $ 16,115 $ 39,920 $ 56,035 $ 6,950 $ 4,154 $ -- $ 67,139
Cost of sales 3,940 10,839 14,779 1,741 1,460 -- 17,980
-------- -------- -------- -------- -------- -------- --------
Gross profit 12,175 29,081 41,256 5,209 2,694 -- 49,159
Selling, general and
administrative expenses:
Business segment 10,536 18,577 29,113 5,802 3,529 -- 38,444
Allocated corporate expenses 1,031 2,551 3,582 449 262 -- 4,293
-------- -------- -------- -------- -------- -------- --------
Income (loss) from operations 608 7,953 8,561 (1,042) (1,097) -- 6,422
Other expense (income):
Interest, net 2,235 1,674 3,909 377 (49) -- 4,237
Other, net (4) (131) (135) (12) (15) -- (162)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes (1,623) 6,410 4,787 (1,407) (1,033) -- 2,347
Income tax expense 8 2,916 2,924 20 1 -- 2,945
-------- -------- -------- -------- -------- -------- --------
Net income (loss) $ (1,631) $ 3,494 $ 1,863 $ (1,427) $ (1,034) $ -- $ (598)
======== ======== ======== ======== ======== ======== ========
Consolidating condensed statement of operations data for the nine months
ended September 30, 2000 and 1999 is summarized as follows (in thousands):
NINE MONTHS ENDED SEPTEMBER 30, 2000
-----------------------------------------------------------------------------------------
GUARANTOR ENTITIES NONGUARANTOR ENTITIES
----------------------------------- ----------------------
JCI JAFRA S.A. TOTAL
(U.S.) (MEXICO) TOTAL EUROPE OTHER ELIMINATIONS CONSOLIDATED
--------- --------- --------- --------- --------- ------------ ------------
Net sales $ 51,109 $ 140,054 $ 191,163 $ 19,263 $ 14,722 $ -- $ 225,148
Cost of sales 10,444 31,933 42,377 4,772 4,451 354 51,954
--------- --------- --------- --------- --------- --------- ---------
Gross profit 40,665 108,121 148,786 14,491 10,271 (354) 173,194
Selling, general and
administrative expenses:
Business segment 34,716 64,636 99,352 16,047 13,962 -- 129,361
Allocated corporate expenses 3,039 8,328 11,367 1,145 876 -- 13,388
Restructuring and impairment charges 679 -- 679 2,438 -- -- 3,117
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations 2,231 35,157 37,388 (5,139) (4,567) (354) 27,328
Other expense (income):
Interest, net 4,572 6,061 10,633 1,106 151 -- 11,890
Royalty (10,438) 10,384 (54) 54 -- -- --
Other, net 3 7,850 7,853 428 53 -- 8,334
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes
and extraordinary item 8,094 10,862 18,956 (6,727) (4,771) (354) 7,104
Income tax expense (benefit) 1,370 5,323 6,693 17 (46) -- 6,664
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary item 6,724 5,539 12,263 (6,744) (4,725) (354) 440
Extraordinary loss on early
extinguishment of debt,
net of income tax benefit of $195 (205) (110) (315) -- -- -- (315)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ 6,519 $ 5,429 $ 11,948 $ (6,744) $ (4,725) $ (354) $ 125
========= ========= ========= ========= ========= ========= =========
In the nine months ended September 30, 2000, JCI charged Jafra S.A a
royalty fee of $11.2 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 $0.8 million for use of the Jafra trademark. These charges are included in
royalty expense (income) and eliminated in consolidation.
9
10
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999
---------------------------------------------------------------------------------------------
GUARANTOR ENTITIES NONGUARANTOR ENTITIES
------------------------------------ -----------------------
JCI JAFRA S.A. TOTAL
(U.S.) (MEXICO) TOTAL EUROPE OTHER ELIMINATIONS CONSOLIDATED
--------- --------- --------- --------- --------- ------------ ------------
Net sales $ 51,168 $ 120,575 $ 171,743 $ 23,370 $ 11,616 $ -- $ 206,729
Cost of sales 14,111 35,489 49,600 5,864 3,893 -- 59,357
--------- --------- --------- --------- --------- --------- ---------
Gross profit 37,057 85,086 122,143 17,506 7,723 -- 147,372
Selling, general and
administrative expenses:
Business segment 31,392 54,309 85,701 19,192 9,851 -- 114,744
Allocated corporate expenses 3,184 7,505 10,689 1,455 723 -- 12,867
Restructuring and impairment charges 2,773 172 2,945 190 -- -- 3,135
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations (292) 23,100 22,808 (3,331) (2,851) -- 16,626
Other expense (income):
Interest, net 6,746 4,820 11,566 1,094 (201) -- 12,459
Other, net (22) (3,984) (4,006) 310 (1) -- (3,697)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes (7,016) 22,264 15,248 (4,735) (2,649) -- 7,864
Income tax expense 54 10,196 10,250 48 26 -- 10,324
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ (7,070) $ 12,068 $ 4,998 $ (4,783) $ (2,675) $ -- $ (2,460)
========= ========= ========= ========= ========= ========= =========
Consolidating condensed balance sheet data as of September 30, 2000 is
summarized as follows (in thousands):
AS OF SEPTEMBER 30, 2000
--------------------------------------------------------------------------------------------------
GUARANTOR ENTITIES NONGUARANTOR ENTITIES
--------------------------------------------- ----------------------
JCI JAFRA S.A. TOTAL
(U.S.) (MEXICO) PARENT TOTAL EUROPE OTHER ELIMINATIONS CONSOLIDATED
--------- --------- --------- --------- --------- --------- ------------ ------------
ASSETS
Current assets:
Receivables $ 2,739 $ 25,410 $ -- $ 28,149 $ 2,223 $ 2,488 $ -- $ 32,860
Inventories 5,787 31,241 -- 37,028 2,873 5,067 (767) 44,201
