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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 MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File Number 333-62989
CDRJ INVESTMENTS (LUX) S.A.
(Exact name of Registrant as specified in its charter)
LUXEMBOURG 98-0185444
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4 BOULEVARD ROYAL
L-2449 LUXEMBOURG
LUXEMBOURG
(Address, including zip code, of registrant's principal executive offices)
(352) 226027
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 3 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common stock, par value $2.00 per share, outstanding at May 10, 2001
834,767 shares
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CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
Index to Financial Statements and Exhibits
Filed with the Quarterly Report of the Company on Form 10-Q
For the Three Months Ended March 31, 2001
PART I -- FINANCIAL INFORMATION
Page No.
--------
Item 1. Financial Statements (Unaudited):
CONSOLIDATED FINANCIAL STATEMENTS -- CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
CONSOLIDATED FINANCIAL STATEMENTS -- JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets 11
Consolidated Statements of Operations 12
Consolidated Statements of Cash Flows 13
Notes to Consolidated Financial Statements 14
CONSOLIDATED FINANCIAL STATEMENTS -- JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V.
AND SUBSIDIARIES
Consolidated Balance Sheets 18
Consolidated Statements of Operations 19
Consolidated Statements of Cash Flows 20
Notes to Consolidated Financial Statements 21
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
Item 3. Quantitative and Qualitative Disclosures about Market Risk 32
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 34
Item 2. Changes in Securities and Use of Proceeds 34
Item 3. Defaults Upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 5. Other Information 34
Item 6. Exhibits and Reports on Form 8-K 34
Signature 35
Exhibits 36
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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)
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,458 $ 5,838
Receivables, less allowances for doubtful accounts of
$3,239 in 2001 and $3,553 in 2000 42,655 35,919
Inventories 35,420 38,146
Prepaid income taxes -- 1,869
Prepaid expenses and other current assets (including value-added tax
receivables of $3,752 in 2001 and $5,329 in 2000) 6,717 10,296
--------- ---------
Total current assets 92,250 92,068
Property and equipment, net 52,403 51,448
Other assets:
Goodwill, net of accumulated amortization of $5,608 in 2001
and $5,114 in 2000 71,901 72,260
Trademarks, net of accumulated amortization of $4,093 in 2001
and $3,724 in 2000 49,977 49,375
Deferred financing fees and other, net of accumulated
amortization of $4,395 in 2001 and $3,998 in 2000 10,622 11,793
--------- ---------
Total $ 277,153 $ 276,944
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt, including current portion of long-term debt $ 5,233 $ 4,846
Accounts payable 15,872 27,988
Accrued liabilities 35,518 34,223
Income taxes payable 1,834 426
Deferred income taxes 5,391 5,391
--------- ---------
Total current liabilities 63,848 72,874
Long-term debt 111,770 104,180
Deferred income taxes 16,310 16,357
Other long-term liabilities 2,357 2,366
--------- ---------
Total liabilities 194,285 195,777
--------- ---------
Commitments and contingencies -- --
Stockholders' equity:
Common stock, par value $2.00; authorized, 1,020,000 shares; issued
and outstanding, 834,767 shares in 2001 and 834,293 shares in 2000 1,669 1,669
Additional paid-in capital 82,227 82,194
Retained earnings 5,514 2,942
Accumulated other comprehensive loss (6,542) (5,572)
Less treasury stock, at cost, 316 shares in 2000 -- (66)
--------- ---------
Total stockholders' equity 82,868 81,167
--------- ---------
Total $ 277,153 $ 276,944
========= =========
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
----------------------------
MARCH 31, MARCH 31,
2001 2000
--------- ---------
Net sales $ 86,917 $ 74,044
Cost of sales 20,319 16,346
-------- --------
Gross profit 66,598 57,698
Selling, general and administrative expenses 55,426 49,469
-------- --------
Income from operations 11,172 8,229
Other income (expense):
Exchange loss (2,180) (3,618)
Interest, net (3,487) (3,996)
Other (expense) income, net (115) 668
-------- --------
Income before income taxes, extraordinary item and
cumulative effect of accounting change 5,390 1,283
Income tax expense 2,944 2,027
-------- --------
Income (loss) before extraordinary item and cumulative
effect of accounting change 2,446 (744)
Extraordinary loss on early extinguishment of debt,
net of income tax benefit of $195 in 2000 -- 315
-------- --------
Income (loss) before cumulative effect of accounting
change 2,446 (1,059)
Cumulative effect of accounting change, net of income
tax expense of $82 126 --
-------- --------
Net income (loss) $ 2,572 $ (1,059)
======== ========
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)
THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31,
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,572 $ (1,059)
Extraordinary loss on early extinguishment of debt, net of taxes -- 315
Cumulative effect of accounting change (126) --
-------- --------
Income (loss) before extraordinary item and cumulative effect
of accounting change 2,446 (744)
Adjustments to reconcile income (loss) before extraordinary item and
cumulative effect of accounting change to net cash used in
operating activities:
Depreciation and amortization 1,830 1,805
Amortization of deferred financing fees 352 364
Unrealized foreign exchange loss 822 3,171
Changes in operating assets and liabilities:
Receivables, net (6,736) (2,888)
Inventories 2,726 (6,256)
Prepaid expenses and other current assets 3,579 (1,128)
Other assets 904 (1,022)
Accounts payable and accrued liabilities (13,488) (3,778)
Income taxes payable/prepaid 3,277 590
Other long-term liabilities (9) 264
-------- --------
Net cash used in operating activities (4,297) (9,622)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,609) (1,236)
Other (50) --
-------- --------
Net cash used in investing activities (1,659) (1,236)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of subordinated debt -- (10,597)
Repayments under term loan facility (1,125) (875)
Net borrowings under revolving credit facility 8,000 16,900
Net proceeds from bank debt 1,102 3,134
Issuance of common stock 99 --
-------- --------
Net cash provided by financing activities 8,076 8,562
-------- --------
Effect of exchange rate changes on cash (500) 1,351
-------- --------
Net increase (decrease) in cash and cash equivalents 1,620 (945)
Cash and cash equivalents as beginning of period 5,838 4,906
-------- --------
Cash and cash equivalents at end of period $ 7,458 $ 3,961
======== ========
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 unaudited interim
financial statements contain all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the Company's consolidated financial
statements as of March 31, 2001 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 unaudited interim consolidated financial statements as
of and for the three months ended March 31, 2001 and 2000 reflect the operations
of the Parent and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
In the fourth quarter of 2000, the Company adopted the provisions of
Emerging Issues Task Force ("EITF") 00-10, "Accounting for Shipping and Handling
Fees and Costs", which requires that amounts billed to customers for shipping
and handling fees be classified as revenues. Reclassifications have been made to
year 2000 amounts to reflect shipping and handling fees, previously reported as
reductions to selling, general, and administrative expenses, in net sales in the
accompanying consolidated statements of operations. The total amount that has
been reclassified as net sales is $2,328,000 for the three months ended March
31, 2000. Shipping and handling costs are included in selling, general and
administrative expenses.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS 133, as amended and interpreted, establishes accounting
and reporting standards for derivative instruments and hedging activities. In
connection with the adoption of SFAS 133, at January 1, 2001, the Company
recorded a net gain of $126,000 (net of a tax effect of $82,000) as a cumulative
transition adjustment to earnings. This adjustment relates to derivatives not
designated as hedges prior to adoption of SFAS 133, and represents the
difference between the carrying value and the fair value of such instruments at
January 1, 2001. See Note 9.
2) INVENTORIES
Inventories consist of the following (in thousands):
MARCH 31, DECEMBER 31,
2001 2000
-------- ------------
Raw materials and supplies ........ $ 5,718 $ 6,751
Finished goods .................... 29,702 31,395
------- -------
Total inventories ................. $35,420 $38,146
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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):
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Land ................................... $17,440 $17,224
Buildings .............................. 17,289 17,089
Machinery and equipment ................ 27,036 25,438
------- -------
61,765 59,751
Less accumulated depreciation .......... 9,362 8,303
------- -------
Property and equipment, net ............ $52,403 $51,448
======= =======
(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 March 2001, Jafra S.A. entered into a three-year bank loan and
borrowed the peso equivalent of $1,448,000 at an annual interest rate of 19.2%.
Principal and interest payments are due monthly through April 28, 2004. As of
March 31, 2001, $483,000 of this loan is classified as short-term debt in the
accompanying consolidated balance sheet and the remainder is classified as
long-term debt.
(5) INCOME TAXES
The actual income tax rate differs from the "expected" income tax rate
(computed by applying the U.S. federal corporate rate of 35% to income before
income taxes) for the three months ended March 31, 2001 principally as a result
of a higher effective tax rate in the Mexico entity, Jafra S.A., due to certain
inflation-related income tax adjustments, and valuation allowances provided
against certain operating losses in Europe and South America.
(6) COMPREHENSIVE INCOME
Comprehensive income is summarized as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
-------------------------
2001 2000
------- -------
Net income (loss)............................... $ 2,572 $(1,059)
Deferral of losses on cash flow hedges.......... (889) --
Foreign currency translation adjustment......... (81) 1,428
------- -------
Comprehensive income............................ $ 1,602 $ 369
======= =======
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8
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: Mexico, the United States, and Europe. Business results for
subsidiaries in South America, the Dominican Republic, and Thailand are combined
and included in the following table under the caption "All Others".
