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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
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
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CDRJ Investments (Lux) S.A.
(Exact name of Registrant as specified in its charter)
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<TABLE>
<S> <C>
Luxembourg 98-0185444
(State or other jurisdiction of (I.R.S. Employer
<CAPTION>
incorporation or organization) Identification Number)
</TABLE>
10, rue Antoine Jans
L-1820 Luxembourg
Luxembourg
(352) 476-867-1
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
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 12 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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 22, 1999, the registrant had outstanding 829,940 shares of
common stock, par value $2.00 per share.
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PART I
ITEM 1. BUSINESS
General
CDRJ Investments (Lux) S.A., a Luxembourg societe anonyme ("Parent") is a
holding company that conducts all of its operations through its subsidiaries.
Prior to the consummation of the acquisition by Parent of the Jafra Business
(as defined) from the Gillette Company ("Gillette") (the "Acquisition"), the
terms "Company" and "Jafra" refer to the various subsidiaries and divisions of
Gillette conducting the worldwide Jafra cosmetics business (the "Jafra
Business"), and, following the consummation of the Acquisition of Jafra, to
Parent and its subsidiaries as a group.
Jafra is a manufacturer and marketer of premium skin and body care products,
color cosmetics, fragrances, nutritional supplements and other personal care
products. Jafra markets its products through a direct selling, multilevel
distribution system comprised of self-employed salespersons (known as "sales
representatives"). Jafra's business is comprised of one industry segment,
direct selling, with worldwide operations. Financial information relating to
geographic areas is incorporated by reference to the analysis of net sales and
pretax income from operations by geographic area in Note 11 to the financial
statements included herein.
Jafra was founded in 1956, as a California corporation, by Jan and Frank Day
and was purchased by Gillette in 1973. The Company expanded into Latin America
in 1977 and into Europe in 1978. On April 30, 1998, the Parent completed the
Acquisition of Jafra from Gillette. The Parent was organized to effect the
Acquisition. The Acquisition was sponsored by Clayton, Dubilier & Rice, Inc.
("CD&R"), a private investment firm specializing in acquisitions that involve
management participation. As part of the financing for the Acquisition,
Clayton, Dubilier & Rice Fund V Limited Partnership ("CD&R Fund V"), certain
members of new management, certain new directors and other persons made an
equity investment in the Parent of approximately $82.9 million in cash. In
addition, $100.0 million of 11 3/4% Senior Subordinated Notes due 2008
("Senior Subordinated Notes" or "Notes") were issued and the Company entered
into a credit agreement (the "Senior Credit Agreement") with certain lenders.
The Senior Credit Agreement provides for senior secured credit facilities,
including a $25.0 million term loan facility (the "Term Loan Facility"), all
of which was drawn at the closing of the Acquisition, and a $65.0 million
revolving credit facility (the "Revolving Credit Facility"), approximately
$18.6 million of which was drawn in connection with the Acquisition (a portion
of which was subsequently repaid). The purchase price was $202.5 million and
transaction fees and expenses related to the Acquisition and financing were
$24.0 million.
In connection with the Acquisition, Ronald B. Clark joined the Company as
its Chairman and Chief Executive Officer, Gonzalo R. Rubio joined as its
President and Chief Operating Officer, Michael DiGregorio joined as its
President of United States Operations, Eugenio Lopez Barrios joined as its
President of Mexican Operations, Jose Luis Peco joined as its President of
European Operations, Jaime Lopez Guirao joined as its President of Global
Operations, Alan Fearnley joined as its Senior Vice President of Global
Marketing, and James Brill joined as its Chief Financial Officer. All of these
officers have purchased equity in Parent.
Strategy
The Company's new owners and management intend to build on Jafra's strong
existing infrastructure and to increase the Company's sales and profitability
by refocusing the Company on growing its sales representative base and
productivity in new and existing markets and by increasing the Company's
operating efficiency. To this end, the Company intends to pursue the following
strategy:
Deploy New Senior Management Team with Significant Direct Selling
Experience. Jafra's new senior management team, identified above, has an
average of over 20 years of direct selling industry experience, including
various senior management positions with Jafra competitors Avon Products, Inc.
("Avon") and Mary Kay Corporation ("Mary Kay"). Jafra believes that this new
team will provide the dynamic leadership required
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to attract new sales representatives and management talent, inspire new and
existing sales representatives to greater productivity, and execute the
Company's new market development strategy.
Grow Sales Representative Base in Existing Markets. Jafra plans to expand
its sales representative base in existing markets by (i) targeting expansion
into new geographic areas and demographic groups within the U.S. and Mexico,
(ii) streamlining the commission structure to provide more rewards to those
sales representatives who actively recruit other sales representatives, (iii)
providing more training in business skills and recruiting techniques to sales
representative managers, and (iv) initiating programs to reactivate former or
inactive sales representatives.
Increase Sales Representative Productivity. The Company plans to focus on
increasing the productivity, as measured by sales per sales representative, of
its existing sales representatives by (i) expanding the Company's product
lines, (ii) initiating better-targeted marketing activities and (iii)
decreasing lead time on new product introductions.
International Expansion. The Company believes that its existing distribution
and manufacturing capabilities provide a strong platform for Jafra to expand
into new markets. The Company presently has operations in 11 countries outside
the U.S. and in a number of additional countries through distributors,
although approximately 78% of the Company's sales in 1998 were in the United
States and Mexico. The Company expects that it will be able to implement its
new market development strategy with limited additional capital expenditures
and without diverting focus from the Company's core markets. The Company
intends to focus its expansion efforts on markets that the Company believes
(i) do not require high start-up costs, such as markets contiguous to the
Company's existing markets, (ii) have proven receptive to direct selling
techniques, (iii) demonstrate promising economic demographics, including
population size, growth of gross domestic product and an expanding middle
class, and (iv) evidence demand for quality cosmetic products.
Improve Operating Efficiency. The Company's new management team believes
that opportunities exist to improve operating efficiency through cost-cutting,
better inventory management, and streamlining of marketing efforts and product
lines.
Products
Jafra continuously introduces new products based on changes in consumer
demand and technological advances in order to enhance the quality, image and
price positioning of its products. During 1998, the Company launched 72 new
products. Research and development is conducted at the Jafra Skin, Body and
Color Laboratory, located in the Westlake Village facility. Amounts incurred
on research activities relating to the development of new products and
improvement of existing products were $3.1 million in 1998, $2.9 million in
1997, and $3.3 million in 1996.
Employees in the Research and Development Department formulate products and
analyze them for chemical purity and microbial integrity. A separate pilot
plant allows testing via small batch production prior to full scale
manufacture. Since 1993, Jafra has invested in the globalization and upgrading
of its product lines. Packaging and formulations have been updated to build
better brand awareness and a fresh image, and contemporary fragrances have
been added to the product line. Through globalized product development,
manufacturing and packaging, Jafra believes that it has enhanced the
consistency and quality of its products in all geographic regions and across
all product lines.
Certain of Jafra's products are based on formulas or include ingredients or
components that have been developed by Gillette. In addition, certain of
Jafra's products have been manufactured at facilities owned by Gillette. The
Transition Services Agreement entered into upon the closing of the Acquisition
allows Jafra to continue using proprietary Gillette formulas and materials in
its products and provided that Gillette would continue to provide
manufacturing services until December 31, 1998. The Company has secured
alternative manufacturing services which are now in place, and are on terms
which are comparable to those that existed previously.
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The following table sets forth the sales of the Company's principal product
lines for the three years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- --------------------------
Sales by Percentage Sales by Percentage Sales by Percentage
Product Line of total Product Line of total Product Line of total
($ in millions) sales ($ in millions) sales ($ in millions) sales
--------------- ---------- --------------- ---------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Color Cosmetics......... $ 70.9 28.6% $ 66.9 29.1% $ 63.3 28.2%
Skin Care............... 58.4 23.5 57.8 25.2 60.6 27.0
Body Care & Daily Use... 46.5 18.7 34.9 15.2 32.4 14.4
Fragrances.............. 47.3 19.0 40.8 17.8 36.2 16.1
Other (1)............... 25.2 10.2 29.1 12.7 32.0 14.3
------ ----- ------ ----- ------ -----
Total................. $248.3 100.0% $229.5 100.0% $224.5 100.0%
====== ===== ====== ===== ====== =====
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(1) Includes sales aids (party hostess gifts, demonstration products, etc.)
and promotional materials.
Color. Jafra's range of color cosmetics for the face, eyes, lips, cheeks and
nails contribute significantly to Company results. The Company develops
internally its lipstick formulas, foundations and mascaras. During 1996, Jafra
introduced an enhanced "global palette" of colors. This replacement product
line features an expanded palette of colors, improved quality and upgraded
packaging. In 1997, Jafra launched its Always Color lipstick line, which
competes with products featuring the latest technology in long-wearing,
transfer-resistant formulas and has helped to revitalize the color line. Time
Protector lipsticks, launched in early 1998, feature contemporary colors with
skin care benefits, including sunscreen and antioxidants, as well as
moisturizers and conditioners.
Skin Care. Jafra sells skin care regimens tailored to five specific skin
types. Each regimen includes cleanser, mask, skin freshener and moisturizers
for day and night. In addition to basic skin care products, Jafra offers a
range of special care products for special needs, including its premier
product, Royal Jelly Milk Balm Moisture Lotion, an Alpha Hydroxy complex
(Rediscover) and products for maturing skin (Advanced Time Protector and Time
Corrector), eye care (Optimeyes) and extra firming (Skin Firming Complex). All
of these special care products use the most recent advances in biotech
ingredients, including an enzyme approach to minimize skin aging.