Other current assets 22,401 13,713 29 36,143 2,687 2,996 (23,531) 18,295
--------- --------- --------- --------- --------- --------- --------- ---------
Total current assets 30,927 70,364 29 101,320 7,783 10,551 (24,298) 95,356
Property and equipment, net 18,094 29,989 -- 48,083 1,095 1,401 -- 50,579
Other assets:
Goodwill, net 33,295 32,445 183 65,923 6,112 1,120 -- 73,155
Trademarks, net -- 50,476 188 50,664 220 239 (376) 50,747
Other (1) 33,486 4,332 76,816 114,634 4,357 799 (107,849) 11,941
--------- --------- --------- --------- --------- --------- --------- ---------
Total $ 115,802 $ 187,606 $ 77,216 $ 380,624 $ 19,567 $ 14,110 $(132,523) $ 281,778
========= ========= ========= ========= ========= ========= ========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued expenses $ 13,198 $ 33,138 $ 10 $ 46,346 $ 6,393 $ 2,380 $ (265) $ 54,854
Other current liabilities 4,773 26,929 2 31,704 4,030 5,774 (23,266) 18,242
--------- --------- --------- --------- --------- --------- --------- ---------
Total current liabilities 17,971 60,067 12 78,050 10,423 8,154 (23,531) 73,096
Total long term debt 78,233 36,063 -- 114,296 -- -- -- 114,296
Other liabilities 1,437 32,408 -- 33,845 19,755 6,369 (41,646) 18,323
--------- --------- --------- --------- --------- --------- --------- ---------
Total liabilities 97,641 128,538 12 226,191 30,178 14,523 (65,177) 205,715
Stockholders' equity 18,161 59,068 77,204 154,433 (10,611) (413) (67,346) 76,063
--------- --------- --------- --------- --------- --------- --------- ---------
Total $ 115,802 $ 187,606 $ 77,216 $ 380,624 $ 19,567 $ 14,110 $(132,523) $ 281,778
========= ========= ========= ========= ========= ========= ========= =========
- --------------
(1) Other assets include long-term intercompany notes receivable, JCI's and
Parent's investment in subsidiaries, and other miscellaneous assets.
10
11
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Consolidating condensed statement of cash flows data for the nine months
ended September 30, 2000 and 1999 is summarized as follows (in thousands):
NINE MONTHS ENDED SEPTEMBER 30, 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 $ (5,691) $ 25,934 $ (288) $ 19,955 $ (3,502) $ (3,200) $ -- $ 13,253
Investing activities (2,903) (819) -- (3,722) (56) (1,084) -- (4,862)
Financing activities 9,532 (24,936) (76) (15,480) 1,907 4,991 -- (8,582)
Effect of exchange rate
changes on cash -- 60 -- 60 132 (199) -- (7)
Cash at beginning of period 24 3 378 405 3,012 1,489 -- 4,906
-------- -------- -------- -------- -------- -------- ------ --------
Cash at end of period $ 962 $ 242 $ 14 $ 1,218 $ 1,493 $ 1,997 $ -- $ 4,708
======== ======== ======== ======== ======== ======== ====== ========
NINE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------------------------------------------------------------
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 $ 2,230 $ (1,502) $ -- $ 728 $ (4,994) $ (2,365) $ -- $ (6,631)
Investing activities (3,134) (1,813) -- (4,947) (193) (648) -- (5,788)
Financing activities 1,870 (7,883) -- (6,013) 2,810 3,228 -- 25
Effect of exchange rate
changes on cash -- (840) -- (840) 208 (764) -- (1,396)
Cash at beginning of period 353 12,045 10 12,408 3,924 2,026 -- 18,358
-------- -------- -------- -------- -------- -------- ------- --------
Cash at end of period $ 1,319 $ 7 $ 10 $ 1,336 $ 1,755 $ 1,477 $ -- $ 4,568
======== ======== ======== ======== ======== ======== ======= ========
(8) RESTRUCTURING AND IMPAIRMENT CHARGES AND RELATED ACCRUALS
In the second quarter of 2000, the Company recorded approximately $1.1
million of restructuring and impairment charges related to repositioning
activities in Europe. The Company recorded an additional $1.3 million of such
charges in the third quarter of 2000. These charges included approximately $1.7
million of severance costs and $0.7 million of costs primarily relating to
closure and/or consolidation of certain facilities and related fixed asset
impairments. The Company anticipates that substantially all of these costs will
be paid by the first quarter of 2001. In 1999, the Company recorded
approximately $3.7 million of restructuring charges, of which $3.1 million were
charged to income from operations in the accompanying consolidated statements of
operations for the nine months ended September 30, 1999. In addition, in the
third quarter of 2000, the Company recognized an asset impairment charge of
approximately $0.7 million relating to the write-down of certain capitalized
computer software costs in the United States.
11
12
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The components of the additions to the aforementioned accruals include
severance, lease costs and fixed asset disposals, and are summarized as follows
(in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------ ------ ------ ------
Additions - charges to income:
Severance $1,045 $ - $1,735 $2,909
Lease costs 235 - 363 57
Fixed asset disposals 50 - 340 169
------ ------ ------ ------
Total additions $1,330 - $2,438 $3,135
====== ====== ====== ======
During the three months and nine months ended September 30, 2000,
amounts of approximately $0.8 million and $1.7 million have been charged against
this accrual, respectively. As of September 30, 2000, the total liability
relating to 1999 and 2000 restructuring activities was $1.9 million.