The accounting policies used to prepare the information reviewed by the
Company's chief operating decision makers 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, 2000
included in the Company's Annual Report on Form 10-K. The Company evaluates
performance based on segment operating income, excluding reorganization and
restructuring charges, unusual gains and losses, and amortization of goodwill
and intangibles. Consistent with the information reviewed by the Company's chief
operating decision makers, corporate costs, foreign exchange gains and losses,
interest expense, other nonoperating income or expense, and income taxes are not
allocated to operating segments. The effects of intersegment sales (net sales
and related gross profit) are excluded from the related captions below and from
the computation of segment operating income.
CORPORATE,
UNITED ALL TOTAL UNALLOCATED CONSOLIDATED
STATES MEXICO EUROPE OTHERS SEGMENTS AND OTHER TOTAL
------ ------ ------ ------ -------- ----------- ------------
(in thousands)
AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 2001
Net sales $ 18,329 $ 56,603 $ 6,266 $ 5,719 $ 86,917 -- $ 86,917
Operating profit (loss) 791 16,984 91 (1,571) 16,295 $ (5,123) 11,172
Depreciation and amortization 545 1,084 91 106 1,826 4 1,830
Capital expenditures 1,550 -- 26 33 1,609 -- 1,609
Segment assets 68,604 178,402 16,958 13,467 277,431 (278) 277,153
AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 2000
Net sales $ 17,725 $ 45,561 $ 6,644 $ 4,114 $ 74,044 -- $ 74,044
Operating profit (loss) (177) 14,210 (445) (992) 12,596 $ (4,367) 8,229
Depreciation and amortization 480 1,063 117 69 1,729 76 1,805
Capital expenditures 1,023 56 14 143 1,236 -- 1,236
Segment assets 68,370 193,485 17,988 10,451 290,294 156 290,450
(8) RESTRUCTURING CHARGES AND RELATED ACCRUALS
At December 31, 2000, restructuring liabilities of approximately $0.7
million were reflected on the Company's consolidated balance sheet. During the
first quarter of 2001, payments of approximately $0.3 million have been charged
against this accrual. As of March 31, 2001, the remaining restructuring
liability was $0.4 million.
(9) FOREIGN CURRENCY FORWARD CONTRACTS
The Company is exposed to currency risk relating to its forecasted U.S.
dollar denominated expenditures at Jafra S.A. As part of its overall strategy to
reduce the risk of adverse exchange rate fluctuations in Mexico, the Company
enters into foreign currency exchange contracts ("forward contracts"). The
Company places forward contracts based on its forecasted U.S. dollar cash
outflows from Jafra S.A. over a rolling 12 month period. In no event does the
Company hedge transactions that are forecasted to occur more than 12 months from
the date the forward contract is entered into. As a matter of policy, the
Company does not hold or issue forward contracts for trading or speculative
purposes nor does it enter into contracts or agreements containing "embedded"
derivative features.
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9
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The forward contracts utilized by the Company did not qualify for hedge
accounting under the applicable accounting standards prior to adoption of SFAS
133, and accordingly such instruments were marked-to-market with gains and
losses included as a component of exchange gain (loss) in the statements of
operations for the three months ended March 31, 2000. Under SFAS 133, such
mark-to-market accounting treatment continues to be applied to certain of the
Company's forward contracts. However, under SFAS 133, the Company's use of
forward contracts to hedge certain forecasted transactions qualifies for hedge
accounting. Unrealized gains and losses from such derivative instruments arising
subsequent to January 1, 2001 are deferred as a separate component of other
comprehensive income, and are recognized in income at the same time that the
underlying hedged exposure is recognized in income. This accounting treatment
results in the matching of gains and losses from such forward contracts with the
corresponding gains and losses generated by the underlying hedged transactions.
The Company currently designates certain of its forward contracts as cash
flow hedges of forecasted U.S. dollar denominated inventory purchases and
forecasted U.S. dollar denominated intercompany charges from JCI to Jafra S.A.
On the date the Company enters into a derivative contract, management designates
the derivative as a hedge of the identified exposure. The Company formally
documents all relationships between hedging instruments and hedged items, as
well as its risk-management objective and strategy for undertaking various hedge
transactions. In this documentation, the Company specifically identifies the
forecasted transaction that has been designated as a hedged item and states how
the hedging instrument is expected to hedge the risks related to the hedged
item. The Company formally measures effectiveness of its hedging relationships
both at the hedge inception and on an ongoing basis in accordance with its risk
management policy. For all qualifying and highly effective cash flow hedges, the
changes in the fair value of the derivative are deferred as a component of other
comprehensive income. Such amounts will be reclassified from other comprehensive
income into net income when the underlying hedged exposure is recognized in
income. For U.S. dollar denominated inventory purchases, this will occur upon
sale to an outside party of the related inventory. For intercompany charges,
this will occur at the date such charges are recorded by Jafra S.A.
During the three months ended March 31, 2000, the Company recognized
losses on forward contracts of approximately $4.9 million as a component of
exchange loss in the accompanying consolidated statement of operations. During
the three months ended March 31, 2001, the Company recognized approximately $3.4
million of losses as a component of exchange loss on forward contracts that did
not qualify for hedge accounting under SFAS 133. Additionally, during the three
months ended March 31, 2001, the Company deferred $916,000 of unrealized losses
on forward contracts that qualify for hedge accounting under SFAS 133. Of this
amount, approximately $27,000 was reclassified to earnings upon recognition of
the underlying hedged exposure prior to March 31, 2001. The Company expects that
substantially all of the remaining $889,000 deferred as a component of other
comprehensive income at March 31, 2001 will be reclassified into net income
within the next twelve months.
During the three months ended March 31, 2001, the ineffectiveness
generated by the Company's forward contracts designated as hedges was
insignificant. Additionally, all hedged forecasted transactions continue to be
probable of occurring, and accordingly no amount of gains or losses were
reclassified into earnings due to the discontinuance of such hedging
relationships.
The outstanding foreign currency forward contracts at March 31, 2001 had
a notional value of $82,514,000 and mature at various dates extending to
December 2001. Notional amounts do not quantify market or credit exposure or
represent assets or liabilities of the Company, but are used in the calculation
of cash settlements under the contracts. The table below describes the forward
contracts that were outstanding at March 31, 2001 (in thousands):
9
10
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
WEIGHTED
FORWARD AVERAGE
POSITION IN MATURITY CONTRACT FAIR
FOREIGN CURRENCY US DOLLARS(1) DATE RATE VALUE(1)
- ---------------- ------------- -------- -------- --------
Buy US Dollar/sell Mexican Peso ........ $ 9,185 4/30/01 10.34 $ 8,432
Buy US Dollar/sell Mexican Peso ........ 6,848 5/31/01 10.37 6,349
Buy US Dollar/sell Mexican Peso ........ 10,027 6/29/01 10.27 9,490
Buy US Dollar/sell Mexican Peso ........ 9,153 7/31/01 10.38 8,659
Buy US Dollar/sell Mexican Peso ........ 11,816 8/31/01 10.32 11,359
Buy US Dollar/sell Mexican Peso ........ 12,125 9/28/01 10.39 11,695
Buy US Dollar/sell Mexican Peso ........ 2,336 10/30/01 10.70 2,206
Buy US Dollar/sell Mexican Peso ........ 10,275 10/31/01 10.71 9,701
Buy US Dollar/sell Mexican Peso ........ 2,878 11/30/01 10.43 2,820
Buy US Dollar/sell Mexican Peso ........ 4,110 12/27/01 10.71 3,957
Buy US Dollar/sell Mexican Peso ........ 3,761 12/31/01 10.90 3,554
-------- --------
$ 82,514 $ 78,222
======== ========
- ----------
(1) The "Forward Position" in US dollars and the "Fair Value" presented above
represent notional amounts. The net of these two amounts, an unrealized
loss of $4,292,000 at March 31, 2001, represents the fair value of the
forward contracts, and has been recorded as a liability in the
accompanying consolidated balance sheet as of March 31, 2001.
10
11
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,297 $ 3,382
Receivables, less allowances for doubtful accounts of
$508 in 2001 and $536 in 2000 7,171 6,730
Inventories 8,983 9,455
Receivables from affiliates 9,886 5,078
Prepaids and other current assets 2,210 2,398
--------- ---------
Total current assets 30,547 27,043
Property and equipment, net 21,303 20,144
Other assets:
Goodwill, net of accumulated amortization of $3,101 in 2001
and $2,868 in 2000 38,839 39,542
Notes receivable from affiliates 18,806 27,182
Deferred financing fees, net of accumulated
amortization of $2,028 in 2001 and $1,871 in 2000 3,475 3,632
Other 3,650 3,599
--------- ---------
Total $ 116,620 $ 121,142
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt $ 2,625 $ 2,500
Accounts payable 3,478 6,552
Accrued liabilities 13,519 11,988
Income taxes payable 922 393
Deferred income taxes 343 343
Payables to affiliates 1,945 2,305
--------- ---------
Total current liabilities 22,832 24,081
Long-term debt 65,858 68,608
Deferred income taxes 548 548
Other long-term liabilities 2,357 2,367
--------- ---------
Total liabilities 91,595 95,604
--------- ---------
Commitments and contingencies -- --
Stockholder's equity:
Common stock, par value $.01; authorized, issued
and outstanding, 1,000 shares in 2001 and 2000 -- --
Additional paid-in capital 39,649 39,649
Retained deficit (11,496) (11,888)
Accumulated other comprehensive loss (3,128) (2,223)
--------- ---------
Total stockholder's equity 25,025 25,538
--------- ---------
Total $ 116,620 $ 121,142
========= =========
See accompanying notes to consolidated financial statements.