Fragrance. Direct selling is a significant distribution channel for
fragrances, and Jafra's new scents have enabled the Company to participate on
a larger scale, as evidenced by the double-digit growth in sales over the last
two years. In 1996, Jafra introduced Adorisse, a contemporary women's
fragrance, and Fm Force Magnetique, a prestige men's fragrance. Jafra further
extended its fragrance line in 1997 with Le Moire for women and Legend for
Men. The fragrance category includes line extensions such as body lotions,
shower gels, deodorants, after-shave lotions and shave creams for some of the
most popular fragrances.
Body Care and Daily Use. Jafra markets a broad selection of body, bath, sun
and personal care products. Jafra's premier body care product, Royal Jelly
Body Complex, contains "royal jelly" (a substance produced by queen bees) in
an oil-free deep moisturizing formula with natural botanical extracts and
vitamins. Other offerings in the body care line include sunscreens, hand care
lotions, contouring creams, revitalizing sprays, bath products, as well as an
aroma therapy brand, Aromascape. A children's product line featuring animal
characters was launched in 1997 and two sunless tanning lotions were launched
in early 1998.
Jafra's daily use products include deodorant, shampoo and nutritional
supplements. Jafra strengthened this category in 1997 with the launch of the
Daily Essentials line, which includes a conditioning body wash, a conditioning
body lotion with Alpha Hydroxy action, a body lotion for sensitive skin, a
multi-vitamin and a ginseng complex. Consumers use these products in regular
cycles, allowing more frequent contact with sales representatives and their
catalogs of Jafra products.
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Marketing
Strategy and Product Positioning. Jafra positions its products to appeal to
a relatively wide range of market categories, demographic groups and
lifestyles. Jafra products generally price at the higher end of the mass
market category but slightly below prestige brands such as Clinique. As
compared to its direct selling competitors, Jafra prices in line with Mary
Kay, but higher than Avon, which targets the lower to middle mass market.
Product Strategy. Jafra's product strategy is to provide customers with
exciting and prestige quality product lines that fit into Jafra's value-added
demonstration sales techniques and promote the sale of multiple products per
home visit. To that end, Jafra develops integrated products and actively
promotes cross-selling among categories, thus encouraging multi-product sales
and repeat purchases. Product variety and modernization are keys to the
Company's success. To seize upon new product trends, the Company employs a
"fast follower" product strategy which focuses the Company's development
efforts on products that have proven successful in the marketplace.
Marketing Material & Support. The Company generally does not advertise,
relying instead on its energetic network of sales representatives and
favorable word-of-mouth that the Company believes its products generate. The
Company's marketing expenses are far below those of its retail competitors.
Independent Sales Force
Jafra's self-employed sales force comprised approximately 247,600 sales
representatives worldwide as of December 31, 1998, 56,200 of which are in the
U.S. and 154,600 are in Mexico. These sales representatives are not agents or
employees of Jafra; they are independent contractors or dealers. They purchase
products directly from the Company and sell them directly to their customers.
More seasoned senior sales representatives, who have experience managing
their own sales representative networks, recruit and train the Company's field
level organization. Jafra sells substantially all of its products directly to
its sales representatives. Each sales representative conducts her Jafra sales
operations as a stand-alone business, purchasing Jafra goods and reselling
them to customers, as well as offering free personal care consultations. The
Company's independent sales force constitutes its primary marketing contact
with the general public.
Selling. The primary role of a Jafra sales representative is to sell Jafra
products. Although the majority of the Company's sales occur as a result of
person-to-person sales, the Company also encourages its sales representatives
to arrange sales parties at customers' homes. Sales parties permit a more
efficient use of a sales representative's time, allowing the sales
representative to offer products and cosmetic advice to multiple potential
customers at the same time, and provide a comfortable selling environment in
which clients can learn about skin care and sample the Jafra product line.
Such parties also provide an introduction to potential recruits and the
opportunity for referrals to other potential clients, party hostesses and
recruits.
Jafra does not require sales representatives to maintain any inventory. The
Company believes that the inventory requirements of other leading direct
sellers are often onerous to sales representatives. Instead, Jafra sales
representatives can wait to purchase products from the Company until they have
a firm customer order to fill. Sales representatives generally personally
deliver orders to their customers within one week of placement of an order. By
delivering products directly to the customer, the Jafra sales representative
creates an additional sales opportunity. The short-term delivery requirements
and the nature of the Company's business preclude any significant backlog.
Recruiting. The Company believes that it enjoys a competitive advantage in
recruiting sales representatives due to its lower start-up costs and its
policy of providing retail discounts even on small orders. Other major
attractions to prospective recruits include flexible hours, increased
disposable income, an attractive
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incentive program (including international travel, national and regional
meetings, awards and free products), personal and professional recognition,
social interaction, product discounts and career development opportunities.
The Company also emphasizes its commitment to sales representatives' personal
and professional training, thereby building sales representatives' management
and entrepreneurial skills.
Sales Representative Management and Training. To become a manager, a sales
representative must sponsor a specified number of recruits and meet certain
minimum sales levels. The manager signs a manager's contract, and earns
commissions on her personal sales plus commissions on the sales of her
downline sales representatives. A manager continues to gain seniority in the
Jafra sales force by meeting the prescribed recruitment and sales requirements
at each level of management. At more senior levels, managers may have several
junior managers who in turn sponsor and manage other managers and sales
representatives. The most successful managers have many such downline managers
and sales representatives, and earn commissions on their personal sales plus
commissions on their downline group's sales.
Training for new sales representatives focuses first on the personalized
selling of the Jafra product line, beginning with skin care and the
administration of a Jafra business. Training is conducted primarily by the
Company's sales representative managers. Managers train their downline sales
representatives at monthly meetings using materials prepared by the Company.
In training managers, the Company seeks to improve leadership and management
skills, while teaching managers to motivate downline sales representatives to
higher sales levels.
Income Opportunities and Recognition. Sales representatives earn income by
purchasing products from Jafra at retail discounts and selling to consumers at
suggested retail prices. Once a sales representative becomes a manager, her
compensation also includes commissions on the wholesale value of paid sales
made by herself and her recruits. Commissions vary among markets. Jafra pays
commissions directly to managers on receipt of payment for the underlying
product sale. While this commission-based incentive system diminishes the
Company's profit margin on individual product sales, it results in increased
numbers of sales representatives selling Jafra products, which ultimately
earns greater profits for the Company.
The Company believes that public recognition of sales accomplishments serves
the dual purpose of identifying successful role models and boosting sales
representative morale. Each year Jafra sponsors major events in each of its
national markets to recognize and reward sales and recruiting achievements and
strengthen the bond between the independent sales force and the Company. Sales
representatives and managers must meet certain minimum levels of sales and new
sales representative sponsorship in order to receive invitations to attend
these events.
International Operations
Jafra's international operations are subject to certain customary risks
inherent in carrying on business abroad, including the risk of adverse
currency fluctuations, currency remittance restrictions and unfavorable
economic and political conditions.
Jafra's international operations are conducted primarily through
subsidiaries in 11 countries outside the United States and in a number of
additional countries through distributors. The Company's most important
markets to date have been the United States, Mexico and Europe, which
represented approximately 30%, 48% and 16%, respectively, of total 1998 sales.
With significant revenue coming from each of the United States, Mexico, and
Europe, the Company believes that it is less vulnerable to adverse economic
developments in any particular market. The Company intends to increase the
number of markets in which it participates and grow revenues in those markets
in order to diversify its revenue base. At the present time, Jafra does not
enter into foreign currency hedging contracts to mitigate this risk, although
it may do so in the future.
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Manufacturing
Over the last three years, Jafra has invested approximately $28.8 million in
new infrastructure, including new machinery and equipment and upgraded
information system capabilities. Consistent with Jafra's globalization
strategy, the Company recently consolidated its manufacturing operations,
instituting a new planning and procurement strategy and unifying the sourcing
of products on a worldwide basis. In addition, the Company has instituted
uniform worldwide packaging for most of its product lines.
The Company has also revamped its approach to product development,
accelerating its new product development cycle and forging additional research
and development alliances with third-party manufacturers and vendors of raw
materials. In the near term, Jafra will continue to outsource pressed powder
godets, liner pencils, liquid eyeliners and nail lacquers. New products may
increasingly be manufactured by third parties or contain licensed
formulations.
Jafra's manufacturing facilities are located in Westlake Village, California
and Naucalpan, Mexico, which is near Mexico City. Skin care products are
produced at the Westlake Village facility and color cosmetics and most
fragrances are produced at the Mexico facility. The manufacturing process at
the Westlake Village facility involves mixing, filling and in-house decoration
processes using product ingredients, plastic bottles, glass bottles, tubes and
caps. Jafra implemented a move to in-house color manufacturing beginning in
1993, and currently produces the majority of its color cosmetics in the Mexico
facility. During 1995, Jafra transitioned from a manual lipstick production
process to highly sophisticated automation in support of its global palette
launch.
Supply of Raw Materials
The Company purchases from third party suppliers certain finished goods and
raw materials for use in its manufacturing operations. In general, the Company
does not have written contracts with suppliers. Finished goods and raw
materials used in the Company's products generally are available stock items
or can be obtained to Company specifications from more than one potential
supplier.
Distribution
The Company has ten distribution centers around the world. The U.S.
warehouses in Bridgeport, New Jersey and Westlake Village, California
currently stock the entire Jafra product line. In Italy, the Company has
outsourced distribution to third parties. In the other European countries
where the Company operates, each country has its own distribution center. In
Mexico, the Company has outsourced virtually all of its distribution to third
parties. Management believes that its facilities are adequate to meet global
demand for the foreseeable future.