A rollforward of the activity of the restructuring accruals for the nine
months ended September 30, 2000 is summarized as follows (in thousands):
Opening balance as of January 1, 2000 $ 1,105
Additions 2,438
Charges against reserves (1,687)
-------
Ending balance $ 1,856
=======
The remaining costs included in the restructuring accrual are summarized
as follows (in thousands):
SEPTEMBER 30, DECEMBER 31,
2000 1999
------ ------
Severance $1,493 $1,105
Lease costs 363 --
------ ------
$1,856 $1,105
====== ======
The principal component of the restructuring accruals is severance. A
summary of the severance activity for the nine months ended September 30, 2000
is as follows (dollar amounts in thousands):
# OF
EMPLOYEES AMOUNT
--------- ---------
Opening balance as of January 1, 43 $ 1,105
Additional planned terminations 35 1,735
Actual terminations (45) (1,347)
------- -------
Ending balance 33 $ 1,493
======= =======
(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 total realized net loss on the contracts that expired during the
nine months ended September 30, 2000 was $4.0 million, of which $4.2 million was
recognized as an exchange loss in the accompanying consolidated statement of
operations during the current period, and $0.2 million was recognized as an
exchange gain in the prior year. The outstanding foreign currency forward
contracts at September 30, 2000 had a notional value of $74,960,000 and mature
at various dates through July 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 September 30, 2000
(dollar amounts in thousands):
12
13
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FORWARD WEIGHTED
POSITION IN MATURITY AVERAGE FAIR
FOREIGN CURRENCY US DOLLARS (1) DATE CONTRACT RATE VALUE (1)
- ------------------------------- ------------- --------- ------------- ---------
Buy US Dollar/sell Mexican Peso $ 7,275 10/31/2000 10.45 $ 6,579
Buy US Dollar/sell Mexican Peso 10,534 11/30/2000 10.54 9,538
Buy US Dollar/sell Mexican Peso 19,874 12/29/2000 10.67 17,922
Buy US Dollar/sell Mexican Peso 6,980 01/26/2001 10.12 6,718
Buy US Dollar/sell Mexican Peso 7,500 02/26/2001 10.20 7,225
Buy US Dollar/sell Mexican Peso 7,529 03/30/2001 10.36 7,181
Buy US Dollar/sell Mexican Peso 5,915 04/30/2001 10.48 5,623
Buy US Dollar/sell Mexican Peso 2,828 05/31/2001 10.61 2,680
Buy US Dollar/sell Mexican Peso 3,907 06/29/2001 10.24 3,869
Buy US Dollar/sell Mexican Peso 2,618 07/31/2001 10.31 2,593
------- -------
$74,960 $69,928
======= =======
- ----------
(1) The "Forward Position in US Dollars" and the "Fair Value" presented
above represent notional amounts. The net of these two amounts,
$5,032,000, represents the unrealized losses on such contracts, and has
been recorded as an accrued liability in the accompanying consolidated
balance sheet as of September 30, 2000.
13
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.
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 unaudited 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 and nine months ended September
30, 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, expressed in millions of dollars and as percentages of
net sales. The table reflects the operations of the Company for the three and
nine months ended September 30, 2000 and 1999, respectively.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------- ---------------------------------------
2000 1999 2000 1999
---------------- ---------------- ----------------- -----------------
(in millions) (in millions)
Net sales $ 76.6 100.0% $ 67.1 100.0% $225.1 100.0% $206.7 100.0%
Cost of sales 17.7 23.1 18.0 26.8 52.0 23.1 59.4 28.7
------ ------ ------ ------ ------ ------ ------ ------
Gross profit 58.9 76.9 49.1 73.2 173.1 76.9 147.3 71.3
Selling, general & administrative
expenses 47.3 61.7 42.7 63.6 142.7 63.4 127.6 61.7
Restructuring and impairment charges 2.0 2.6 -- 0.0 3.1 1.4 3.1 1.5
------ ------ ------ ------ ------ ------ ------ ------
Income from operations 9.6 12.6 6.4 9.6 27.3 12.1 16.6 8.1
Exchange gain (loss) (4.4) (5.7) 0.3 0.4 (9.7) (4.3) 3.7 1.8
Interest, net (3.9) (5.1) (4.2) (6.3) (11.9) (5.3) (12.5) (6.0)
Other income (expense), net 0.2 0.3 (0.2) (0.3) 1.4 0.6 0.0 0.0
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes and
extraordinary item 1.5 2.1 2.3 3.4 7.1 3.1 7.8 3.9
Income tax expense 1.3 1.7 2.9 4.3 6.7 3.0 10.3 5.0
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) before extraordinary
item 0.2 0.4 (0.6) (0.9) 0.4 0.1 (2.5) (1.1)
Extraordinary loss on early extinguishment
of debt, net of income tax
benefit of $0.2 -- -- -- -- (0.3) (0.1) -- --
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) $ 0.2 0.4% $ (0.6) (0.9)% $ 0.1 0.0% $ (2.5) (1.1)%
====== ====== ====== ====== ====== ====== ====== ======
- ----------
(1) Certain 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
14
15
are $0.5 million and $1.0 million for the three and nine months ended September
30, 1999, respectively. In addition, charges of $0.4 million, which were
previously included in selling, general and administrative expenses, have been
reclassified to restructuring charges in the accompanying unaudited consolidated
statements of operations for the nine months ended September 30, 1999.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
Net sales. Net sales in the third quarter of 2000 increased to $76.6
million from $67.1 million in the third quarter of 1999, an increase of $9.5
million, or 14.2%. Net sales in local currencies in the third quarter of 2000
increased by 15.4% over the comparable prior year period. The sales increase in
local currencies was higher than the increase measured in U.S. dollars,
primarily as a result of the weakening of currencies in Europe. The Company's
average number of consultants (who perform the duties of sales representatives)
worldwide in the third quarter increased to approximately 314,000, or 13.8% over
the 1999 average.