11
12
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
THREE MONTHS ENDED
-----------------------
MARCH 31, MARCH 31,
2001 2000
-------- --------
Net sales $ 27,949 $ 28,090
Cost of sales 7,937 8,834
-------- --------
Gross profit 20,012 19,256
Selling, general and administrative expenses 24,261 24,317
Management fee income from affiliates (2,253) (1,772)
-------- --------
Loss from operations (1,996) (3,289)
Other income (expense):
Royalty income from affiliates 4,692 3,283
Exchange gain (loss) 200 (87)
Interest, net (1,736) (1,777)
Other (expense) income, net (94) 107
-------- --------
Income (loss) before income taxes and extraordinary item 1,066 (1,763)
Income tax expense 674 144
-------- --------
Income (loss) before extraordinary item 392 (1,907)
Extraordinary loss on early extinguishment of debt,
net of income tax benefit of $120 in 2000 -- 205
-------- --------
Net income (loss) $ 392 $ (2,112)
======== ========
See accompanying notes to consolidated financial statements.
12
13
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
THREE MONTHS ENDED
-----------------------
MARCH 31, MARCH 31,
2001 2000
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 392 $(2,112)
Extraordinary loss on early extinguishment of debt, net of taxes -- 205
------- -------
Income (loss) before extraordinary item 392 (1,907)
Adjustments to reconcile income (loss) before extraordinary item
to net cash used in operating activities:
Depreciation and amortization 651 659
Amortization of deferred financing fees 157 161
Unrealized foreign exchange loss 22 --
Changes in operating assets and liabilities:
Receivables, net (441) 2,871
Inventories 472 (420)
Prepaid expenses and other assets 187 (1,900)
Intercompany receivables and payables (5,168) (3,900)
Accounts payable and accrued liabilities (1,544) (1,918)
Income taxes payable/prepaid 529 74
Other long-term liabilities (10) (890)
------- -------
Net cash used in operating activities (4,753) (7,170)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,576) (1,037)
Other (50) (282)
------- -------
Net cash used in investing activities (1,626) (1,319)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of subordinated debt -- (6,358)
Repayments under term loan facility (625) (500)
Net borrowings (repayments) under revolving credit facility (2,000) 9,400
Transactions with affiliates 8,376 4,280
------- -------
Net cash provided by financing activities 5,751 6,822
------- -------
Effect of exchange rate changes on cash (457) 775
------- -------
Net decrease in cash and cash equivalents (1,085) (892)
Cash and cash equivalents as beginning of period 3,382 3,026
------- -------
Cash and cash equivalents at end of period $ 2,297 $ 2,134
======= =======
See accompanying notes to consolidated financial statements.
13
14
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
Jafra Cosmetics International, Inc., a Delaware corporation ("JCI") is an
indirect wholly owned subsidiary of CDRJ Investments (Lux) S.A., a Luxembourg
societe anonyme (the "Parent"). JCI, its subsidiaries, 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").
The unaudited interim consolidated financial statements of JCI 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 unaudited interim financial statements contain all adjustments,
consisting of normal recurring adjustments, necessary to present fairly JCI's
consolidated financial statements as of March 31, 2001 and for all the interim
periods presented.
The accompanying unaudited interim consolidated financial statements as
of and for the three months ended March 31, 2001 and 2000 reflect the operations
of JCI and its subsidiaries (collectively, the "Company"). The Company is an
operating subsidiary in the United States, and currently has operating
subsidiaries in Austria, Germany, Italy, the Netherlands, Switzerland, the
Dominican Republic, and Thailand. All significant intercompany accounts and
transactions between entities comprising the Company have been eliminated in
consolidation.
In connection with the Acquisition, JCI and an affiliated company, Jafra
S.A. (the indirect, wholly owned Mexican subsidiary of the Parent) issued $100
million aggregate principal amount of 11.75% Subordinated Notes due 2008 (the
"Notes"). The Notes represent several obligations of JCI and Jafra S.A., with
each participating on a pro rata basis upon redemption. JCI and Jafra S.A. have
fully and unconditionally guaranteed the obligations of the other under the
Notes on a senior subordinated basis, subject to a 30-day standstill period
prior to enforcement of such guarantees. As the cross-guarantee of JCI and Jafra
S.A. is subject to a 30-day standstill period, the Parent is filing these
separate financial statements of JCI in its Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2001.
In the fourth quarter of 2000, the Company adopted the provisions of
Emerging Issues Task Force ("EITF") 00-10, "Accounting for Shipping and Handling
Fees and Costs", which requires that amounts billed to customers for shipping
and handling fees be classified as revenues. Reclassifications have been made to
year 2000 amounts to reflect shipping and handling fees, previously reported as
reductions to selling, general, and administrative expenses, in net sales in the
accompanying consolidated statements of operations. The total amount that has
been reclassified as net sales is $1,101,000 for the three months ended March
31, 2000. Shipping and handling costs are included in selling, general and
administrative expenses.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS 133, as amended and interpreted, establishes accounting
and reporting standards for derivative instruments and hedging activities. The
adoption of SFAS 133 did not have a material impact on the Company's
consolidated financial statements.
(2) INVENTORIES
Inventories consist of the following (in thousands):
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Raw materials and supplies ........ $ 70 $ 44
Finished goods .................... 8,913 9,411
------ ------
Total inventories ................. $8,983 $9,455
====== ======
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
14
15
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Land ................................. $ 6,188 $ 6,188
Buildings ............................ 5,982 5,998
Machinery and equipment .............. 13,544 11,997
------- -------
25,714 24,183
Less accumulated depreciation ........ 4,411 4,039
------- -------
Property and equipment, net .......... $21,303 $20,144
======= =======
(4) DEBT
In the first quarter of 2000, JCI repurchased and retired a portion of
the 11.75% Subordinated Notes due 2008 (the "Notes") with a face value of $6.5
million. In connection with the repurchase of the Notes, the related portion of
the unamortized deferred financing costs of $459,000 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
$205,000, which is net of an income tax benefit of $120,000.
(5) INCOME TAXES
The actual income tax rate differs from the "expected" income tax rate
(computed by applying the U.S. federal corporate rate of 35% to income before
income taxes) for the three months ended March 31, 2001 principally as a result
of valuation allowances provided against certain operating losses in Europe.
(6) COMPREHENSIVE LOSS
Comprehensive loss is summarized as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
-------------------------
2001 2000
------- -------
Net income (loss).......................... $ 392 $(2,112)
Foreign currency translation adjustment.... (905) 208
------- -------
Comprehensive loss......................... $ (513) $(1,904)
======= =======
(7) RELATED PARTY TRANSACTIONS
The Company distributes skin and body products to other affiliates of the
Parent ("Affiliates"). Sales to Affiliates, primarily in Mexico and South
America, were $2,504,000 and $3,774,000 for the three months ended March 31,
2001 and 2000, respectively. These sales were made at cost plus a markup ranging
from 0 to 11%.
In addition, the Company provides certain management services, such as
legal, accounting and treasury, management oversight, and other administrative
functions to Affiliates. The cost of these services is included in selling,
general and administrative expenses in the accompanying consolidated statements
of operations. The Company charges out a portion of these management expenses to
its Affiliates based principally upon a formula using the percentage of revenues
of each affiliate to the total consolidated revenues of the Parent. The Company
believes the amounts and methods of allocations are reasonable and approximate
the cost of the actual services provided. The management fee income, which
consists of amounts billed to Affiliates in Mexico and South America, was
$2,253,000 and $1,772,000 for the three months ended March 31, 2001 and 2000,
respectively.
Beginning in 2000, the Company has been charged a royalty by Jafra S.A.
for the right to use the Jafra trademark in the United States and Europe. The
total royalty expense charged by Jafra S.A. to the Company was $402,000 and
$269,000 for the three months ended March 31, 2001 and 2000, and is offset
against royalty income from affiliates in the accompanying consolidated
statements of operations.
15
16
JAFRA COSMETICS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company owns the worldwide rights to its multi-level sales know-how
(referred to as the "Jafra Way"). The Jafra Way was initially developed in the
United States for lineage, training, and compensation of consultants. The
royalty fees charged by the Company to Jafra S.A. for the three months ended
March 31, 2001 and 2000 were $5,094,000 and $3,552,000, respectively and are
based upon a percentage of Jafra S.A.'s sales.
The Company has granted loans to certain Affiliates at annual interest
rates ranging from 6% to 9%. Such loans are due to be repaid five years from the
date of grant, with no prepayment penalty. Notes receivable from Affiliates
consists primarily of amounts owed by Jafra S.A. as a result of Jafra S.A.'s
purchase of U.S. and German trademarks from the Company in December 1999, and
amounts billed to Jafra S.A. in connection with the Jafra Way royalty. In
addition, the Company has made loans to an indirect subsidiary of the Parent to
fund certain of the Parent's operations in South America. Net interest income
from Affiliates, primarily Jafra S.A., was $289,000 and $648,000 for the three
months ended March 31, 2001 and 2000, respectively.
(8) FINANCIAL REPORTING FOR BUSINESS SEGMENTS
The Company's business is comprised of one industry segment, direct
selling, with worldwide operations, principally in the United States and Europe.
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. The Company has two reportable business segments: the United States
and Europe. Business results for subsidiaries in the Dominican Republic and
Thailand are combined and included in the following table under the caption "All
Others".
The accounting policies used to prepare the information reviewed by the
Company's chief operating decision makers 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, 2000
included in the Parent's Annual Report on Form 10-K. The Company evaluates
performance based on segment operating income, excluding reorganization and
restructuring charges, unusual gains and losses, and amortization of goodwill
and intangibles. Consistent with the information reviewed by the Company's chief
operating decision makers, corporate costs, foreign exchange gains and losses,
interest expense, other nonoperating income or expense, and income taxes are not
allocated to operating segments. The effects of intersegment sales (net sales
and related gross profit) are excluded from the computation of segment operating
income. Gross profit from Affiliates (primarily in Mexico and South America) is
included in the following table under the caption "Corporate, Unallocated and
Other". Segment assets exclude notes and accounts receivable from Affiliates.