Typically, owned or leased distribution centers are located in an area that
allows for direct delivery to sales representatives by either post or carrier.
Maintaining a short delivery cycle in direct selling is an important
competitive advantage.
Competition
Jafra sells all of its products in highly competitive markets. The principal
bases of competition in the cosmetics direct selling industry are price,
quality and range of product offerings. On the basis of information available
to it from industry sources, management believes that there are over a
thousand companies (including both direct sales and cosmetic manufacturing
companies) that sell products that compete with Jafra's products. Several
direct sales companies compete with Jafra in sales of cosmetic products, and
at least two such competitors, Mary Kay and Avon, are substantially larger
than Jafra in terms of total independent salespersons, sales volume and
resources. In addition, Jafra's products compete with cosmetics and toiletry
items manufactured by cosmetic companies that sell their products in retail or
department stores. Several of such competitors are substantially larger than
Jafra in terms of sales and have substantially more resources. Jafra also
faces competition in recruiting independent salespersons from other direct
selling organizations whose product lines may or may not compete with Jafra's
products.
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Jafra believes that its well-trained and loyal direct sales force, prestige
quality product lines, "fast follower" product development strategy,
geographic diversification, short delivery cycle, and investments in
manufacturing technology are significant factors in establishing and
maintaining its competitive position.
Patents and Trademarks
Jafra's operations do not depend to any significant extent upon any single
trademark other than the Jafra trademark. Some of the trademarks used by
Jafra, however, are identified with and important to the sale of Jafra's
products. Jafra's most important trademarks are: Adorisse (a contemporary
woman's fragrance), Eau D'Aromes (revitalizing fragrance spray), Fm Force
Magnetique (a men's prestige fragrance), Legend for Men (a men's premium
fragrance), Le Moire (a contemporary woman's fragrance), Optimascara
(mascara), Optimeyes (eye treatment lotion), Rediscover (skin cream with Alpha
Hydroxy), Royal Jelly Body Complex (body lotion), Royal Jelly Milk Balm
Moisture Lotion (moisturizing lotion), Time Corrector (skin cream) and Time
Protector (skin cream). Jafra's operations do not depend to any significant
extent on any single or related group of patents, although the Company has
applied for or received patent protection in its major markets for certain
dispensers and product containers, nor do they rely upon any single or related
group of licenses, franchises or concessions. Jafra has in the past licensed
know-how from Gillette relating to the design, development and manufacture of
its products. Jafra may continue to use such know-how in connection with its
products, although it replaced Gillette as a provider of certain standard-
setting and testing services in early 1999.
As of November 1998, a former employee of Gillette had received
registrations for the Jafra trademark in Algeria, China, Cyprus, Malawi,
Morocco, Pakistan, Sierra Leone, Surinam, Tanzania, Tunisia, and Zambia,
jurisdictions in which the Company does not currently operate. Gillette has
obtained a court order prohibiting this employee from transferring or
licensing such trademark applications and registrations and requiring that the
trademark applications and registrations be assigned to Gillette. If Gillette
is not successful in obtaining such assignments or does not transfer these
applications and registrations to Jafra, Jafra may be prohibited from
distributing its products in such jurisdictions, or may face significant costs
in establishing its right to do so.
Management Information Systems
Historically, each marketing region within Jafra handled its own computing
systems, staffing and development, leading to the development of disparate
functionality and standards. In early 1995, management formulated and began to
implement a plan to replace the commercial systems that handle order entry,
commissions and accounts receivable, among other functions, at all existing
Jafra companies, other than in the United States, with the commercial system
developed in Mexico. The Company expects to complete this project and have a
year 2000 compliant version of the Mexican commercial system installed at all
Jafra companies, other than in the United States, in 1999. The Westlake
Village facility will continue to use an older commercial system that is not
currently year 2000 compliant but which will be modified to be year 2000
compliant by mid-1999. The Company has budgeted $1.5 million through 1999 to
modify or replace its business critical information systems so as to be year
2000 compliant prior to December 31, 1999. See "Management's Discussion and
Analysis--Year 2000 Issue."
Seasonality
The Company's sales in the fourth quarter of the year are typically higher
than in the other three quarters of the year due to seasonal holiday
purchases. Fourth quarter net sales were approximately 29% of total net sales
in both 1998 and 1997.
Environmental Matters
The Company is subject to various federal, state, local and foreign laws or
regulations governing environmental, health and safety matters. The Company
believes that it is in material compliance with all such laws and regulations
and under present conditions the Company does not foresee that such laws and
regulations will have a material adverse effect on capital expenditures,
earnings or the competitive position of the Company.
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Employees
As of December 31, 1998, the Company had 751 full-time employees, of which
314 were employed in the U.S. and 437 in other countries. On a functional
basis, 211 were in manufacturing, warehousing, distribution and technical
operations, 346 were in sales and marketing, and 195 were in administration.
The Company also had 344 outside contract employees.
ITEM 2. PROPERTIES
The Company is headquartered in Westlake Village, California, 40 miles north
of Los Angeles. Manufacturing is done on a global basis and by product line in
Westlake Village and Naucalpan, Mexico. The Westlake Village, California and
Naucalpan, Mexico facilities are owned by the Company, except for a small
portion of the Naucalpan facility that is leased. In addition, the Company
leases certain distribution facilities, sales offices and service centers to
facilitate its operations globally. The Company's properties are suitable and
adequate to meet its current and anticipated requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in routine legal matters
incidental to its business. The Company believes that the resolution of such
matters will not have a material adverse effect on the Company's business,
financial condition or results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for Parent common stock (the
"Common Stock"). Prior to September 30, 1998, the only holders of the Common
Stock were CD&R Fund V and Messrs. Clark, Rubio, and Ralph S. Mason, III. On
September 30, 1998, members of management, certain directors and other persons
purchased an aggregate of 40,437 shares of the Common Stock in a transaction
exempt from the registration requirements of the Securities Act of 1933, as
amended. See "Security Ownership of Certain Beneficial Owners and Management."
No dividends have been paid by Parent on its shares of the Common Stock nor
does Parent expect to pay dividends on its Common Stock in the foreseeable
future. The declaration and payment of future dividends, if any, will be at
the sole discretion of the Board of Directors of Parent, subject to the
restrictions set forth in the Senior Credit Agreement and the indenture for
its Senior Subordinated Notes (the "Indenture"), which currently restrict the
payment of cash dividends to stockholders, and restrictions, if any, imposed
by other indebtedness outstanding from time to time. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations--
Liquidity and Capital Resources."
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ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of selected financial data of the Company, as
described in Note 1 of the consolidated financial statements appearing
elsewhere herein (amounts in millions except for per share data). The
financial data as of and for the year ended December 31, 1994 have been
derived from unaudited financial statements and include, in the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary to present fairly the data for such periods. All other financial
data presented has been derived from the audited financial statements of the
Company. The audited financial statements for the eight months ended December
31, 1998, the four months ended April 30, 1998, and the years ended December
31, 1997 and 1996 and as of December 31, 1998 and 1997 appear elsewhere
herein, and the related selected financial data should be read in conjunction
with such statements and notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The financial data
prior to April 30, 1998 reflect the Jafra Business prior to the Acquisition
and are referred to as the "Predecessor" operations. Prior to 1998, accounts
of subsidiaries and operations outside the United States are included in the
historical combined financial data on the basis of fiscal years generally
ending November 30.
<TABLE>
<CAPTION>
Predecessor
---------------------------------------------------------
Eight Months Four Months
Ended Ended Year Ended December 31,
December 31, April 30, -------------------------------------------
1998 1998 1997 1996 1995 1994
------------ ----------- -------- -------- -------- -----------
(Unaudited)
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net sales............... $ 171.0 $ 77.3 $ 229.5 $ 224.5 $ 218.4(a) $ 263.9
Cost of sales........... 50.8(b) 20.3 59.1 58.2 54.3 59.8
-------- -------- -------- -------- -------- --------
Gross profit............ 120.2 57.0 170.4 166.3 164.1 204.1
Selling, general and
administrative
expenses(c)............ 112.9 51.6 150.4 156.6 154.6 172.3
-------- -------- -------- -------- -------- --------
Income from operations.. 7.3 5.4 20.0 9.7 9.5 31.8
Other income (expense):
Exchange gain (loss).. (1.8) 1.4 0.3 -- 25.5(d) 0.1
Interest income
(expense), net....... (11.5) 0.1 0.3 0.8 4.3 0.5
Other expense, net.... (0.3) 0.1 (0.4) (0.5) (0.4) (1.0)
-------- -------- -------- -------- -------- --------
Income (loss) before
income taxes........... (6.3) 7.0 20.2 10.0 38.9 31.4
Income taxes............ 1.7 2.9 4.8 2.6 6.1 13.4
-------- -------- -------- -------- -------- --------
Net income (loss)....... $ (8.0) $ 4.1 $ 15.4 $ 7.4 $ 32.8 $ 18.0
======== ======== ======== ======== ======== ========
Balance Sheet Data (at
end of period):
Cash and cash
equivalents............ $ 18.4 $ 10.2 $ 8.7 $ 7.5 $ 6.2
Total working capital... 22.9 22.6 24.4 49.4 75.1
Property and equipment,
net.................... 56.2 43.7 41.8 43.7 31.8
Total assets............ 288.6 175.2 164.5 203.1 217.4
Total debt.............. 141.5 8.5 -- -- --
Stockholders' equity.... 75.4 77.3 78.6 108.7 120.8
Other Financial Data:
EBITDA(e)............... $ 10.2 $ 8.3 $ 24.4 $ 12.4 $ 37.4 $ 34.1
Net cash provided by
(used in) operating
activities............. 18.1 (8.0) 26.7 2.8 27.5 28.3
Net cash provided by
(used in) investing
activities............. (211.1) 2.6 (5.8) (4.5) (13.9) (8.5)
Net cash provided by
(used in) financing
activities............. 211.7 (8.8) (19.0) 5.0 (13.4) (16.5)
Depreciation and
amortization........... 5.1 1.4 4.4 3.3 2.8 3.2
Amortization of deferred
financing costs........ 1.4
Capital expenditures.... 3.5 6.1 8.9 10.3 20.3 10.7
Sales representatives... 247,600 220,000 220,800 208,500 216,700 216,800
Sales representative
productivity(f)........ $ 1,060(g) $ 1,060(g) $ 1,070 $ 1,056 $ 1,008 $ 1,276
</TABLE>
10
<PAGE>
- --------
(a) In 1995, net sales in Mexico declined $59 million or 43%, primarily as a
result of the December 1994 devaluation of the Mexican peso and related
economic weakness in Mexico.