In Mexico, net sales in the third quarter of 2000 increased to $48.9
million from $39.9 million in the third quarter of 1999, an increase of $9.0
million, or 22.6%. The impact of Mexican peso exchange rate fluctuations on net
sales in the quarter was not material. The year-to-year increase was primarily
the result of an increased consultant base, greater productivity of consultants
and price increases. In Mexico, the average number of consultants for the third
quarter of 2000 increased to approximately 195,000, or 7.7% over the 1999 third
quarter average, while consultant productivity increased 12.2% in the third
quarter of 2000 from the third quarter of 1999. 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 the U.S., net sales in the third quarter of 2000 increased to $16.2
million from $16.1 million in the third quarter of 1999, an increase of $0.1
million, or 0.6%. U.S. net sales in the third quarter of 1999 included
approximately $0.3 million of sales generated in the Dominican Republic. Due to
the establishment of a subsidiary in the Dominican Republic in the second
quarter of 2000, these sales are now excluded from U.S. results and now included
in "Other" nonguarantor entities. Excluding the impact of these sales, net sales
in the U.S. in the third quarter of 2000 increased $0.4 million, or 2.5%, due
primarily to an increased consultant base and greater activity (ordering) level,
partially offset by lower consultant productivity. In the U.S., the average
number of consultants in the third quarter of 2000 increased to 60,000, or 9.7%
over the 1999 third quarter average, while the percentage of consultants placing
orders increased by 10.0%. Consultant productivity decreased primarily due to a
change in the commission structure that stimulated ordering activity, but at
lower order sizes.
In Europe, net sales decreased to $6.0 million in the third quarter of
2000 from $7.0 million in the third quarter of 1999, a decrease of $1.0 million,
or 14.3%. Most of the sales decline was due to an unfavorable exchange rate
impact on sales of $0.9 million. Excluding the exchange rate impact, net sales
in the third quarter of 2000 were slightly below the 1999 level. In Europe, the
average number of consultants in the third quarter of 2000 decreased to
approximately 16,000, or 5.4% below the 1999 average.
Gross profit. Gross profit in the third quarter of 2000 increased to
$58.9 million from $49.1 million in the comparable prior year period, an
increase of $9.8 million, or 20.0%. Gross profit as a percentage of sales (gross
margin) increased to 76.9% from 73.2%. The increase in gross margin was due
primarily to sales price increases, a more favorable product mix and product
cost reductions.
In Mexico, gross profit in the third quarter of 2000 increased to $37.6
million from $29.1 million in 1999, an increase of $8.5 million, or 29.2%. Gross
margin increased to 76.9% from 72.8%, 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 regular products (non-promotional) as
compared to promotional products. The reduced product costs included foreign
exchange gains from inventory and components purchased in dollar-denominated
transactions as the peso strengthened against the U.S. dollar.
In the U.S., gross profit in the third quarter of 2000 increased to
$13.1 million from $12.2 million in 1999, an increase of $0.9 million, or 7.4%.
Gross margin increased to 80.9% from 75.6%, due to a more favorable product mix
consisting of a higher percentage of regular products as compared to promotional
products, and improved gross margins on both regular and promotional products as
a result of price increases and product cost reductions.
15
16
In Europe, gross profit in the third quarter of 2000 decreased to $4.3
million from $5.2 million in 1999, a decrease of $0.9 million, or 17.3%. Gross
margin decreased to 72.7% from 74.9%, due to increased sales of promotional
products which have a lower gross margin compared to the regular products.
Selling, general and administrative expenses. SG&A expenses in the third
quarter of 2000 increased to $47.3 million from $42.7 million in the third
quarter of 1999, an increase of $4.6 million, or 10.8%. SG&A as a percentage of
net sales decreased in the third quarter of 2000 to 61.7% from 63.6% for the
same period in 1999, due primarily to reduced sales promotional expenses in the
U.S. and a slight decrease in corporate expenses.
In Mexico, SG&A expenses in the third quarter of 2000 increased to $22.9
million from $18.6 million in the comparable prior year period, an increase of
$4.3 million, or 23.1%, relating primarily to sales promotion, commissions and
administrative expenses incurred to support growing sales. SG&A as a percentage
of net sales increased to 46.9% from 46.5%, due primarily to incremental sales
promotional and administrative expenses including additional bad debt expense
incurred and costs incurred in connection with the recovery of certain tax
receivables. In the U.S., SG&A expenses in the third quarter of 2000 decreased
to $9.8 million from $10.5 million in the comparable prior year period, a
decrease of $0.7 million, or 6.7%. SG&A as a percentage of net sales decreased
to 60.5% from 65.4%, due primarily to reduced sales promotional expenses as a
result of a difference in the timing of promotional events held between the
periods. In Europe, SG&A expenses in the third quarter of 2000 decreased to $5.0
million from $5.8 million in the comparable prior year period, a decrease of
$0.8 million, or 13.8%, primarily as a result of expense containment measures,
primarily in Germany. SG&A as percentage of net sales increased to 84.0% from
83.5%, due to the decline in sales level. Corporate expenses in the third
quarter of 2000 decreased to $4.1 million from $4.3 million, a decrease of $0.2
million, or 4.7%, primarily as a result of reduced headquarter administrative
expenses.