CORPORATE,
UNITED ALL TOTAL UNALLOCATED CONSOLIDATED
STATES EUROPE OTHERS SEGMENTS AND OTHER TOTAL
------ ------ ------ -------- ----------- ------------
(in thousands)
AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 2001
Net sales ................................. $ 18,329 $ 6,231 $ 885 $ 25,445 $ 2,504 $ 27,949
Operating profit (loss) ................... 791 91 (323) 559 (2,555) (1,996)
Depreciation and amortization ............. 545 90 16 651 -- 651
Capital expenditures ...................... 1,550 26 -- 1,576 -- 1,576
Segment assets ............................ 68,604 16,865 2,459 87,928 -- 87,928
AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31, 2000
Net sales ................................. $ 17,725 $ 6,592 -- $ 24,317 $ 3,773 $ 28,090
Operating profit (loss) ................... (177) (296) $ (69) (542) (2,747) (3,289)
Depreciation and amortization ............. 480 179 -- 659 -- 659
Capital expenditures ...................... 1,023 14 -- 1,037 -- 1,037
Segment assets ............................ 68,370 18,879 314 87,563 -- 87,563
16
17
(9) RESTRUCTURING CHARGES AND RELATED ACCRUALS
At December 31, 2000, restructuring liabilities of approximately $0.5
million were reflected on the Company's consolidated balance sheet. During the
first quarter of 2001, payments of approximately $0.2 million have been charged
against this accrual. As of March 31, 2001, the remaining restructuring
liability was $0.3 million.
17
18
JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,556 $ 561
Receivables, less allowances for doubtful accounts of
$1,840 in 2001 and $2,117 in 2000 32,283 26,712
Inventories 23,061 25,149
Receivables from affiliates 4,859 4,679
Prepaid income taxes -- 1,846
Prepaid expenses 228 1,948
Value-added tax receivables 3,683 5,146
--------- ---------
Total current assets 67,670 66,041
Property and equipment, net 30,259 30,402
Other assets:
Goodwill, net of accumulated amortization of $2,411 in 2001
and $2,154 in 2000 31,952 31,550
Trademarks, net of accumulated amortization of $2,859 in 2001
and $2,475 in 2000 49,707 49,082
Deferred financing fees, net of accumulated amortization
of $2,367 in 2001 and $2,127 in 2000 1,823 1,983
Other 1,850 2,707
--------- ---------
Total $ 183,261 $ 181,765
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt, including current portion of long-term debt $ 2,608 $ 2,346
Accounts payable 11,500 20,266
Accrued liabilities 20,391 20,735
Income taxes payable 933 --
Payables to affiliates 7,168 2,140
Deferred income taxes 5,048 5,048
--------- ---------
Total current liabilities 47,648 50,535
Long-term debt 45,912 35,572
Deferred income taxes 15,762 15,809
Notes payable to affiliates 10,368 20,093
--------- ---------
Total liabilities 119,690 122,009
--------- ---------
Commitments and contingencies -- --
Stockholders' equity:
Series B common stock, no par value; authorized, issued
and outstanding, 151 shares in 2001 and 2000 -- --
Additional paid-in capital 34,184 34,184
Retained earnings 30,783 27,030
Accumulated other comprehensive loss (1,396) (1,458)
--------- ---------
Total stockholders' equity 63,571 59,756
--------- ---------
Total $ 183,261 $ 181,765
========= =========
See accompanying notes to consolidated financial statements.
18
19
JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31,
2001 2000
-------- --------
Net sales $ 59,335 $ 47,761
Cost of sales 15,956 12,117
-------- --------
Gross profit 43,379 35,644
Selling, general and administrative expenses 26,723 21,224
Management fee expense from affiliates 2,240 1,745
-------- --------
Income from operations 14,416 12,675
Other income (expense):
Royalty expense to affiliates (4,692) (3,283)
Exchange loss (2,158) (3,596)
Interest, net (1,682) (2,177)
Other income, net 6 540
-------- --------
Income before income taxes, extraordinary item and
cumulative effect of accounting change 5,890 4,159
Income tax expense 2,263 1,946
-------- --------
Income before extraordinary item and cumulative
effect of accounting change 3,627 2,213
Extraordinary loss on early extinguishment of debt,
net of income tax benefit of $75 in 2000 -- 110
-------- --------
Income before cumulative effect of accounting
change 3,627 2,103
Cumulative effect of accounting change, net of income
tax expense of $82 126 --
-------- --------
Net income $ 3,753 $ 2,103
======== ========
See accompanying notes to consolidated financial statements.
19
20
JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31,
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,753 $ 2,103
Extraordinary loss on early extinguishment of debt, net of taxes -- 110
Cumulative effect of accounting change (126) --
-------- --------
Income before extraordinary item and cumulative effect of
accounting change 3,627 2,213
Adjustments to reconcile income before extraordinary item and
cumulative effect of accounting change to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,084 1,063
Amortization of deferred financing fees 195 202
Unrealized foreign exchange loss 800 3,171
Changes in operating assets and liabilities:
Receivables, net (5,571) (3,963)
Inventories 2,088 (5,933)
Prepaid expenses and other current assets 3,183 (512)
Intercompany receivables and payables 4,848 4,029
Other assets 857 (819)
Accounts payable and accrued liabilities (11,757) (1,933)
Income taxes payable/prepaid 2,779 302
Other long-term liabilities (10) --
-------- --------
Net cash provided by (used in) operating activities 2,123 (2,180)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment -- (56)
-------- --------
Net cash used in investing activities -- (56)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of subordinated debt -- (4,239)
Repayments under term loan facility (500) (375)
Net borrowings under revolving credit facility 10,000 7,500
Net proceeds from bank debt 1,102 3,134
Transactions with affiliates (9,539) (4,480)
-------- --------
Net cash provided by financing activities 1,063 1,540
-------- --------
Effect of exchange rate changes on cash (191) 693
-------- --------
Net increase (decrease) in cash and cash equivalents 2,995 (3)
Cash and cash equivalents as beginning of period 561 3
-------- --------
Cash and cash equivalents at end of period $ 3,556 $ --
======== ========
See accompanying notes to consolidated financial statements.
20
21
JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
Jafra Cosmetics International, S.A. de C.V., a sociedad anomina de
capital variable organized under the laws of the United Mexican States ("Jafra
S.A.") is an indirect wholly owned subsidiary of CDRJ Investments (Lux) S.A., a
Luxembourg societe anonyme (the "Parent"). Jafra S.A., its subsidiaries, 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").
The unaudited interim consolidated financial statements of Jafra S.A. 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 unaudited interim financial statements contain all adjustments,
consisting of normal recurring adjustments, necessary to present fairly Jafra
S.A.'s consolidated financial statements as of March 31, 2001 and for all the
interim periods presented.
The accompanying unaudited interim consolidated financial statements as
of and for the three months ended March 31, 2001 and 2000 reflect the operations
of Jafra S.A. and its subsidiaries (collectively, the "Company"). All
significant intercompany accounts and transactions between entities comprising
the Company have been eliminated in consolidation.
In connection with the Acquisition, Jafra S.A. and an affiliated company,
JCI (the indirect, wholly owned United States subsidiary of the Parent) issued
$100 million aggregate principal amount of 11.75% Subordinated Notes due 2008
(the "Notes"). The Notes represent several obligations of Jafra S.A and JCI,
with each participating on a pro rata basis upon redemption. Jafra S.A. and JCI
have fully and unconditionally guaranteed the obligations of the other under the
Notes on a senior subordinated basis, subject to a 30-day standstill period
prior to enforcement of such guarantees. As the cross-guarantee of Jafra S.A.
and JCI is subject to a 30-day standstill period, the Parent is filing these
separate financial statements of Jafra S.A. in its Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2001.
The functional currency for the Company is the Mexican peso. For
presentation purposes, assets and liabilities are translated into U.S. dollars
at current exchange rates, and related revenues and expenses are translated at
average exchange rates in effect during the period. Resulting translation
adjustments are recorded as a component of other comprehensive income.
In the fourth quarter of 2000, the Company adopted the provisions of
Emerging Issues Task Force ("EITF") 00-10, "Accounting for Shipping and Handling
Fees and Costs", which requires that amounts billed to customers for shipping
and handling fees be classified as revenues. Reclassifications have been made to
year 2000 amounts to reflect shipping and handling fees, previously reported as
reductions to selling, general, and administrative expenses, in net sales in the
accompanying consolidated statements of operations. The total amount that has
been reclassified as net sales is $1,165,000 for the three months ended March
31, 2000. Shipping and handling costs are included in selling, general and
administrative expenses.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS 133, as amended and interpreted, establishes accounting
and reporting standards for derivative instruments and hedging activities. In
connection with the adoption of SFAS 133, at January 1, 2001, the Company
recorded a net gain of $126,000 (net of a tax effect of $82,000) as a cumulative
transition adjustment to earnings. This adjustment relates to derivatives not
designated as hedges prior to adoption of SFAS 133, and represents the
difference between the carrying value and the fair value of such instruments at
January 1, 2001. See Note 8.