(b) Cost of sales for the eight months ended December 31, 1998 included $2.7
million relating to the sale of certain inventories that were revalued in
conjunction with the Acquisition.
(c) Selling, general and administrative expenses include the following non-
recurring items: for 1997, net reorganization charges of $3.5 million that
were partially offset by a cash recovery of $2.3 million resulting from
the settlement of a legal action brought by the Company against a computer
systems contractor for which a $5.4 million charge was taken in 1996, and
a gain of $0.8 million relating to the sale of a facility that had
previously been written-off; for 1996 a $5.4 million non-cash charge for
the write-off of certain computer systems and related costs, and net
reorganization charges of $0.7 million; and for 1995, net reorganization
charges of $9.6 million.
(d) Exchange gain (loss) for 1995 includes a $25.5 foreign exchange gain in
Jafra S.A. resulting from having had U.S. dollar denominated intercompany
receivables from affiliates at the time of the December 1994 peso
devaluation.
(e) EBITDA is defined as net income before net interest expense, income taxes,
depreciation and amortization. The Company believes that EBITDA provides
useful information regarding the Company's ability to service debt but
should not be considered in isolation or as a substitute for the statement
of operations or cash flow data prepared in accordance with the generally
accepted accounting principles and included elsewhere in this Form 10-K or
as a measure of the Company's operating performance, profitability or
liquidity. While EBITDA is frequently used as a measure of operations and
the ability to meet debt service requirements, it is not necessarily
comparable to other similarly titled captions of other companies due to
differences in methods of calculation.
(f) Sales representative productivity in any calendar year represents (i)
sales for such calendar year divided by (ii) the average number of sales
representatives at the commencement and the end of such calendar year.
(g) Full year 1998 sales representative productivity is shown for
comparability purposes.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the results of operations, financial condition
and liquidity of the Company should be read in conjunction with the
information contained in the consolidated financial statements and notes
thereto included elsewhere in this Form 10-K. These statements have been
prepared in conformity with generally accepted accounting principles and
require management to make estimates and assumptions that affect amounts
reported and disclosed in the financial statements and related notes. Actual
results could differ from these estimates.
Results of Operations
The following table represents selected components of the Company's results
of operations, in thousands of dollars and as percentages of net sales. The
table reflects the combined operations of the Predecessor and the Company for
the year ended December 31, 1998, and operations of the Predecessor for 1997
and 1996.
<TABLE>
<CAPTION>
Predecessor
-----------------------------
Year Ended December 31,
----------------------------------------------
1998(1) 1997 1996
-------------- ------------- -------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Net sales.................... $ 248.3 100.0 % $229.5 100.0 % $224.5 100.0 %
Cost of sales................ 71.1 28.6 59.1 25.8 58.2 25.9
------- ----- ------ ----- ------ -----
Gross profit................. 177.2 71.4 170.4 74.2 166.3 74.1
Selling, general &
administrative expenses..... 164.5 66.3 150.4 65.5 156.6 69.8
------- ----- ------ ----- ------ -----
Income from operations....... 12.7 5.1 20.0 8.7 9.7 4.3
Exchange gain (loss)......... (0.4) (0.1) 0.3 0.1 -- 0.0
Interest income (expense),
net......................... (11.4) (4.6) 0.3 0.1 0.8 0.4
Other income (expense), net.. (0.2) (0.1) (0.4) (0.1) (0.5) (0.2)
------- ----- ------ ----- ------ -----
Income before income taxes... 0.7 0.3 20.2 8.8 10.0 4.5
Income tax expense........... 4.6 1.9 4.8 2.1 2.6 1.2
------- ----- ------ ----- ------ -----
Net income (loss)............ $ (3.9) (1.6)% $ 15.4 6.7 % $ 7.4 3.3 %
======= ===== ====== ===== ====== =====
Statement of Cash Flows Data:
Net cash provided by
operating activities........ $ 10.1 $ 26.7 $ 2.8
Net cash provided by (used
in) investing activities.... (208.7) (5.8) (4.5)
Net cash provided by (used
in) financing activities.... 203.0 (19.0) 5.0
Effect of exchange rate
changes on cash............. (0.9) (0.3) (2.2)
Effect of accounting calendar
change on cash.............. 6.3 -- --
------- ------ ------
Net Increase (Decrease) in
cash........................ $ 9.8 $ 1.6 $ 1.1
======= ====== ======
</TABLE>
- --------
(1) Pursuant to the terms of the Acquisition, the Company was acquired by
Parent on April 30, 1998. Accordingly, for purposes of Management's
Discussion and Analysis of Financial Condition and Results of Operations,
the results of operations and cash flows for the year ended December 31,
1998 are a combination of the historic results of the Predecessor for the
four months ended April 30, 1998 and the Company's results of operations
for the eight months ended December 31, 1998.
Year ended December 31, 1998 compared to the year ended December 31, 1997
Net sales. Net sales for 1998 increased to $248.3 million from $229.5
million in 1997, an increase of $18.8 million, or 8.2%. The Company's year-end
number of sales representatives worldwide increased to approximately 247,600,
or 12.1%, over 1997. Productivity, as measured in U.S. dollar sales per sales
representative, declined 1.0% to $1,060 on a worldwide basis, principally due
to weak sales in Europe and the
12
<PAGE>
impact of the decline in the peso to U.S. dollar exchange rate. In the U.S.,
net sales increased 5.2% to $74.3 million in 1998 from $70.6 million in 1997,
while the number of sales representatives increased to approximately 56,200,
or 5.7%, over 1997. Approximately $2.5 million of the U.S. sales increase
consisted of low-margin sales to a formerly affiliated third party
manufacturer during the transition period following the Acquisition, while the
remainder of the increase was due to growth in the sales representative base.
In Latin America, net sales increased to $133.8 million in 1998 from
$112.1 million in 1997, an increase of $21.7 million, or 19.4%, while the
number of sales representatives increased to approximately 172,900, or 17.9%.
The majority of the increase in Latin American sales came from Mexico, where
net sales increased $21.0 million, or 21.5%, and the sales representative base
increased to approximately 154,600, or 19.7%, over 1997. Sales in Mexico in
local currency increased by 42.5% over the prior year due to the larger sales
representative base, product price increases, the Company's successful annual
convention and the introduction of new products. Sales in Europe declined
14.1% to $40.2 million in 1998 from $46.8 million in 1997, due primarily to
the decline in the number of sales representatives in Europe to approximately
18,600, down 11.5% from 1997.
Gross profit. Gross profit in 1998 increased to $177.2 million from $170.4
million in 1997, an increase of $6.8 million, or 4.0%. Gross profit as a
percentage of sales (gross margin) decreased to 71.4% from 74.2%. The decrease
in gross margin was due principally to the effects of accounting for the
Acquisition and low-margin sales to a formerly affiliated third-party
manufacturer during the transition period following the Acquisition. Cost of
sales for 1998 included a $2.7 million charge relating to the sale of certain
inventories that were revalued in conjunction with the Acquisition. In
addition, $2.5 million of incremental sales in 1998 were made to a former
Gillette affiliate that assisted in the production process and sold certain
products to the Company's Mexican subsidiary. These U.S. sales were made
subsequent to the Acquisition on a cost-recovery basis with no profit.
Excluding the effects of these items, adjusted gross margin for 1998 was 73.4%
compared to 74.4% for 1997. The remainder of the decrease in gross margin was
due to an unfavorable sales mix in Europe.
Selling, general and administrative expenses. SG&A expenses in 1998
increased to $164.5 million from $150.4 million in 1997, an increase of $14.1
million, or 9.4%. SG&A as a percentage of net sales increased in 1998 to 66.3%
from 65.5% for 1997. The primary reason for the increase in SG&A was a $8.6
million increase in promotional expense, relating primarily to markets which
have experienced sales growth. SG&A in the United States rose in part due to
increased personnel costs as a result of the Acquisition and management
transition. Additionally, as a result of the Acquisition, 1998 SG&A expenses
included $2.1 million of amortization of goodwill and trademarks. The Company
expects full year amortization of approximately $3.2 million in 1999.
Excluding the acquisition-related amortization from 1998, SG&A as a percentage
of sales for 1998 was 65.4%.