Restructuring and impairment charges. In the third quarter of 2000, the
Company recorded approximately $1.3 million of restructuring and impairment
charges related to repositioning activities in Europe. These charges included
approximately $1.0 million of severance costs and $0.3 million of costs
primarily relating to closure and/or consolidation of certain facilities and
related fixed asset impairments. In addition, the Company recognized an asset
impairment charge of approximately $0.7 million relating to the write-down of
certain capitalized computer software costs in the United States.
Interest expense. Net interest expense (including amortization of
deferred financing fees) in the third quarter of 2000 decreased to $3.9 million
from $4.2 million in 1999, a decrease of $0.3 million, or 7.1%. During the
latter part of 1999 and the first quarter of 2000, the Company repurchased and
retired $24.8 million (face value) of its Notes and replaced them with debt
under the Revolving Credit Facility which currently has a lower effective
interest rate. These debt-restructuring activities resulted in interest savings
of approximately $0.3 million for the quarter as compared to the third quarter
of 1999.
Exchange gain (loss). The Company's foreign exchange loss was $4.4
million in the third quarter of 2000, compared to a foreign exchange gain of
$0.3 million in the comparable prior year period, a net change of $4.7 million.
The net foreign exchange loss in the third quarter of 2000 has three elements:
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. For the three months ended
September 30, 2000, the net loss on forward contracts was $7.2 million. The
remeasurement of U.S. dollar-denominated debt resulted in an unrealized exchange
gain of $2.3 million. Net realized gains on other foreign currency transactions
were $0.5 million. During the third quarter of 1999, there were no forward
contracts in place and the $0.3 million gain was primarily the result of
remeasuring U.S. dollar-denominated debt.
Income tax expense. Income tax expense decreased to $1.3 million in the
third quarter of 2000 from $2.9 million in the comparable 1999 period, a
decrease of $1.6 million. 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 September 30, 2000 and
1999 due to certain valuation allowances in
16
17
Europe, South America and the U.S. in 1999 and 2000, and an effective tax rate
in the Mexican entity, Jafra S.A., that exceeds the U.S. federal tax rate due to
certain inflation-related income tax adjustments. The decreased income tax
expense is primarily the result of a change in the geographic composition of the
Company's income and loss, as certain subsidiaries are in a tax-paying position
and certain subsidiaries are in a loss position for which no income tax benefit
is provided.
Net income (loss). Net income increased $0.8 million to $0.2 million in
the third quarter of 2000, compared to a net loss of $0.6 million in the
comparable 1999 period. The change was primarily due to a $9.8 million increase
in gross profit, a $0.3 million decrease in interest expense, a $0.4 million
increase in other income, and a $1.6 million decrease in income tax expense,
partially offset by a $4.6 million increase in SG&A expenses, a $2.0 million
restructuring and impairment charge incurred in the third quarter of 2000, and a
$4.7 million negative fluctuation in foreign exchange gain (loss).
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999
Net sales. Net sales for the nine months ended September 30, 2000
increased to $225.1 million from $206.7 million in the comparable prior year
period, an increase of $18.4 million, or 8.9%. Net sales in local currencies in
the nine months ended September 30, 2000 increased by 9.5% over the comparable
prior year period. The sales increase in local currencies was higher than the
increase measured in U.S. dollars due to the weakening of currencies in Europe
and South American markets, 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 worldwide for the nine months ended
September 30, 2000 increased to approximately 306,000, or 13.1% over the average
for the comparable prior year period.
In Mexico, net sales for the nine months ended September 30, 2000
increased to $140.1 million from $120.6 million in the comparable prior year
period, an increase of $19.5 million, or 16.2%. Sales in Mexico in local
currency increased by 14.2% over the comparable 1999 period. The year-to-year
increase was primarily the result of an increased consultant base, greater
productivity of consultants and price increases, partially offset by a slightly
lower activity (ordering) level. In Mexico, the average number of consultants
for the nine months ended September 30, 2000 increased to approximately 193,000,
or 9.5% over the 1999 nine month average, while consultant productivity
increased 15.5% in the nine months ended September 30, 2000 over the comparable
1999 period.
In the U.S., net sales for the nine months ended September 30, 2000
decreased to $51.1 million from $51.2 million in the comparable 1999 period, a
decrease of $0.1 million, or 0.1%. U.S. net sales for the nine months ended
September 30, 1999 included approximately $1.2 million of certain low margin
sales to a third party manufacturer and $0.5 million of sales generated in the
Dominican Republic. Due to the establishment of a subsidiary in the Dominican
Republic in the second quarter of 2000, these sales are now excluded from U.S.
results. Excluding the impact of these two sources of sales, net sales in the
U.S. for the nine months ended September 30, 2000 increased $1.6 million, or
3.2%, 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 nine months ended September 30, 2000 increased to
61,000, or 6.7% over the 1999 average, while the percentage of ordering
consultants increased by 8%, but consultant productivity decreased by 19.2%,
primarily due to a change in the commission structure that stimulated ordering
activity, but at lower order sizes.
In Europe, net sales decreased to $19.3 million for the nine months
ended September 30, 2000 from $23.4 million in the comparable 1999 period, a
decrease of $4.1 million, or 17.5%. Contributing to the sales decline was an
unfavorable exchange rate impact on sales of $2.8 million. Excluding the
exchange rate impact, net sales decreased 5.6%, due primarily to a decrease in
the number of consultants. In Europe, the average number of consultants for the
nine months ended September 30, 2000 decreased to approximately 17,000, or 7.5%
below the 1999 nine-month average.