21
22
JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) INVENTORIES
Inventories consist of the following (in thousands):
MARCH 31, DECEMBER 31,
2001 2000
------- ------------
Raw materials and supplies ........ $ 5,403 $ 6,443
Finished goods .................... 17,658 18,706
------- -------
Total inventories ................. $23,061 $25,149
======= =======
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
MARCH 31, DECEMBER 31,
2001 2000
------- ------------
Land .................................. $11,252 $11,036
Buildings ............................. 11,308 11,091
Machinery and equipment ............... 12,200 12,146
------- -------
34,760 34,273
Less accumulated depreciation ......... 4,501 3,871
------- -------
Property and equipment, net ........... $30,259 $30,402
======= =======
(4) DEBT
In the first quarter of 2000, Jafra S.A. repurchased and retired a
portion of the 11.75% Subordinated Notes due 2008 (the "Notes") with a face
value of $4.3 million. In connection with the repurchase of the Notes, the
related portion of the unamortized deferred financing costs of $274,000 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 $110,000, which is net of an income tax benefit of $75,000.
In March 2001, Jafra S. A. entered into a three-year bank loan and
borrowed the peso equivalent of $1,448,000 at an annual interest rate of 19.2%.
Principal and interest payments are due monthly through April 28, 2004. As of
March 31, 2001, $483,000 of this loan is classified as short-term debt in the
accompanying consolidated balance sheet and the remainder is classified as
long-term debt.
(5) INCOME TAXES
The actual income tax rate differs from the "expected" income tax rate
(computed by applying the Mexican federal corporate rate of 35% to income before
income taxes) for the three months ended March 31, 2001 principally as a result
of certain inflation-related income tax adjustments.
(6) COMPREHENSIVE INCOME
Comprehensive income is summarized as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
-------------------------
2001 2000
------- -------
Net income................................. $ 3,753 $ 2,103
Deferral of losses on cash flow hedges..... (889) --
Foreign currency translation adjustment.... 951 1,307
------- -------
Comprehensive income $ 3,815 $ 3,410
======= =======
(7) RELATED PARTY TRANSACTIONS
22
23
JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company manufactures and distributes color cosmetics and fragrance
products to other affiliates of the Parent ("Affiliates"). Sales to Affiliates,
primarily in the United States and Germany, were $2,732,000 and $2,200,000 for
the three months ended March 31, 2001 and 2000, respectively. These sales were
made at cost plus a markup ranging from 0 to 11%.
In addition, the Company is provided with certain management services,
such as legal, accounting and treasury, management oversight, and other
administrative functions from JCI. The cost of these services is included in
management fee expense from affiliate in the accompanying consolidated
statements of operations. JCI charges out a portion of these management expenses
to its Affiliates based principally upon a formula using the percentage of
revenues of each affiliate to the total consolidated revenues of the Parent. JCI
believes the amounts and methods of allocations are reasonable and approximate
the cost of the actual services provided. The management fee expense charged by
JCI to the Company was $2,240,000 and $1,745,000 for the three months ended
March 31, 2001 and 2000, respectively.
Beginning in 2000, Jafra S.A. charged JCI a royalty for the right to use
the Jafra trademark in the United States and Europe. The total royalty income
charged by Jafra S.A. to JCI and Jafra Germany was $402,000 and $269,000 for the
three months ended March 31, 2001 and 2000, respectively, and is offset against
royalty expense to affiliates in the accompanying consolidated statements of
operations.
JCI owns the worldwide rights to its multi-level sales know-how (referred
to as the "Jafra Way"). The Jafra Way was initially developed in the United
States for lineage, training, and compensation of consultants. The royalty fees
charged by JCI to Jafra S.A. for the use of the Jafra Way for the three months
ended March 31, 2001 and 2000 were $5,094,000 and $3,552,000, respectively, and
are based upon a percentage of Jafra S.A.'s sales.
The Company has obtained loans from certain Affiliates at annual interest
rates ranging from 6% to 9%. Such loans are due to be repaid five years from the
date of grant, with no prepayment penalty. Notes payable to Affiliates consists
primarily of amounts owed by Jafra S.A. as a result of Jafra S.A.'s purchase of
the U.S. and German trademarks from JCI in December 1999, and amounts billed to
Jafra S.A. in connection with the Jafra Way royalty. Net interest expense to
Affiliates, primarily JCI, was $210,000 and $598,000 for the three months ended
March 31, 2001 and 2000, respectively.
(8) FOREIGN CURRENCY FORWARD CONTRACTS
The Company is exposed to currency risk relating to its forecasted U.S.
dollar denominated expenditures. As part of the Parent's overall strategy to
reduce the risk of adverse exchange rate fluctuations in Mexico, the Company
enters into foreign currency exchange contracts ("forward contracts"). The
Company places forward contracts based on its forecasted U.S. dollar cash
outflows over a rolling 12 month period. In no event does the Company hedge
transactions that are forecasted to occur more than 12 months from the date the
forward contract is entered into. As a matter of policy, the Company does not
hold or issue forward contracts for trading or speculative purposes nor does it
enter into contracts or agreements containing "embedded" derivative features.
The forward contracts utilized by the Company did not qualify for hedge
accounting under the applicable accounting standards prior to adoption of SFAS
133, and accordingly such instruments were marked-to-market with gains and
losses included as a component of exchange gain (loss) in the statements of
operations for the three months ended March 31, 2000. Under SFAS 133, such
mark-to-market accounting treatment continues to be applied to certain of the
Company's forward contracts. However, under SFAS 133, the Company's use of
forward contracts to hedge certain forecasted transactions qualifies for hedge
accounting. Unrealized gains and losses from such derivative instruments arising
subsequent to January 1, 2001 are deferred as a separate component of other
comprehensive income, and are recognized in income at the same time that the
underlying hedged exposure is recognized in income. This accounting treatment
results in the matching of gains and losses from such forward contracts with the
corresponding gains and losses generated by the underlying hedged transactions.
23
24
JAFRA COSMETICS INTERNATIONAL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company currently designates certain of its forward contracts as cash
flow hedges of forecasted U.S. dollar denominated inventory purchases and
forecasted U.S. dollar denominated intercompany charges from JCI. On the date
the Company enters into a derivative contract, management designates the
derivative as a hedge of the identified exposure. The Company formally documents
all relationships between hedging instruments and hedged items, as well as its
risk-management objective and strategy for undertaking various hedge
transactions. In this documentation, the Company specifically identifies the
forecasted transaction that has been designated as a hedged item and states how
the hedging instrument is expected to hedge the risks related to the hedged
item. The Company formally measures effectiveness of its hedging relationships
both at the hedge inception and on an ongoing basis in accordance with its risk
management policy. For all qualifying and highly effective cash flow hedges, the
changes in the fair value of the derivative are deferred as a component of other
comprehensive income. Such amounts will be reclassified from other comprehensive
income into net income when the underlying hedged exposure is recognized in
income. For U.S. dollar denominated inventory purchases, this will occur upon
sale to an outside party of the related inventory. For intercompany charges,
this will occur at the date such charges are recorded by the Company.
During the three months ended March 31, 2000, the Company recognized
losses on forward contracts of approximately $4.9 million as a component of
exchange loss in the accompanying consolidated statement of operations. During
the three months ended March 31, 2001, the Company recognized approximately $3.4
million of losses as a component of exchange loss on forward contracts that did
not qualify for hedge accounting under SFAS 133. Additionally, during the three
months ended March 31, 2001, the Company deferred $916,000 of unrealized losses
on forward contracts that qualify for hedge accounting under SFAS 133. Of this
amount, $27,000 was reclassified to earnings upon recognition of the underlying
hedged exposure prior to March 31, 2001. The Company expects that substantially
all of the remaining $889,000 deferred as a component of other comprehensive
income at March 31, 2001 will be reclassified into net income within the next
twelve months.
During the three months ended March 31, 2001, the ineffectiveness
generated by the Company's forward contracts designated as hedges was
insignificant. Additionally, all hedged forecasted transactions continue to be
probable of occurring, and accordingly no amount of gains or losses were
reclassified into earnings due to the discontinuance of such hedging
relationships.
The outstanding foreign currency forward contracts at March 31, 2001 had
a notional value of $82,514,000 and mature at various dates extending to
December 2001. Notional amounts do not quantify market or credit exposure or
represent assets or liabilities of the Company, but are used in the calculation
of cash settlements under the contracts. The table below describes the forward
contracts that were outstanding at March 31, 2001 (in thousands):
WEIGHTED
FORWARD AVERAGE
POSITION IN MATURITY CONTRACT FAIR
FOREIGN CURRENCY US DOLLARS(1) DATE RATE VALUE(1)
- ---------------- ------------- -------- -------- --------
Buy US Dollar/sell Mexican Peso ........ $ 9,185 4/30/01 10.34 $ 8,432
Buy US Dollar/sell Mexican Peso ........ 6,848 5/31/01 10.37 6,349
Buy US Dollar/sell Mexican Peso ........ 10,027 6/29/01 10.27 9,490
Buy US Dollar/sell Mexican Peso ........ 9,153 7/31/01 10.38 8,659
Buy US Dollar/sell Mexican Peso ........ 11,816 8/31/01 10.32 11,359
Buy US Dollar/sell Mexican Peso ........ 12,125 9/28/01 10.39 11,695
Buy US Dollar/sell Mexican Peso ........ 2,336 10/30/01 10.70 2,206
Buy US Dollar/sell Mexican Peso ........ 10,275 10/31/01 10.71 9,701
Buy US Dollar/sell Mexican Peso ........ 2,878 11/30/01 10.43 2,820
Buy US Dollar/sell Mexican Peso ........ 4,110 12/27/01 10.71 3,957
Buy US Dollar/sell Mexican Peso ........ 3,761 12/31/01 10.90 3,554
-------- --------
$ 82,514 $ 78,222
======== ========
- ----------
(1) The "Forward Position" in US dollars and the "Fair Value" presented above
represent notional amounts. The net of these two amounts, an unrealized
loss of $4,292,000 at March 31, 2001, represents the fair value of the
forward contracts, and has been recorded as a liability in the
accompanying consolidated balance sheet as of March 31, 2001.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 interim consolidated financial statements and notes
thereto and with the Company's audited consolidated financial statements as of
and for the year ended December 31, 2000, included in the Company's Annual
Report on Form 10-K. The results of operations for the three months ended March
31, 2001 are not necessarily indicative of results that may be expected for
future periods.