Interest expense. During 1998, the Company incurred $11.4 million of
interest expense (including amortization of certain financing costs) related
to the debt incurred in conjunction with the Acquisition. Prior to the
Acquisition, the Company was not leveraged. Interest expense for 1999 is
expected to be proportionately higher than in 1998 to reflect a full year of
interest charges instead of only eight months. If the Company's outstanding
loan balances and interest rates in effect as of December 31, 1998 were to
remain constant throughout 1999, annual interest expense for 1999 would be
approximately $15.1 million.
Other expense (income). Other expense (income) increased to $0.6 million in
1998 from $0.1 million in 1997, an increase of $0.5 million. Other expense
(income) includes foreign exchange gains and losses and other miscellaneous
items. The increase in other expense (income) in 1998 resulted primarily from
an increase in foreign currency transaction losses of $0.7 million, primarily
in Mexico.
Income tax expense. Income tax expense decreased $0.2 million to $4.6
million in 1998 from $4.8 million in 1997. In 1998, the Company provided
valuation allowances against net operating losses in the U.S. and Europe which
had the impact of significantly increasing the effective tax rate. In
addition, the 1997 effective tax rate in Mexico was abnormally low due to
favorable permanent differences relating to the tax treatment of certain peso-
denominated inflationary items.
Net income (loss). Net income (loss) decreased $19.3 million to a $3.9
million loss in 1998 from $15.4 million of income in 1997. This increase was
due principally to $11.7 million of increased net interest
13
<PAGE>
expense in 1998 resulting from the new debt structure, the $2.7 million
increase in cost of sales resulting from the revaluation of inventories in
connection with the Acquisition, the absence of margin on $2.5 million of
incremental sales made in 1998 to a former Gillette affiliate who assisted in
the production process and sold certain products to the Company's Mexican
subsidiary, and $2.1 million in increased goodwill and trademark amortization.
In addition, the Company's effective income tax rate increased significantly
due to valuation allowances provided against net operating losses in the U.S.
and Europe.
Year ended December 31, 1997 compared to the year ended December 31, 1996
Net sales. Net sales for 1997 increased to $229.5 million from $224.5
million in 1996, an increase of $5.0 million, or 2.2%. The Company's year end
number of total sales representatives increased by approximately 12,300, or
approximately 5.9%, in 1997, primarily in Latin America. Productivity
increased slightly to $1,070 per sales representative. Net sales in Latin
America rose 23.4% to $111.8 million in 1997 from $90.6 million in 1996 due to
a larger sales representative base, product price increases, the Company's
successful Christmas promotion and introduction of new products. The majority
of the increase in Latin American sales came from Mexico. Increased sales in
Latin America were partially offset by decreased sales in Europe, which
declined 22.3% to $46.8 million in 1997 from $60.2 million in 1996. The
reduction in sales in Europe was due principally to losses resulting from
currency depreciations and a significant reduction in sales representative
productivity.
Gross profit. Gross profit for 1997 increased to $170.4 million from $166.3
million in 1996, an increase of $4.1 million or 2.5%. Gross margin increased
to 74.2% from 74.1%. The increase in gross profit was due principally to
product price increases as well as improvements in production processes,
particularly in Mexico. These increases were partially offset by higher
manufacturing overhead costs. Gross profit was also negatively impacted by
increased freight costs resulting from a higher than normal use of air freight
to Europe and increased shipping costs in the United States.
Selling, general and administrative expenses. SG&A expenses for 1997
decreased to $150.4 million from $156.6 million for 1996, a decline of $6.2
million, or 4.0%. SG&A as a percentage of net sales for 1997 decreased to
65.5% from 69.7% for 1996, a decline of 4.2% of net sales. This decrease
resulted primarily from a net decrease of $5.7 million of non-recurring
charges from 1996 to 1997, as discussed below. In addition, SG&A expenses were
lower due to a decrease of $2.2 million in sales and promotional expenses and
infrastructure improvements that provided for increased economies of scale.
Net non-recurring charges decreased by $5.7 million from 1996 to 1997 as a
result of the following factors: In 1996, the Company incurred $6.1 million of
net non-recurring charges, primarily due to the write off of $5.4 million of
charges related to certain proprietary computer systems which were improperly
installed by a vendor. In addition, $2.4 million of charges were incurred
relating to market closures in Brazil, which were partially offset by a $1.7
million gain recognized on the sale of property in Mexico. In 1997, net
reorganization costs of $3.5 million were incurred, but were substantially
offset by recovery through litigation of $2.3 million of the charges described
above relating to the improper computer installation and a $0.8 million gain
on the sale of a facility which had previously been written off.
Other expense (income). Net other expense for 1997 decreased $0.4 million to
$0.1 million from $0.5 million in 1996. Other items include foreign exchange
gains and losses and other miscellaneous items. This reduction of other
expense resulted primarily from foreign exchange gains of $0.3 million and to
a lesser extent, from decreases in miscellaneous items.
Income tax expense. Income tax expense increased $2.2 million to $4.8
million in 1997 from $2.6 million in 1996. The effective tax rate for 1997
decreased 2.2% to 23.8% from 26.0% in 1996. The reduction in the effective tax
rate was due to an increase in 1997 over the 1996 amount of favorable
permanent differences relating to the tax treatment of certain peso-
denominated inflationary items in Mexico, as well as a reduction in the
valuation allowances that were previously established relating to taxable
losses incurred in the U.S.
14
<PAGE>
Net income (loss). Net income increased $8.0 million to $15.4 million in
1997 from $7.4 in 1996. This increase was due principally to a reduction in
non-recurring charges of $5.7 million from 1996 to 1997, a reduction in the
effective income tax rate, and an increase in net sales.
Liquidity and Capital Resources
Prior to the Acquisition, working capital needed to finance the Company's
operations and growth was principally provided by cash flows from operations
and intercompany transactions with Gillette. On April 30, 1998, the
Acquisition was completed. As part of the financing for the Acquisition,
$100.0 million of Senior Subordinated Notes were issued, $43.6 million of
borrowings were initially drawn down under the Senior Credit Agreement ($25.0
million under the Term Loan Facility and $18.6 million under the Revolving
Credit Facility), and $82.9 million of cash was contributed as an equity
investment by CD&R Fund V, certain members of management, certain directors
and other persons. The purchase price was $202.5 million and transaction costs
were $24.0 million. $16.5 million of the costs were capitalized as deferred
financing costs and are being amortized over the term of the related debt,
while the remaining $7.5 million were reflected as additional goodwill.
Net cash provided by operating activities was $10.1 million in 1998,
compared to $26.7 million in 1997 and $2.8 million in 1996. The $16.6 million
decrease in cash flow from operations in 1998 compared to 1997 is attributable
to a $8.1 million decrease in net income adjusted for depreciation and
amortization and other non-cash items included in net income and a $8.5
million decrease in the change in working capital items over 1997. Cash flow
from operating activities increased $23.9 million in 1997 compared to 1996
primarily due to a $15.5 million decrease in inventories following the success
of the Company's 1997 Christmas promotion. The increase in net income of $8.0
million and a decrease of $4.2 million related to income taxes, partially
offset by a net $2.7 million decrease in accounts payable, also served to
increase the Company's cash position in 1997.
Net cash used in investing activities increased to $208.7 million in 1998
from $5.8 million in 1997 and $4.5 million in 1996. The $202.9 million
increase in cash used in investing activities is attributable to the cash
requirements of the Acquisition of $207.7 million (net of cash received),
which was partially offset by proceeds from the sale of certain property and
equipment of $8.8 million that occurred during the four months ended April 30,
1998 in anticipation of the Acquisition. Capital expenditures were $9.6
million in 1998, $8.9 million in 1997 and $10.3 million in 1996. The Company's
capital expenditures during these periods substantially relate to investments
in equipment and facilities to augment the Company's manufacturing
capabilities and to satisfy information system requirements. Capital
expenditures in 1999 are expected to be approximately $8.4 million, comprised
of $4.3 million for upgrade of equipment and $4.1 million for information
technology.
Net cash provided by financing activities was $203.0 million in 1998,
compared to net cash used in financing activities of $19.0 million in 1997 and
net cash provided by financing activities of $5.0 million in 1996. Cash flows
from financing activities subsequent to the Acquisition reflect $100.0 million
from the issuance of 11 3/4% Senior Subordinated Notes (the "Notes"), $25.0
million from borrowings under the Term Loan Facility, $16.5 million from net
borrowings under the Revolving Credit Facility, and $82.9 million in equity
contributed by CD&R Fund V, certain members of management, certain directors
and other persons. Cash flows from financing activities prior to the
Acquisition consisted principally of intercompany transactions between the
Company and Gillette, and resulted in net cash payments of $8.8 million for
the four months ended April 30, 1998, and $27.5 million in 1997, and net cash
receipts of $5.0 million in 1996. During 1997, financing activities also
included $8.5 million of proceeds from the issuance of low-interest short term
foreign bank debt.
The Notes represent the several obligation of Jafra Cosmetics International,
Inc. ("JCI") and Jafra Cosmetics International, S.A. de C.V. ("Jafra S.A.") in
the amount of $60 million and $40 million, respectively, with each
participating on a pro rata basis upon redemption. The Notes mature in the
year 2008 and bear a fixed interest rate of 11 3/4% payable semi-annually.