Gross profit. Gross profit for the nine months ended September 30, 2000
increased to $173.1 million from $147.3 million in the comparable prior year
period, an increase of $25.8 million, or 17.5%. Gross profit as a percentage of
sales (gross margin) increased to 76.9% from 71.3%. The increase in gross margin
was due primarily to sales price increases, a more favorable product mix and
product cost reductions.
17
18
In Mexico, gross profit for the nine months ended September 30, 2000
increased to $108.1 million from $85.1 million in 1999, an increase of $23.0
million, or 27.0%. Gross margin increased to 77.2% from 70.6%, 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 regular products
(non-promotional) as compared to promotional products, and among the promotional
products, there was a lower level of discounting compared to the prior year. The
reduced product costs included foreign exchange gains from inventory and
components purchased in dollar-denominated transactions when the peso was
stronger against the U.S. dollar, as well as 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. Due to the
planned increase in promotional and holiday activities in the remainder of the
year, the gross margin in Mexico is expected to decrease in the fourth quarter
of 2000.
In the U.S., gross profit for the nine months ended September 30, 2000
increased to $40.7 million from $37.1 million in 1999, an increase of $3.6
million, or 9.7%. Low margin third party sales in 1999 were $1.2 million. Gross
margin, excluding the impact of third party sales in 1999, increased to 79.6%
from 74.1%, due to a more favorable product mix consisting of a higher
percentage of regular products as compared to promotional products and improved
gross margins on both regular and promotional products as a result of price
increases and product cost reductions. The margin on non-resale items improved
significantly from the comparable prior year period due to price increases and
the reconfiguration of cases sold to first-time consultants. 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 for the nine months ended September 30, 2000
decreased to $14.5 million from $17.5 million in 1999, a decrease of $3.0
million, or 17.1%. Gross margin increased to 75.2% from 74.9%, due primarily to
a change in the product mix.
Selling, general and administrative expenses. SG&A expenses for the nine
months ended September 30, 2000 increased to $142.7 million from $127.6 million
in the comparable prior year period, an increase of $15.1 million, or 11.8%.
SG&A as a percentage of net sales for the nine months ended September 30, 2000
increased to 63.4% from 61.7% for the same period in 1999, due primarily to
incremental administrative, sales promotional and commission expenses incurred
in Mexico and the U.S. and additional expenses incurred in Brazil as a result of
the Company's commitment to grow and expand newly developed markets.
In Mexico, SG&A expenses in the nine months ended September 30, 2000
increased to $64.6 million from $54.3 million in the comparable prior year
period, an increase of $10.3 million, or 19.0%, relating primarily to sales
promotional, commissions and administrative expenses incurred to support growing
sales. SG&A as a percentage of net sales increased to 46.2% from 45.0%, due
primarily to incremental administrative expenses including additional bad debt
expense incurred and costs incurred in connection with the recovery of certain
tax receivables. In the U.S., SG&A expenses in the nine months ended September
30, 2000 increased to $34.7 million from $31.4 million in the comparable prior
year period, an increase of $3.3 million, or 10.5%. SG&A as a percentage of net
sales increased to 67.9% from 61.4%. The U.S. incurred additional sales
promotional expenses in 2000 primarily as a result of the Company's commitment
to expand business in the market, and holding an additional major promotional
event in the first quarter to launch a new skin care line. In addition, the U.S.
made a change in the lineage program that resulted in higher commissions. In
Europe, SG&A expenses in the nine months ended September 30, 2000 decreased to
$16.0 million from $19.2 million in the comparable prior year period, a decrease
of $3.2 million, or 16.7%, due primarily to expense containment measures,
primarily in Germany. SG&A as a percentage of net sales increased to 83.3% from
82.1%, due to the decline in sales level. Corporate expenses in the nine months
ended September 30, 2000 increased to $13.4 million from $12.9 million, an
increase of $0.5 million, or 3.9%, primarily as a result of expenses incurred in
connection with the development of the Company's e-commerce business.
Restructuring and impairment charges. In the second and third quarter of
2000, the Company recorded approximately $2.4 million of restructuring and
impairment charges related to repositioning activities in Europe. These charges
included approximately $1.7 million of severance costs and $0.7 million of costs
primarily relating to closure and/or consolidation of certain facilities and
related fixed asset impairments. The Company anticipates that substantially all
of these costs will be paid by the first quarter of 2001. In addition, in the
third quarter of 2000, the Company recognized an asset impairment charge of
approximately $0.7 million relating to the write-down of certain capitalized
computer software costs in the United States. For the nine months ended
September 30, 1999,
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the restructuring charges of $3.1 million included approximately $2.7 million of
charges related to the outsourcing of the Company's U.S. product manufacturing
functions, and approximately $0.4 million of other charges related to certain
restructuring activities in the U.S., Europe and Mexico. Substantially all of
those charges related to severance costs.
Interest expense. Net interest expense (including amortization of
deferred financing fees) for the nine months ended September 30, 2000 decreased
to $11.9 million from $12.5 million in 1999, a decrease of $0.6 million, or
4.8%. During the latter part of 1999 and the first quarter of 2000, the Company
repurchased and retired $24.8 million (face value) of its Notes and replaced
them with debt under the Revolving Credit Facility that currently has a lower
effective interest rate. These debt-restructuring activities resulted in
interest savings of approximately $0.8 million for the nine months ended
September 30, 2000, which were offset by a $0.2 million decrease in interest
income due to lower average cash balances and lower interest rates in Mexico.