RESULTS OF OPERATIONS
The following table represents selected components of the Company's
results of operations, in millions of dollars and as percentages of net sales.
The table reflects the operations of the Company for the three months ended
March 31, 2001 and 2000.
THREE MONTHS ENDED MARCH 31,
------------------------------------------
2001 2000(1)
----------------- -----------------
(IN MILLIONS)
Net sales $86.9 100.0% $74.0 100.0%
Cost of sales 20.3 23.4 16.3 22.0
----- ----- ----- -----
Gross profit 66.6 76.6 57.7 78.0
Selling, general and administrative expenses 55.4 63.8 49.5 66.9
----- ----- ----- -----
Income from operations 11.2 12.8 8.2 11.1
Exchange loss (2.2) (2.5) (3.6) (4.9)
Interest, net (3.5) (4.0) (4.0) (5.4)
Other (expense) income, net (0.1) (0.1) 0.6 0.8
----- ----- ----- -----
Income before income taxes, extraordinary item and
cumulative effect of accounting change 5.4 6.2 1.2 1.6
Income tax expense 2.9 3.3 2.0 2.7
----- ----- ----- -----
Income (loss) before extraordinary item and cumulative
effect of accounting change 2.5 2.9 (0.8) (1.1)
Extraordinary loss on early extinguishment
of debt, net of income tax benefit of $0.2 -- -- 0.3 0.4
----- ----- ----- -----
Income (loss) before cumulative effect of accounting
change 2.5 2.9 (1.1) (1.5)
Cumulative effect of accounting change, net of income
tax expense of $0.1 0.1 0.1 -- --
----- ----- ----- -----
Net income (loss) $ 2.6 3.0% ($1.1) (1.5)%
===== ===== ===== =====
- ----------
(1) In the fourth quarter of 2000, the Company adopted the provisions of
Emerging Issues Task Force ("EITF") 00-10, "Accounting for Shipping and
Handling Fees and Costs", which requires that amounts billed to customers
for shipping and handling fees be classified as revenues.
Reclassifications have been made to year 2000 amounts to reflect shipping
and handling fees, previously reported as reductions to selling, general
and administrative expenses, in net sales to conform to the current
period presentation. Total amounts that have been reclassified are
approximately $2.3 million for the three months ended March 31, 2000.
Shipping and handling costs are included in selling, general and
administrative expenses.
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THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2000
Net sales. Net sales in the first quarter of 2001 increased to $86.9
million from $74.0 million in the first quarter of 2000, an increase of $12.9
million, or 17.4%. Net sales in local currencies in the first quarter of 2001
increased by 20.0% 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 weaker average exchange rates of local currencies in
Mexico, and additionally in South America and Europe, during the first quarter
of 2001 as compared to the first quarter of 2000. The Company's average number
of consultants (who perform the duties of sales representatives) worldwide for
the first quarter increased to approximately 339,000 or 15.1% over the 2000
average, while the number of active consultants placing orders increased by
23.2% over the same period of 2000. The Company defines consultant productivity
as net sales in U.S. dollars per active consultant. In general, consultants are
considered to be active if they place one order within four months.
In Mexico, net sales in the first quarter of 2001 increased to $56.6
million from $45.6 million in the first quarter of 2000, an increase of $11.0
million, or 24.1%. Sales in Mexico in local currency increased by 26.8% over the
comparable 2000 period. The year-to-year increase was due primarily to higher
sponsoring (activation of new consultants) and increased ordering activity
achieved as a result of certain promotional activities implemented during the
first quarter of 2001. In Mexico, the average number of consultants for the
first quarter of 2001 increased to approximately 211,000, or 8.3%, and the
number of active, ordering consultants increased by 20.8%, over the respective
first quarter 2000 averages.
In the U.S., net sales in the first quarter of 2001 increased to $18.3
million from $17.7 million in the first quarter of 2000, an increase of $0.6
million, or 3.4%. The year-to-year increase was due to a combination of an
increase in the average consultant base achieved by good retention and
sponsoring, and increased ordering activity. The increased ordering activity was
due to successful product launches of the Home Spa and Tropical Rhythm shades,
and a new commission structure which was in effect for the entire first quarter
of 2001, but only one month of the first quarter of 2000. In the U.S., the
average number of consultants for the first quarter of 2001 increased to
approximately 64,000, or 13.3%, and the number of active, ordering consultants
increased by 27.6%, over the respective first quarter 2000 averages. These
increases were partially offset by a decrease in consultant productivity,
because the new commission structure resulted in lower average order sizes.
In Europe, net sales decreased to $6.2 million in the first quarter of
2001 from $6.6 million in the first quarter of 2000, a decrease of $0.4 million,
or 6.1%. Contributing to the sales decline was an unfavorable exchange rate
impact on sales of $0.3 million. Excluding the exchange rate impact, net sales
decreased nominally by $0.1 million, and the average number of consultants for
the first quarter of 2001 was unchanged from the comparable prior year period at
17,000.
Gross profit. Consolidated gross profit in the first quarter of 2001
increased to $66.6 million from $57.7 million in the comparable prior year
period, an increase of $8.9 million, or 15.4%. Gross profit as a percentage of
sales (gross margin) decreased to 76.6% from 78.0%. The reduction in gross
margin in the first quarter of 2001 was due primarily to a heavier mix of
promotional products, as compared to regular (non-discounted) products.
In Mexico, gross margin in the first quarter of 2001 decreased to 76.0%
from 76.7% in the first quarter of 2000, due primarily to a heavier mix of
promotional color and body care products, including lower-margin promotional
kits, which were offered to stimulate sponsoring activity. In the United States,
gross margin in the first quarter of 2001 decreased slightly to 78.0% from 78.1%
in the first quarter of 2000, due to a slightly heavier mix of promotional
products in the first quarter of 2001. In Europe, gross margin in the first
quarter of 2001 increased to 81.8% from 78.4% in the first quarter of 2000, due
primarily to better management of promotional kits and a more favorable product
mix.
Selling, general and administrative expenses. SG&A expenses in the first
quarter of 2001 increased to $55.4 million from $49.5 million in the first
quarter of 2000, an increase of $5.9 million, or 11.9%. SG&A as a percentage of
net sales decreased in the first quarter of 2001 to 63.8% from 66.9% for the
same period in 2000, primarily due to reduced promotional spending in the United
States and administrative cost savings in the United States and Europe.
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In Mexico, SG&A expenses in the first quarter of 2001 increased by $5.3
million, or 25.5%, from the first quarter of 2000. SG&A as a percentage of net
sales in Mexico was 46.0% in the first quarter of 2001, compared to 45.6% for
the first quarter of 2000. The increased SG&A in Mexico related primarily to
sales promotional and commission expenses, which tend to increase proportionally
with sales. Sales promotional expenses increased proportionately more than sales
during the first quarter of 2001, due to certain planned promotional activities,
but they were substantially offset by economies of scale in administrative
expenses. In the U.S., SG&A expenses in the first quarter of 2001 decreased by
$0.5 million, or 3.7% from the first quarter of 2000. SG&A expenses as a
percentage of net sales in the U.S. was 73.6% in the first quarter of 2001,
compared to 79.1% for the first quarter of 2000. The reduced SG&A expenses in
the U.S. were primarily due to changes in the scope of certain sales promotional
events and administrative cost savings achieved in the first quarter of 2001. In
Europe, SG&A expenses in the first quarter of 2001 decreased by $0.6 million, or
11.0%, from the the first quarter of 2000. The decrease was primarily the result
of administrative cost savings achieved from restructuring activities undertaken
during the latter part of 2000.
SG&A expenses in other selling markets (South America and Thailand) and
at corporate headquarters in the first quarter of 2001 increased by $1.7
million, or 18.7%, primarily as a result of sales promotional and commission
expenses in the Company's growing South American markets.
Exchange gain (loss). The Company's foreign exchange loss was $2.2
million in the first quarter of 2001, compared to a foreign exchange loss of
$3.6 million in the prior year, a decrease of $1.4 million, or 38.9%. The
Company's foreign exchange gains and losses primarily result from its operations
in Mexico. During the first quarter of 2001, the Company recognized $3.4 million
of exchange losses on forward contracts, resulting from the strengthening of the
Mexican peso against the U.S. dollar during the period. These exchange losses
were partially offset by an unrealized exchange gain of $1.0 million on the
remeasurement of U.S. dollar-denominated debt, and exchange gains on other
foreign currency transactions during the first quarter of 2001 of $0.2 million.
During the first quarter of 2000, the Company recognized $4.9 million of
exchange losses on forward contracts, resulting from the strengthening of the
Mexican peso against the U.S. dollar during the period, and $0.5 million of
exchange losses on other foreign currency transactions. These exchange losses
were partially offset by an unrealized exchange gain of $1.8 million on the
remeasurement of U.S. dollar-denominated debt. See " -Recent Accounting
Pronouncement".
Interest expense. Net interest expense (including amortization of
deferred financing fees) in the first quarter of 2001 decreased to $3.5 million
from $4.0 million in 2000, a decrease of $0.5 million, or 12.5%. The decrease
was due to a combination of lower average balances on the term loan and
revolving credit line, and lower interest rates on those borrowings. The lower
interest rates in the first quarter of 2001 reflected both decreases in general
market interest rates of approximately 50 basis points, and a 75 basis point
reduction in borrowing costs achieved by the Company due to the attainment of
specified leverage ratios as defined by the Company's credit agreement.