15
<PAGE>
Each of JCI and Jafra S.A. is an indirect, wholly-owned subsidiary of the
Parent and has fully and unconditionally guaranteed the obligations under the
Notes of the other on a senior subordinated basis, subject to a 30-day
standstill period prior to enforcement of such guarantees. In addition, the
Parent has fully and unconditionally guaranteed the Notes on a senior
subordinated basis. JCI currently has no U.S. subsidiaries. Each acquired or
organized U.S. subsidiary of JCI will fully and unconditionally guarantee the
Notes jointly and severally, on a senior subordinated basis. Each existing
subsidiary of Jafra S.A. fully and unconditionally guarantees the Notes
jointly and severally, on a senior subordinated basis, and each subsequently
acquired or organized subsidiary of Jafra S.A. will fully and unconditionally
guarantee the Notes jointly and severally, on a senior subordinated basis. The
nonguarantor entities are the Parent's indirect European subsidiaries in
Germany, Netherlands, Switzerland, Italy and Austria and its indirect South
American subsidiaries in Colombia, Argentina and Venezuela. All guarantor and
nonguarantor entities are either direct or indirect wholly owned subsidiaries
of the Parent.
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. The Notes
were registered in a registered exchange offer, effective as of January 25,
1999, under the Securities Act of 1933, as amended.
In addition, JCI and Jafra S.A. entered into a Senior Credit Agreement that
provides for senior secured credit facilities in an aggregate principal amount
of $90 million, consisting of a multicurrency Revolving Credit Facility and a
Term Loan Facility of $25 million. Borrowings under the Term Loan Facility are
payable in quarterly installments of principal and interest over 6 years.
Borrowings under the Revolving Credit Facility mature on April 30, 2004.
Borrowings under the Senior Credit Agreement bear interest at an annual rate
of LIBOR plus a margin not to exceed 2.625% or an alternate base rate (the
higher of the prime rate or federal funds rate plus 1%, plus an applicable
margin not to exceed 1.625%). The interest rates in effect at December 31,
1998 ranged from approximately 7.8% to approximately 8.3% for the LIBOR-based
borrowings, and the rate for the prime-based borrowings was approximately
9.4%.
Both the Indenture, dated as of April 30, 1998, under which the Notes were
issued, (the "Indenture") 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. These debt agreements 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 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.
Foreign Operations
Sales outside of the United States aggregated 70%, 69%, and 68% of the
Company's total net sales for the fiscal years 1998, 1997, and 1996,
respectively. In addition, as of December 31, 1998, international subsidiaries
comprised approximately 62% (excluding intercompany balances) of the Company's
consolidated total assets. Accordingly, the Company has experienced and
continues to be exposed to foreign exchange risk. Although the Company
historically has not entered into foreign currency hedging contracts to
mitigate this risk, it may do so in the future. Foreign currency fluctuations
can also impact operating results. During 1998, the stronger U.S. dollar
negatively affected revenues and operating income. Had average exchange rates
in 1998 remained the same as in 1997, 1998 net sales would have been
approximately $18.9 million higher than reported.
The Company derived approximately 47.7% of its net sales for the year ended
December 31, 1998 and 42.5% for the year ended December 31, 1997 from Mexico,
substantially all of which were denominated in
16
<PAGE>
Mexican pesos. The Company manufactures its products in Mexico and the United
States. This allows the Company to have a significant portion of its Mexican
manufacturing costs denominated in pesos. Although Jafra S.A. buys products
manufactured in the United States in dollar denominated prices, it also sells
a majority of its manufactured product for export in dollar denominated
prices. These dollar denominated sales help to mitigate the currency exposure
on dollar denominated purchases.
Mexico has experienced periods of high inflation from time to time in the
past, including during most of the 1980s and during 1995 through 1997. In
1997, Mexico was classified as a hyperinflationary economy for financial
reporting purposes, and accordingly, the functional currency of Jafra S.A. was
designated as the U.S. dollar. The Company has generally been able to offset
the effects of inflation in Mexico by increasing its product prices by at
least the level of inflation, although there can be no assurance that the
Company will be able to maintain its pricing policy in the future.
Throughout 1998, Mexico's functional currency was the U.S. dollar because
Mexico was considered to be a hyperinflationary economy. Mexico will no longer
be considered hyperinflationary as of January 1, 1999, at which time the
Company will account for its Mexican operations using the peso as its
functional currency. The change in the functional currency of Mexico is not
expected to materially affect the Company's operations or financial
statements, except that Jafra S.A. had $55 million of U.S. dollar denominated
third party debt as of December 31, 1998. It is anticipated that gains and
losses of remeasuring such debt to the U.S. dollar from the peso will be
included in income beginning January 1, 1999.
Year 2000 Issue
Prior to the Acquisition, the Company established a year 2000 compliance
methodology and schedule based on the Gillette model. This methodology
encompassed six phases: discovery, planning, resolution, testing,
implementation and certification. The scope of the Company's compliance
program includes information technology (computer systems, hardware and
operating systems), facilities (phone systems, plant machinery, elevators and
security systems), embedded software in production equipment and major
suppliers of raw materials and finished goods. The Company has completed the
discovery and planning phases with respect to both its information technology
systems and non-information technology systems. Approximately 25% of the
systems addressed were found to require some level of remediation or
replacement. The Company is currently in the resolution phase with respect to
such systems, in which all affected hardware, software and equipment is being
repaired, upgraded or replaced.
The Company expects to complete the resolution phase for all systems
(information technology and non-information technology) by the end of the
second quarter of 1999. The Company expects to have completed the testing
phase for all systems by the end of the second quarter of 1999 and the
implementation and certification phases by the end of the third quarter of
1999. As of December 31, 1998, the Company estimated that its resolution and
testing phase for information technology systems was approximately 40%
complete. The Company has upgraded its main operating and financial systems to
a Year 2000 compliant version in Germany, Holland, and Colombia, and expects
to have the operating and financial systems upgraded in Austria by April 1999,
Italy by July 1999, Switzerland by September 1999, Venezuela by June 1999, and
Argentina by May 1999. No further testing will be required upon the completion
of the upgrade.
The two most important information technology systems that are not Year 2000
compliant are the operating and financial systems that are installed in the
United States and Mexico. The Company is currently upgrading these systems and
expects to have the upgrades completed by June 1999.
With respect to its non-information technology systems, the Company
estimates that its resolution and testing phases are virtually complete. Most
non-information technology systems were already Year 2000 compliant, but
several phone systems and one voice mail system required upgrades that are now
completed. The Company has spent approximately $600,000 to date on the
discovery, planning, and resolution phases for both information technology and
non-information technology systems.
17
<PAGE>
The Company has budgeted $1.5 million to complete the remaining Year 2000
compliance program, and believes it has sufficient cash, cash flow, and
borrowing availability to meet its cash needs. Costs incurred to modify
existing systems are being expensed as incurred. The allocation of amounts may
change from time to time.
As part of its investigation conducted in the discovery phase, the Company
prepared a questionnaire that it distributed to approximately 106 of its major
suppliers, which supply 75% of the raw materials and finished goods purchased
by the Company from third party suppliers. As of March 9, 1999 the Company has
received written responses from 80 of these suppliers. Of these, 77 have
informed the Company that they do not expect that the dating problems
associated with the year 2000 will have a material adverse effect on their
ability to continue to supply the Company in accordance with past practice.
Based on these replies, the Company does not believe that the inability of any
of the suppliers that have not yet responded or have responded unfavorably to
the Company's request for information to continue to supply the Company would
have a material adverse effect on the Company's business, financial condition
or results of operations. The Company intends to seek and identify alternate
sources of supply for the affected raw materials and finished products in the
event it has not received assurance by March 31, 1999 from the remaining
companies that they will be able to supply the Company without material
disruption into the year 2000. The Company currently believes there are
alternative sources for all such materials.
In the event the Company does not complete all phases of its year 2000
compliance program by December 31, 1999, the Company's most likely worst case
scenario would be that it would have to consider outsourcing its customer
service and order processing functions. No assurance can be given that the
Company will be able to outsource these functions or that the Company will not
incur significant additional expense in doing so. In the event the Company
could not outsource these functions, the Company would be unable to process
orders in a timely manner or respond to customer inquiries. This could lead to
a loss of revenue and customer satisfaction, which could have a material
adverse effect on the Company's results of operations, liquidity, and
financial condition.
European Economic and Monetary Union
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and the euro. The participating countries adopted the euro as their
common legal currency on that day. The euro will trade on currency exchanges
and be available for non-cash transactions during the transition period
between January 1, 1999 and January 1, 2002. During this transition period,
the existing currencies are scheduled to remain legal tender in the
participating countries as denominations of the euro and public and private
parties may pay for goods and services using either the euro or the
participating countries' existing currencies.
During the transition period, the Company will continue to utilize the
respective country's existing currency as the functional currency. Use of the
euro by the Company or its sales representatives is not expected to be
significant and will be converted and recorded in the Company's accounting
records in the existing functional currency.
The Company intends to adopt the euro as its functional currency when the
majority of its transactions in the member countries are conducted in the
euro. The Company is currently identifying the impact the euro will have on
its information systems throughout Europe. The Company has identified that its
European commercial system will not support the euro, and is looking into
various alternatives either to update or replace the system. The Company does
not expect the introduction of the euro to materially adversely affect its
business, financial condition, or results of operations.