Other income (expense). Other income for the nine months ended September
30, 2000 was $1.4 million, which consisted primarily of income related to a
recovery of the effect of inflation upon an account receivable due from the
Mexican government. Other income (expense) in the nine months ended September
30, 1999 was nominal.
Exchange gain (loss). The Company's foreign exchange loss was $9.7
million for the nine months ended September 30, 2000, compared to a foreign
exchange gain of $3.7 million in the prior year, a net change of $13.4 million.
The net foreign exchange loss for 2000 has three elements: gains or losses on
forward contracts, unrealized gains or losses on the remeasurement of U.S.
dollar-denominated debt, 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 purchased 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.
For the nine months ended September 30, 2000, the net loss on forward contracts
was $9.3 million. The remeasurement of U.S. dollar-denominated debt resulted in
an unrealized exchange loss of $0.1 million, and net realized losses on other
foreign currency transactions were $0.3 million. During the first nine months of
1999, there were no forward contracts in place and the $3.7 million gain was
primarily the result of remeasurement of U.S. dollar-denominated debt.
Income tax expense. Income tax expense decreased to $6.7 million for the
nine months ended September 30, 2000 from $10.3 million in the comparable 1999
period, a decrease of $3.6 million. The decreased income tax expense is
primarily the result of a change in the geographic composition of the Company's
income and loss, as certain subsidiaries are in a tax-paying position and
certain subsidiaries are in a loss position for which no income tax benefit is
provided. 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 nine months ended September 30, 2000 and 1999 due to
certain valuation allowances in Europe, South America and the U.S. in 1999 and
2000, and an effective tax rate in the Mexico entity, Jafra S.A. that exceeds
the U.S. federal tax rate, due to certain inflation-related income tax
adjustments.
Net income (loss). Net income increased $2.6 million to $0.1 million for
the nine months ended September 30, 2000, compared to a net loss of $2.5 million
in the comparable 1999 period. The change was primarily due to a $25.8 million
increase in gross profit, a $0.6 million decrease in net interest expense, a
$1.4 million increase in other income and a $3.6 million decrease in income tax
expense, partially offset by a $15.1 million increase in SG&A expenses, a $13.4
million negative fluctuation in foreign exchange gain (loss), and a $0.3 million
extraordinary loss, net of tax, on early extinguishment of debt.
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
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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 JCI and 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 ($2.6 million of which has been paid as of September
30, 2000), $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 ($23.5 million as of September 30, 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
September 30, 2000 was approximately 8.3% for the LIBOR-based borrowings, and
the rate for the prime-based borrowings was approximately 10.1%. Borrowings
under the Senior Credit Agreement are secured by substantially all of the assets
of JCI and Jafra S. A. During the nine months ended September 30, 2000, cash
paid for interest was approximately $9.1 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 two letters of credit outstanding as of
September 30, 2000 under the Revolving Credit Facility, in the amount of
approximately $1.8 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
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 to exceed 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 September 30, 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 the nine months ended September 30, 2000, Jafra S.A. received income
tax refunds of approximately $12.5 million from the Mexican government.
In September 2000, Jafra S. A. entered into a short-term bank loan of
50.2 million Mexican pesos in connection with the settlement of foreign currency
forward contracts. The interest rate on the peso-denominated loan was 20.1% per
annum (U.S. dollar equivalent of 10.1% based on peso/dollar forward rate pricing
at September 30, 2000) and the loan was repaid in October 2000.
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.
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CASH FLOWS
Net cash provided by operating activities was $13.3 million for the nine
months ended September 30, 2000, compared to cash used in operating activities
of $6.6 million for the comparable 1999 period. The $19.9 million increase in
cash flow from operations in 2000 compared to 1999 is primarily attributable to
an increase of $11.8 million in net income (loss) before extraordinary item
adjusted for depreciation, amortization and other non-cash items included in net
income (loss) before extraordinary item, and a $8.1 million decrease in the cash
used by working capital items. The changes in working capital items consisted of
a decrease in income tax payable/prepaid due primarily to income tax refunds
received by Jafra S.A. in 2000 and lower estimated tax payments in Mexico, and a
reduction in accounts payable and accrued liabilities, partially offset by an
increase in inventory to achieve higher service levels.
Net cash used in investing activities was $4.9 million for the nine
months ended September 30, 2000, which was used for capital expenditures,
consisting primarily of information system upgrades, facilities costs and
production equipment. Capital expenditures in the remainder of 2000 are expected
to be between $4.0 million and $5.0 million, mainly for information system
upgrades (including e-commerce systems).
Net cash used in financing activities was $8.6 million for the nine
months ended September 30, 2000, consisting of payments of $10.6 million for the
repurchase of subordinated debt with a face value of $10.8 million during 2000,
repayments of $2.6 million under term loan facilities, and repayments of $1.5
million under the Revolving Credit Facility, partially offset by net proceeds
from short-term bank debt of 50.2 million Mexican pesos (equivalent of $5.3
million) and from the issuance of common stock of $0.8 million.
FOREIGN OPERATIONS
Sales outside of the United States aggregated approximately 77.3% and
75.2% of the Company's total net sales for the nine months ended September 30,
2000 and 1999, respectively. In addition, as of September 30, 2000,
international subsidiaries comprised approximately 75.5% 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
62.2% of the Company's net sales for the nine months ended September 30, 2000,
compared to 58.3% for the comparable 1999 period, substantially all of which
were denominated in Mexican pesos. Jafra S.A. had $37.9 million of U.S.
dollar-denominated third party debt and $16.6 million of U.S. dollar-denominated
intercompany debt as of September 30, 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 nine months ended September 30, 2000, Jafra S. A. recognized
an unrealized gain of $0.2 million on remeasurement of this U.S.
dollar-denominated debt and a net loss of $9.3 million on foreign currency
forward contracts.