Other income (expense). Other expense in the first quarter of 2001 was
$0.1 million, compared to other income of $0.6 million in the first quarter of
2000, a change of $0.7 million. The other income in the first quarter of 2000
consisted primarily of $0.5 million related to a recovery of the effect of
inflation upon an account receivable due from the Mexican government.
Income tax expense. Income tax expense increased to $2.9 million in the
first quarter of 2001 from $2.0 million in the comparable 2000 period, an
increase of $0.9 million, or 45%. The increase is due to higher taxable income
generated by the Company's Mexican and United States subsidiaries in 2001 as
compared to 2000. After taking into effect the tax impacts related to the
cumulative effect of accounting change in 2001 and the extraordinary item in
2000, in the first quarter of 2001, the Company's effective income tax rate
decreased to approximately 54%, compared to 238% for the comparable period of
2000. The decrease in the effective tax rate was driven in part by the U.S.
subsidiary. During the first quarter of 2000, valuation allowances were taken
against certain foreign tax credits of the U.S. subsidiary. During the first
quarter of 2001, no such valuation allowances were necessary. In the first
quarter of 2001 and 2000, valuation allowances were again taken against net
operating losses in Europe and South America.
Net income (loss). Net income was $2.6 million for the first quarter of
2001, a $3.7 million change compared to a net loss of $1.1 million in 2000. The
change was due to a $8.9 million increase in gross profit, a $1.4 million
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reduction in foreign exchange loss, a $0.5 million reduction in interest
expense, the absence of a $0.3 million extraordinary loss (net of income taxes)
on early extinguishment of debt which was incurred in 2000, and income of $0.1
million (net of income taxes) from the cumulative effect of an accounting
change, partially offset by a $5.9 million increase in SG&A expenses, a $0.7
million negative fluctuation in other (expense) income, and a $0.9 million
increase in income tax expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise primarily from principal and interest
payments under its 11.75% Senior Subordinated Notes due 2008 ("Notes"), the Term
Loan Facility and the Revolving Credit Facility. The Notes represent several
obligations of Jafra Cosmetics International, Inc. ("JCI") and Jafra Cosmetics
International, S.A. de C.V. ("Jafra S.A.") in the original amount of $60 million
and $40 million (currently at $45.1 million and $30.0 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 through April 30, 2004.
Scheduled term loan principal payments under the Term Loan Facility will be
approximately $4.5 million, $5.5 million, $6.5 million, and $2.5 million for
each of the years from 2001 through 2004, respectively. Borrowings under the
Revolving Credit Facility ($22.5 million as of March 31, 2001) 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 0.5%, plus an
applicable margin not to exceed 0.625%). The interest rate in effect at March
31, 2001 was approximately 6.8% for the LIBOR-based borrowings, and the rate for
the prime-based borrowings was approximately 8.6%. Borrowings under the senior
Credit Agreement are secured by substantially all of the assets of JCI and Jafra
S. A. During the first quarter of 2001, cash paid for interest was approximately
$1.0 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
March 31, 2001 under the Revolving Credit Facility, totaling $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 exceeding the aggregate cash proceeds of one or more equity offerings,
at a redemption price of 111.75% plus accrued interest; provided, however, that
an aggregate principal amount of the Notes equal to at least 65% of the original
aggregate principal amount of the Notes must remain outstanding after each such
redemption.
A Consent and Waiver, dated November 19, 1999, to the Senior Credit
Agreement allows the Company to repurchase the Notes in the open market from
time to time, with the aggregate purchase price for all such Notes repurchased
not to exceed $25.0 million. Aggregate repurchases as of March 31, 2001 were
$24.8 million. The repurchased debt has been replaced with debt under the
Revolving Credit Facility, which currently has lower effective interest rates.
In March 2001, Jafra S.A. paid off the balance remaining under a one-year
term loan originally due on August 16, 2001, and entered into a three-year bank
loan, borrowing the peso equivalent of $1,448,000 at an annual interest rate of
19.2%. Principal and interest payments are due monthly through April 28, 2004.
As of March 31, 2001, $483,000 of this loan is classified as short-term debt in
the accompanying consolidated balance sheet and the remainder is classified as
long-term debt.
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The Company believes, but no assurance can be given, that its existing
cash, cash flow from operations and availability under the Senior Credit
Agreement will provide sufficient liquidity to meet the Company's cash
requirements and working capital needs over the next twelve months.
CASH FLOWS
Net cash used in operating activities was $4.3 million in the first
quarter of 2001, consisting of $5.4 million provided by net income adjusted for
depreciation, amortization, and other non-cash items included in net income,
offset by $9.7 million used by changes in operating assets and liabilities. The
significant elements of net cash used by changes in operating assets and
liabilities in the first quarter of 2001 were an increase of $6.7 million in
accounts receivable and a reduction of $13.5 million in accounts payable and
accrued liabilities, partially offset by a reduction in prepaid income taxes of
$3.3 million, a reduction in inventories of $2.7 million, and a reduction in
prepaid and other assets of $4.5 million.
Net cash used in investing activities was $1.7 million for the first
quarter of 2001, which was used for capital expenditures, consisting primarily
of information system upgrades. Capital expenditures in 2001 are expected to be
approximately $12.0 million.
Net cash provided by financing activities was $8.1 million for the first
quarter of 2001, and consisted of net borrowings under the revolving credit
facilities of $8.0 million, net proceeds from short-term bank debt of $1.1
million, and $0.1 million of proceeds from the issuance of common stock,
partially offset by repayments of $1.1 million under term loan facility.
The effect of exchange rate changes on cash was $0.5 million for the
first quarter of 2001, relating primarily to fluctuations in the exchange rates
in Europe.
RECENT ACCOUNTING PRONOUNCEMENT
The Company is exposed to currency risk relating to its forecasted U.S.
dollar denominated expenditures at Jafra S.A. As part of its overall strategy to
reduce the risk of adverse exchange rate fluctuations in Mexico, the Company
enters into foreign currency exchange contracts ("forward contracts"). The
Company places forward contracts based on its forecasted U.S. dollar cash
outflows from Jafra S.A. over a rolling 12 month period. In no event does the
Company hedge transactions that are forecasted to occur more than 12 months from
the date the forward contract is entered into. As a matter of policy, the
Company does not hold or issue forward contracts for trading or speculative
purposes nor does it enter into contracts or agreements containing "embedded"
derivative features.
The forward contracts utilized by the Company did not qualify for hedge
accounting under the applicable accounting standards prior to adoption of SFAS
133, and accordingly such instruments were marked-to-market with gains and
losses included as a component of exchange gain (loss) in the statements of
operations for the three months ended March 31, 2000. Under SFAS 133, such
mark-to-market accounting treatment continues to be applied to certain of the
Company's forward contracts. However, under SFAS 133, the Company's use of
forward contracts to hedge certain forecasted transactions qualifies for hedge
accounting. Unrealized gains and losses from such derivative instruments arising
subsequent to January 1, 2001 are deferred as a separate component of other
comprehensive income, and are recognized in income at the same time that the
underlying hedged exposure is recognized in income. This accounting treatment
results in the matching of gains and losses from such forward contracts with the
corresponding gains and losses generated by the underlying hedged transactions.
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The Company currently designates certain of its forward contracts as cash
flow hedges of forecasted U.S. dollar denominated inventory purchases and
forecasted U.S. dollar denominated intercompany charges from JCI to Jafra S.A.
On the date the Company enters into a derivative contract, management designates
the derivative as a hedge of the identified exposure. The Company formally
documents all relationships between hedging instruments and hedged items, as
well as its risk-management objective and strategy for undertaking various hedge
transactions. In this documentation, the Company specifically identifies the
forecasted transaction that has been designated as a hedged item and states how
the hedging instrument is expected to hedge the risks related to the hedged
item. The Company formally measures effectiveness of its hedging relationships
both at the hedge inception and on an ongoing basis in accordance with its risk
management policy. For all qualifying and highly effective cash flow hedges, the
changes in the fair value of the derivative are deferred as a component of other
comprehensive income. Such amounts will be reclassified from other comprehensive
income into net income when the underlying hedged exposure is recognized in
income. For U.S. dollar denominated inventory purchases, this will occur upon
sale to an outside party of the related inventory. For intercompany charges,
this will occur at the date such charges are recorded by Jafra S.A.
During the three months ended March 31, 2000, the Company recognized
losses on forward contracts of approximately $4.9 million as a component of
exchange loss in the accompanying consolidated statement of operations. During
the three months ended March 31, 2001, the Company recognized approximately $3.4
million of losses as a component of exchange loss on forward contracts that did
not qualify for hedge accounting under SFAS 133. Additionally, during the three
months ended March 31, 2001, the Company deferred $916,000 of unrealized losses
on forward contracts that qualify for hedge accounting under SFAS 133. Of this
amount, approximately $27,000 was reclassified to earnings upon recognition of
the underlying hedged exposure prior to March 31, 2001. The Company expects that
substantially all of the remaining $889,000 deferred as a component of other
comprehensive income at March 31, 2001 will be reclassified into net income
within the next twelve months.
During the three months ended March 31, 2001, the ineffectiveness
generated by the Company's forward contracts designated as hedges was
insignificant. Additionally, all hedged forecasted transactions continue to be
probable of occurring, and accordingly no amount of gains or losses were
reclassified into earnings due to the discontinuance of such hedging
relationships.
FOREIGN OPERATIONS
Sales outside of the United States aggregated approximately 79% and 76%
of the Company's total net sales for the first quarter of 2001 and 2000,
respectively. In addition, as of March 31, 2001, international subsidiaries
comprised approximately 75% of the Company's consolidated total assets.