18
<PAGE>
Information Concerning Forward-Looking Statements
Certain of the statements contained in this report (other than the Company's
consolidated financial statements and other statements of historical fact) are
forward-looking statements, including, without limitation, (i) the statements
in "Business--Strategy" concerning (a) the Company's and management's
intention to build on Jafra's strong infrastructure; (b) the Company's belief
that the new senior management team will provide the dynamic leadership
required to attract new sales representatives and management talent, inspire
new and existing sales representatives to greater productivity and execute the
Company's new market development strategy; (c) the Company's plans to expand
its sales representative base in existing markets and to increase sales
representative productivity; (d) the Company's belief that its existing
distribution and manufacturing capabilities provide a strong platform for
Jafra to expand into new markets; and (e) the Company's expectation that it
will be able to implement its new market development strategy with limited
additional capital expenditures and without diverting focus from the Company's
core markets; (ii) the statements in "Business--International Operations" that
(a) the Company believes it is less vulnerable to adverse economic conditions
in any particular market because it has significant revenue from each of the
United States, Latin America and Europe and (b) the Company intends to
increase the number of markets in which it participates and grow revenues in
those markets in order to diversify its revenue base; (iii) the statement in
"Business--Manufacturing" that new products may increasingly be manufactured
by third parties or contain licensed formulations; (iv) the statement in
"Business--Distribution" that management believes its facilities are adequate
to meet global demand for the foreseeable future; (v) the statement in
"Business--Patents and Trademarks" concerning the consequences of Gillette's
inability to obtain and transfer to the Company certain trademark assignments;
(vi) the statements in "Business--Management Information Systems" concerning
the Company's expectations that (a) its implementation project will be
completed, and a year 2000 compliant version of the Mexican commercial system
will be installed at all Jafra companies, other than in the United States, in
1999 and (b) the commercial system used at the Westlake Village facility will
be modified to be year 2000 compliant by mid-1999; (vii) the statement in
"Business--Environmental Matters" that the Company believes that environmental
laws and regulations will not have a material adverse effect on its capital
expenditures, earnings or competitive position; (viii) other statements as to
management's or the Company's expectations, intentions and beliefs presented
in "Business;" (ix) the statement in "Properties" that the Company's
properties are suitable to meets its anticipated requirements; (x) the
statement in "Legal Proceedings" that the Company believes that the resolution
of the routine legal matters in which it is involved will not have a material
adverse effect on the Company's business, financial condition or results of
operations; (xi) the statement in "--Results of Operations" that the Company
expects full year amortization of approximately $3.2 million in 1999 ; (xii)
the statements in "--Liquidity and Capital Resources" concerning (a) the
Company's expectation that capital expenditures in 1999 will be $8.4 million;
and (b) the Company's belief that it will have sufficient liquidity to meet
its cash requirements and working capital needs over the next twelve months;
(xiii) the statements in "--Foreign Operations" that (a) the change in the
functional currency of Mexico is not expected to materially affect the
Company's operations or financial statements and (b) the Company may enter
into foreign currency hedging contracts in the future; (xiv) the statements in
"--Year 2000 Issue" concerning (a) the Company's expectation that the
resolution phase for all systems will be complete by the end of the second
quarter of 1999; (b) the Company's expectation that it will complete the
testing phase for all systems by the end of the second quarter of 1999 and the
implementation and certification phases by the end of the third quarter of
1999; (c) the Company's expectation that its operating and financial systems
will be upgraded in Austria by April 1999, Italy by July 1999, Switzerland by
September 1999, Venezuela by June 1999 and Argentina by May 1999; (d) the
Company's expectation that its information technology upgrades in the United
States and Mexico will be completed by June 1999; (e) the Company's belief
that it has sufficient cash, cash flow and borrowing availability to meet its
cash needs; (f) the Company's belief that the inability of its suppliers to
continue to supply the Company would not have a material adverse effect on the
Company's business, financial condition or results of operations; (g) the
Company's belief that there are alternative sources for potentially affected
raw materials and finished products; (h) the Company's identification of its
most likely worst case scenario; and (xv) the statements in "--European
Economic and Monetary Union" concerning the Company's expectations that (a)
use of the euro by the Company or its sales representatives will not be
significant and (b) the introduction of the euro will not materially adversely
affect its business, financial condition or results of operations; and (xvi)
other statements as to management's or the Company's expectations
19
<PAGE>
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
following important factors, and those important factors described elsewhere
in this report (including, without limitation, those discussed in "Business--
Strategy," "--International Operations," "--Distribution," "--Manufacturing,"
"--Patents and Trademarks," "--Management Information Systems," and "--
Environmental Matters," "Properties," "Legal Proceedings" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Results of Operations," "--Liquidity and Capital Resources," "--Foreign
Operations," "--Year 2000 Issue," and "European Economic and Monetary Union"),
or in other Securities and Exchange Commission filings, could affect (and in
some cases have affected) the Company's actual results and could cause such
results to differ materially from estimates or expectations reflected in such
forward-looking statements:
. The Company's high degree of leverage could have important consequences
to the Company, including but not limited to the following: (i) the
Company's ability to obtain additional financing for working capital,
capital expenditures, acquisitions, general corporate purposes or other
purposes may be impaired in the future; (ii) a substantial portion of
the Company's cash flow from operations must be dedicated to the payment
of principal and interest on its indebtedness, thereby reducing the
funds available to the Company for other purposes; (iii) certain of the
Company's borrowings will be at variable rates of interest, which could
cause the Company to be vulnerable to increases in interest rates and
(iv) the Company may be more vulnerable to economic downturns and be
limited in its ability to withstand competitive pressures.
. The Company's ability to make scheduled payments or to refinance its
obligations with respect to its indebtedness, and to comply with the
covenants and restrictions contained in the instruments governing such
indebtedness, will depend on its financial and operating performance,
which, in turn, is subject to prevailing economic and competitive
conditions and to certain financial, business and other factors beyond
its control, including operating difficulties, increased operating
costs, market cyclicality, product prices, the response of competitors,
regulatory developments, and delays in implementing strategic projects.
. The Company's ability to meet its debt service and other obligations
will depend in significant part on the extent to which the Company can
implement successfully its business strategy. The components of the
Company's strategy are subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond
the control of the Company.
. The Company's ability to conduct and expand its business outside the
United States and the amount of revenues derived from foreign markets
are subject to the risks inherent in international operations. The
Company's international operations may be adversely affected by import
duties or other legal restrictions on imports, currency exchange control
regulations, transfer pricing regulations, the possibility of
hyperinflationary conditions and potentially adverse tax consequences,
among other things. Given the balance of payment deficits and shortages
in foreign exchange reserves that many such economies, including the
Mexican economy, have suffered in recent years, there can be no
assurance that the governments of nations in which the Company operates,
or intends to expand, will not take actions that materially adversely
affect the Company and its business.
. The direct selling cosmetics and personal care products business is
highly competitive. A number of the Company's competitors, including
Avon and Mary Kay, are significantly larger and have substantially
greater resources and less leverage that the Company, which may provide
them with greater flexibility to respond to changing business and
economic conditions that the Company. An increase in the amount of
competition faced by the Company, or the inability of the Company to
20
<PAGE>
compete successfully, could have a material adverse effect on the
Company's business, financial condition and results of operations.
. The Company's ability to anticipate changes in market and industry
trends and to successfully develop and introduce new and enhanced
products on a timely basis will be a critical factor in its ability to
grow and to remain competitive. There can be no assurance that new
products and product enhancements will be completed on a timely basis or
will enjoy market acceptance following their introduction. In addition,
the anticipated development schedules for new or improved products are
inherently difficult to predict and are subject to delay or change as a
result of shifting priorities in response to customers' requirements and
competitors' new product introductions.
. The sale of cosmetics and other personal care products correlates
strongly to the level of consumer spending generally, and thus is
significantly affected by the general state of the economy and the
ability and willingness of consumers to spend on discretionary items.
Reduced consumer confidence and spending generally may result in reduced
demand for the Company's products and limitations on the ability of the
Company to maintain or increase prices. A decline in general economic
conditions or general consumer spending in any of the Company's major
markets could have a material adverse effect on the Company's business,
financial condition and results of operations.
. The Company is subject to or affected by governmental regulations
concerning, among other things, (i) product formulation, (ii) product
claims and advertising, whether made by the Company or its sales
representatives, (iii) fair trade and distributor practices and (iv)
environmental, health and safety matters. In addition, new regulations
could be adopted or any of the existing regulations could be changed at
any time in a manner that could have a material adverse effect on the
Company's business and results of operations. Present or future health
or safety or food and drug regulations could delay or prevent the
introductions of new products into a given country or marketplace or
suspend or prohibit the sale of existing products in such country or
marketplace. The Company believes that it is in compliance in all
material respects with such laws and regulations now in effect.
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.
21
<PAGE>
ITEM 7A. 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.
Interest rate risk
The Company has U.S. dollar denominated debt obligations in both the United
States and Mexico that have fixed and variable interest rates and mature on
various dates. The table below presents principal cash flows and related
interest rates by fiscal year of maturity:
Debt Obligations Information at December 31, 1998
(Amounts in U.S. dollars in 000's)
<TABLE>
<CAPTION>
Expected Year of Maturity Fair Value
----------------------------------------------------------- December 31,
1999 2000 2001 2002 2003 Thereafter Total 1998(1)
------ ------ ------ ------ ------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Senior Subordinated
Notes, Term Loan, and
Revolving Credit
Facility
Fixed Rate (US$)...... $100,000 $100,000 $88,000
Average Interest
Rate................. 11.75%
Variable Rate (US$)... $2,500 $3,500 $4,500 $5,500 $6,500 19,000 41,500 41,500
Average Interest
Rate................. 8.04% 8.04% 8.04% 8.04% 8.04% 8.04%
</TABLE>
- --------
(1) The Company's estimate of the fair value of its Senior Subordinated Notes
was based upon information provided by a broker dealer that makes a market
in the Company's Senior Subordinated Notes. The Company's estimate of the
fair value of its Term Loan and Revolving Credit Facility was based on
information provided by one of its lending banks.