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 is traded on currency
exchanges and is 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.
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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 plans to replace the
existing system with a new enterprise system before the end of 2001. 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 geographic areas and later in others, may impact future
quarterly results.
The Company has experienced significant sales growth in Mexico from the
fourth quarter of 1998 through the fourth quarter of 1999, and has continued its
growth in the first three quarters of 2000, but at a slower rate. The Company's
Mexican subsidiary generated 62.2% of the Company's consolidated net sales for
the nine months ended September 30, 2000, compared to 59.1% for the full year in
1999. The year-to-year sales growth in Mexico for the nine months ended
September 30, 2000 was 16.2% in U.S. dollars and 14.2% in local currency.
Assuming 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.
Excluding the impact of low margin sales to a third party manufacturer
and Dominican Republic sales, net sales in the U.S. for the nine months ended
September 30, 2000 increased 3.2% compared to the prior year. The U.S. plans to
implement strategies in the remainder of 2000 which, along with the separation
of U.S. operations into general and Hispanic divisions to better address the
specific preferences of its customers and an increased focus on sponsoring new
consultants through enhanced training programs, are intended to stimulate sales
growth in the range of 3-5% over 1999 levels.
Net sales in Europe have been on a downward trend for the last two
years. For the nine months ended September 30, 2000, excluding the impact of
exchange rates, net sales decreased 5.6% from 1999, primarily due to a decline
in the number of consultants. Sales in Europe for the year 2000 are expected to
be slightly below 1999 levels in local currencies, but down 12-15% in U.S.
dollars. The Company has taken actions to streamline its operations to enhance
the profitability achieved by these markets.
The South American business has grown significantly over the last four
quarters. The number of ending consultants at September 30, 2000 increased by
59% from September 30, 1999 and is projected to increase by approximately
another 15% by the end of the year. The Company has plans for further geographic
expansion in South America and believes it will become an increasingly important
business segment in the future.
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 begun to develop new business through expansion into new
markets, including Thailand, which began operation in the third quarter of 2000
and Peru, which will begin operation in the fourth quarter of 2000, 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
statement in "--Nine months ended September 30, 2000 compared to the nine months
ended September 30, 1999" concerning the Company's expectation that gross margin
in Mexico will decrease in the fourth quarter of 2000; (ii) the statement 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; (iii) the statement in "--Cash Flows" that
total capital expenditures in the remainder of 2000 are expected to be between
$4.0 million and $5.0 million;
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(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 geographic areas and later in others, may impact
future quarterly results; (c) assuming 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
3-5% due to new strategies; (e) the Company's expectation that sales in Europe
for the year 2000 will be slightly below 1999 levels in local currencies, but
down 12-15% in U.S. dollars; (f) the Company's projection that the number of
ending consultants in South America will increase by approximately another 15%
by the end of the year, and that South America will become an increasingly
important business segment in the future; and (g) 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," "--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," "--European Economic and Monetary Union", and "--Business
Trends and Initiatives"), 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 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 nine months ended September 30, 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 the nine months ended September 30, 2000 was generated
in countries with a functional currency other than the U.S. dollar. As a result,
the Company's earnings and cash flows 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 and forecasted 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
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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
September 30, 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 CURRENCY US DOLLARS (1) DATE CONTRACT RATE VALUE (1)
- ------------------------------ ------------- ---------- ------------- ---------
Buy US Dollar/sell Mexican Peso $ 7,275 10/31/2000 10.45 $ 6,579
Buy US Dollar/sell Mexican Peso 10,534 11/30/2000 10.54 9,538
Buy US Dollar/sell Mexican Peso 19,874 12/29/2000 10.67 17,922
Buy US Dollar/sell Mexican Peso 6,980 01/26/2001 10.12 6,718
Buy US Dollar/sell Mexican Peso 7,500 02/26/2001 10.20 7,225
Buy US Dollar/sell Mexican Peso 7,529 03/30/2001 10.36 7,181
Buy US Dollar/sell Mexican Peso 5,915 04/30/2001 10.48 5,623
Buy US Dollar/sell Mexican Peso 2,828 05/31/2001 10.61 2,680
Buy US Dollar/sell Mexican Peso 3,907 06/29/2001 10.24 3,869
Buy US Dollar/sell Mexican Peso 2,618 07/31/2001 10.31 2,593
------- -------
$74,960 $69,928
======= =======
- ----------
(1) The "Forward Position in US Dollars" and the "Fair Value" presented
above represent notional amounts. The net of these two amounts, $5,032,000,
represents the unrealized losses on such contracts, and has been recorded as an
accrued liability in the accompanying consolidated balance sheet as of September
30, 2000.
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(1) 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
On July 27, 2000, August 2, 2000 and September 30, 2000, Parent sold
158, 316 and 4,108 shares of its common stock, par value $2.00 per share,
respectively (the 158 shares issued on July 27, 2000 resulted from the exercise
of options), to four members of senior management. The sales were made pursuant
to an exemption from the registration requirements of the Securities Act of
1933, as amended, provided by Rule 701 because the sales were made to employees
pursuant to a compensatory benefit plan and the employees were provided with the
disclosure required by the Rule. The Company used the proceeds for general
corporate purposes.
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 September 30, 2000, the Company filed no
reports on Form 8-K.
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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)
November 13, 2000
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 Financial Data Schedule
27