Accordingly, the Company has experienced and continues to be exposed to foreign
exchange risk. In 2001, 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
65.1% of the Company's net sales for the first quarter of 2001, compared to
61.5% for the comparable 2000 period, substantially all of which were
denominated in Mexican pesos. Jafra S.A. had $47.1 million of U.S.
dollar-denominated third party debt and $17.5 million of U.S. dollar-denominated
intercompany debt as of March 31, 2001. Gains and losses from remeasuring such
debt to the U.S. dollar from the peso are included as a component of net income.
During the first quarter of 2001, Jafra S.A. recognized an unrealized gain of
$1.0 million on remeasurement of this U.S. dollar-denominated debt, and a net
loss of $3.4 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 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
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31
denominations of the euro and public and private parties may pay for goods and
services using either the euro or the participating countries' existing
currencies.
During the transition period, the Company will continue to utilize the
respective country's existing currency as the functional currency. Use of the
euro by the Company or its consultants is not expected to be significant and
will be converted and recorded in the Company's accounting records in the
existing functional currency.
The Company intends to adopt the euro as its functional currency when the
majority of its transactions in the member countries are conducted in the euro.
The Company has identified that its European commercial system will not support
the euro, and that modifications are required in order to adapt the commercial
system to support the Euro. The Company started modifying its system in the
second quarter of 2001, expects to complete the necessary modifications by the
end of 2001, and does not expect to incur significant expenses in achieving a
euro-compliant system. The Company does not expect the euro to materially
adversely affect its business, financial condition, or results of operations.
BUSINESS TRENDS AND INITIATIVES
The Company has experienced significant sales growth and an increased
concentration of sales in Mexico over the last three years, due primarily to
increases in the number of consultants. The Company's Mexican subsidiary
generated 65% of the Company's consolidated net sales for the first quarter of
2001, compared to 62% for the full year in 2000. The year to year sales growth
in Mexico for the first quarter of 2001 was approximately 24% in U.S. dollars
and 27% in local currency. Assuming a continued stable economic environment, the
Company intends to continue to grow its revenues and consultant base in Mexico,
but at rates in the range of 10-12% per year.
The Company is employing a strategy to leverage diversification through
growth in other markets besides Mexico. The U.S. subsidiary has created distinct
business divisions to recognize the distinct elements of its General and
Hispanic customer groups. Net sales in the U.S. in the first quarter of 2001
increased 3% compared to the first quarter of the prior year. The U.S. plans to
implement a number of strategies in the remainder of 2001 which, along with the
initiation of doing business via e-commerce and an increased focus on sponsoring
new consultants through enhanced training programs, are intended to stimulate
sales growth in the high single digits over 2000 levels.
Net sales in Europe have been on a downward trend for the last two years.
European sales have declined from approximately 16% of the Company's business in
1998 to 7% of the Company's business in the first quarter of 2001. In the first
quarter of 2001, excluding the impact of exchange rates, net sales decreased
nominally by $0.1 million from the first quarter of 2000. While no assurance can
be given, the Company expects to achieve approximately the same level of
European sales in year 2001 as was achieved in 2000, but at higher operating
profit as a result of the repositioning and restructuring activities undertaken
during 2000.
During the last two years, the Company has made significant investments
in new markets in South America. Sales in the South American region grew by over
20% in 2000 and are up 23% in the first quarter of 2001. In 2000, net sales
generated by subsidiaries in the South American region were approximately 6% of
consolidated sales, but the Company expects the region to contribute
approximately 9% of consolidated sales for 2001.
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 and South
America will increase slightly, and its percentage of net sales in Europe will
decrease slightly for the near term.
The Company has made plans to develop new business in 2001 through
expansion into new markets, particularly Thailand, and by utilizing the Internet
and electronic commerce to increase its revenue base in existing markets.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
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Certain of the statements contained in this report (other than the
Company's consolidated financial statements and other statements of historical
fact) are forward-looking statements, including, without limitation, (i) the
statements in "--Liquidity and Capital Resources" concerning the Company's
belief that it will have sufficient liquidity to meet its cash requirements and
working capital needs over the next twelve months; (ii) the statement in "--Cash
Flows" that total capital expenditures in 2001 are expected to be approximately
$12.0 million; (iii) the statements in "--European Economic and Monetary Union"
concerning the Company's expectations that (a) during the transition period, use
of the euro by the Company or its consultants will not be significant; (b) it
will complete the necessary modifications to achieve a euro-compliant system by
the end of 2001 without incurring significant expenses, and (c) the introduction
of the euro will not materially adversely affect its business, financial
condition or results of operations; (iv) the statements in "--Business Trends
and Initiatives" that (a) assuming a continued stable economic environment, the
Company intends to continue to grow its revenues and consultant base in Mexico,
but at rates in the range of 10-12% per year; (b) the Company's expectation that
U.S. sales growth will be in the high single digits in 2001; (c) the Company's
expectation that the level of sales in Europe for the year 2001 will be
approximately the same as was achieved in 2000, but at higher operating profit;
(d) the Company's expectation that the percentage of net sales in South America
will increase to approximately 9% of consolidated sales for 2001, and (e) the
Company's expectation that the percentage of net sales in Mexico and South
America will increase slightly, and that its percentage of net sales in Europe
will decrease slightly for the near term; and (v) 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, 2000 (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," and
"European Economic and Monetary Union"), or in other Securities and Exchange
Commission filings, could affect (and in some cases have affected) the Company's
actual results and could cause such results to differ materially from estimates
or expectations reflected in such forward-looking statements.
While the Company periodically reassesses material trends and
uncertainties affecting the Company's results of operations and financial
condition in connection with its preparation of management's discussion and
analysis of 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, 2000. No significant changes have occurred during
the first quarter of 2001 in relation to the interest rate risk or its credit
standing.
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, 79% of
the Company's revenue for first quarter of 2001 was generated in countries with
a functional currency other than the U.S. dollar. As a result, the Company's
earnings and cash flows for the first quarter of 2001 are exposed to
fluctuations in foreign currency exchange rates.
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The Company may reduce its primary market exposures to fluctuations in
foreign exchange rates and hedge contractual foreign currency cash flows or
obligations (including third-party and intercompany foreign currency
transactions) by creating offsetting positions through the use of forward
exchange contracts. The Company regularly monitors its foreign currency
exposures and ensures that contract amounts do not exceed the amounts of the
underlying exposures. The Company does not use derivative financial instruments
for trading or speculative purposes, nor is the Company a party to leveraged
derivatives.
The outstanding foreign currency forward contracts at March 31, 2001 had
a notional value of $82,514,000 and mature at various dates extending to
December 2001. Notional amounts do not quantify market or credit exposure or
represent assets or liabilities of the Company, but are used in the calculation
of cash settlements under the contracts. The table below describes the forward
contracts that were outstanding at March 31, 2001 (in thousands):
WEIGHTED
FORWARD AVERAGE
POSITION IN MATURITY CONTRACT FAIR
FOREIGN CURRENCY US DOLLARS(1) DATE RATE VALUE(1)
- ---------------- ------------- -------- -------- --------
Buy US Dollar/sell Mexican Peso ........ $ 9,185 4/30/01 10.34 $ 8,432
Buy US Dollar/sell Mexican Peso ........ 6,848 5/31/01 10.37 6,349
Buy US Dollar/sell Mexican Peso ........ 10,027 6/29/01 10.27 9,490
Buy US Dollar/sell Mexican Peso ........ 9,153 7/31/01 10.38 8,659
Buy US Dollar/sell Mexican Peso ........ 11,816 8/31/01 10.32 11,359
Buy US Dollar/sell Mexican Peso ........ 12,125 9/28/01 10.39 11,695
Buy US Dollar/sell Mexican Peso ........ 2,336 10/30/01 10.70 2,206
Buy US Dollar/sell Mexican Peso ........ 10,275 10/31/01 10.71 9,701
Buy US Dollar/sell Mexican Peso ........ 2,878 11/30/01 10.43 2,820
Buy US Dollar/sell Mexican Peso ........ 4,110 12/27/01 10.71 3,957
Buy US Dollar/sell Mexican Peso ........ 3,761 12/31/01 10.90 3,554
-------- --------
$ 82,514 $ 78,222
======== ========
- ----------
(1) The "Forward Position" in US dollars and the "Fair Value" presented above
represent notional amounts. The net of these two amounts, an unrealized
loss of $4,292,000 at March 31, 2001, represents the fair value of the
forward contracts, and has been recorded as a liability in the
accompanying consolidated balance sheet as of March 31, 2001.
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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, 2000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 10, 2001, Parent sold 474 shares of its common stock, par
value $2.00 per share, for an aggregate offering price of $99,540, to six
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:
10.1 Amended and Restated Consulting Agreement, dated as of January 1,
2001, by and among CDRJ Investments (Lux) S.A., Jafra Cosmetics
International, Inc., Jafra Cosmetics International, S.A. de C.V.,
and Clayton, Dubilier & Rice, Inc.
(b) Reports on Form 8-K
During the quarter ended March 31, 2001, 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 A. DIGREGORIO
----------------------------------------
Michael A. DiGregorio
Senior Vice President and Chief
Financial Officer of the Advisory
Committee (Principal Financial Officer)
May 15, 2001
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INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
10.1 Amended and Restated Consulting Agreement, dated as of January 1, 2001, by and among CDRJ
Investments (Lux) S.A., Jafra Cosmetics International, Inc., Jafra Cosmetics International,
S.A. de C.V., and Clayton, Dubilier & Rice, Inc.
36