Foreign Currency Risk
The Company manufactures its products in the United States and Mexico, which
then sell the products to Jafra subsidiaries in various global markets. All
intercompany product sales are denominated in US dollars. As a result, the
Company's earnings and cash flows are exposed to fluctuations in foreign
currency exchange rates. The Company attempts to limit these exposures through
operational strategies such as purchasing products locally in local currency.
At the present time, the Company does not enter into foreign currency hedging
contracts to mitigate this risk, although it may do so in the future.
In addition, the Company's Mexican holding company had $55 million of U.S.
dollar denominated debt at December 31, 1998. As the functional currency of
Mexico was considered to be the U.S. dollar in 1998, gains and losses on
remeasuring this debt to the U.S. dollar were not included in income during
1998. Effective January 1, 1999, the Company will account for its Mexican
operations using the peso as the functional currency. Accordingly, gains and
losses on remeasuring the $55 million of debt to the U.S. dollar will be
included in income. Based upon the $55.0 million of outstanding debt at
December 31, 1998, a 10% decline in the peso to U.S. dollar exchange rate
would result in a $5.5 million foreign currency transaction loss. During 1998,
the value of the peso to the U.S. dollar declined by 22.6%.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report for the eight month period ended December
31, 1998 and the four month period ended April 30, 1998................. 24
Independent Auditors' Report for the years ended December 31, 1997 and
1996.................................................................... 25
Consolidated Balance Sheets--As of December 31, 1998 and 1997............ 26
Consolidated Statements of Operations--For the eight month period ended
December 31, 1998, the four month period ended April 30, 1998, and the
years ended December 31, 1997 and 1996.................................. 27
Consolidated Statements of Stockholders' Equity--For the eight month
period ended December 31, 1998, the four month period ended April 30,
1998, and the years ended December 31, 1997 and 1996.................... 28
Consolidated Statements of Cash Flows--For the eight month period ended
December 31, 1998, the four month period ended April 30, 1998, and the
years ended December 31, 1997 and 1996.................................. 29
Notes to Consolidated Financial Statements............................... 31
Schedule II--Valuation and Qualifying Accounts........................... 54
</TABLE>
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
CDRJ Investments (Lux) S.A.:
Luxembourg
We have audited the accompanying consolidated balance sheet of CDRJ
Investments (Lux) S.A. and subsidiaries as of December 31, 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the eight-month period ended December 31, 1998 and the combined
statements of operations, divisional equity, and cash flows of Jafra Cosmetics
International (the "Predecessor") for the four-month period ended April 30,
1998. Our audits also included the financial statement schedule listed in the
Index at Item 14(a)(2). These financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CDRJ
Investments (Lux) S.A. and subsidiaries as of December 31, 1998 and the
results of their operations and their cash flows for the eight-month period
ended December 31, 1998 and the combined results of operations and cash flows
of the Predecessor for the four-month period ended April 30, 1998 in
conformity with generally accepted accounting principles. Also, in our
opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth herein.
Deloitte & Touche LLP
March 15, 1999
Los Angeles, California
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
CDRJ Investments (Lux) S.A.:
We have audited the accompanying combined balance sheet of Jafra Cosmetics
International (the "Predessor Company") as of December 31, 1997 and the
related combined statements of operations, divisional equity, and cash flows
for the years ended December 31, 1996 and 1997. These combined financial
statements are the responsibility of the Predessor Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits. Our audits also included the financial statement schedule
listed in the Index at Item 14(a)(2). These financial statements and financial
statement schedule are the responsibility of the Predessor Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Jafra Cosmetics
International as of December 31, 1997 and the results of its operations and
its cash flows for the years ended December 31, 1996 and 1997 in conformity
with generally accepted accounting principles. Also, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth herein.
KPMG LLP
February 27, 1998
Los Angeles, California
25
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Predecessor
------------
December 31, December 31,
1998 1997
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 18,358 $ 10,231
Receivables, less allowance for doubtful accounts
of $2,284 in 1998
and $2,057 in 1997................................ 24,449 27,298
Inventories........................................ 33,195 38,028
Due from Gillette entities......................... -- 39,885
Prepaid taxes...................................... 5,835 --
Prepaid expenses and other current assets.......... 5,648 3,197
-------- --------
Total current assets............................. 87,485 118,639
Property and equipment, net.......................... 56,238 43,682
Other assets:
Goodwill, net...................................... 74,895 10,269
Trademarks, net.................................... 53,234 --
Deferred financing costs and other, net............ 16,782 2,660
-------- --------
Total............................................ $288,634 $175,250
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.................. $ 2,500 $ 8,513
Accounts payable................................... 25,905 12,688
Accrued liabilities................................ 34,183 22,696
Due to Gillette entities........................... -- 45,440
Deferred income taxes.............................. 953 711
Income taxes payable............................... 1,017 5,978
-------- --------
Total current liabilities........................ 64,558 96,026
Long-term debt..................................... 139,000 --
Deferred income taxes.............................. 8,202 --
Other long-term liabilities........................ 1,433 1,920
-------- --------
Total liabilities................................ 213,193 97,946
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $2.00; authorized,
1,020,000 shares; issued and outstanding, 829,940
shares............................................ 1,660 --
Divisional equity.................................. -- 77,304
Additional paid-in capital......................... 81,275 --
Accumulated deficit................................ (8,041) --
Other comprehensive income--cumulative foreign
currency translation adjustment................... 547 --
-------- --------
Total stockholders' equity....................... 75,441 77,304
-------- --------
TOTAL............................................ $288,634 $175,250
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Predecessor
-------------------------------------
Eight Months Four Months
Ended Ended Year Ended Year Ended
December 31, April 30, December 31, December 31,
1998 1998 1997 1996
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales.................. $171,019 $77,282 $229,524 $224,544
Cost of sales.............. 50,783 20,322 59,129 58,216
-------- ------- -------- --------
Gross profit............. 120,236 56,960 170,395 166,328
Selling, general and
administrative expenses... 112,993 51,519 150,334 156,600
-------- ------- -------- --------
Income from operations... 7,243 5,441 20,061 9,728
Other income (expense):
Exchange gain (loss)..... (1,742) 1,376 312 (7)
Interest, net............ (11,431) 78 306 834
Other, net............... (351) 104 (414) (542)
-------- ------- -------- --------
Income (loss) before income
taxes..................... (6,281) 6,999 20,265 10,013
Income tax expense......... 1,760 2,899 4,816 2,620
-------- ------- -------- --------
Net income (loss).......... $ (8,041) $ 4,100 $ 15,449 $ 7,393
======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except for shares)
<TABLE>
<CAPTION>
Cumulative
Common Stock(1) foreign
----------------- Additional currency Retained Total Other
Number of paid-in translation earnings stockholders' comprehensive
Shares Amount capital(1) adjustment (deficit) equity(1) income
--------- ------- ---------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR:
Balance at January 1,
1996................... -- $47,641 $ 1,918 $(51,820) $110,996 $108,735
Net income.............. -- -- -- -- 7,393 7,393 $ 7,393
Dividends paid to
Gillette............... -- -- -- -- (37,970) (37,970) --
Capital contributions by
Gillette............... -- -- 2,646 -- -- 2,646 --
Translation adjustment.. -- -- -- (2,163) -- (2,163) (2,163)
-------
Total comprehensive
income................. -- -- -- -- -- -- $ 5,230
------- ------- ------- -------- -------- -------- =======
Balance at December 31,
1996................... -- 47,641 4,564 (53,983) 80,419 78,641
Net income.............. 15,449 15,449 $15,449
Dividends paid to
Gillette............... -- -- -- -- (18,355) (18,355) --
Capital of new division
included in combined
group.................. 1,926 -- -- -- 1,926 --
Translation adjustment.. -- -- -- (357) -- (357) (357)
-------
Total comprehensive
income................. -- -- -- -- -- -- $15,092
------- ------- ------- -------- -------- -------- =======
Balance at December 31,
1997................... -- 49,567 4,564 (54,340) 77,513 77,304
Net income for four
months ended April 30,
1998................... -- -- -- -- 4,100 4,100 $ 4,100
Net loss for foreign
subsidiaries due to
change in reporting
period (unaudited)..... -- -- -- -- (1,197) (1,197) --
Dividends paid to
Gillette............... -- -- -- -- (20,990) (20,990) --
Capital contributions by
Gillette............... -- -- -- -- 31,735 31,735 --
Translation adjustment.. -- -- -- (333) -- (333) (333)
-------
Total comprehensive
income................. -- -- -- -- -- -- $ 3,767
------- ------- ------- -------- -------- -------- =======
Balance at April 30,
1998................... -- $49,567 $ 4,564 $(54,673) $ 91,161 $ 90,619
======= ======= ======= ======== ======== ========
CDRJ INVESTMENTS (LUX)
S.A. AND SUBSIDIARIES:
Common stock issued upon
formation of CDRJ
Investments (Lux) S.A.,
April 30, 1998......... 789,503 $ 1,579 $77,371 -- -- $ 78,950
Issuance of common
stock.................. 40,437 81 3,904 -- -- 3,985
Net loss for eight
months ended December
31, 1998............... -- -- -- -- $ (8,041) $ (8,041) $(8,041)
Translation adjustment.. -- -- -- $ 547 -- 547 547
-------
Total comprehensive
income................. -- -- -- -- -- -- $(7,494)
------- ------- ------- -------- -------- -------- =======
Balance at December 31,
1998................... 829,940 $ 1,660 $81,275 $ 547 $ (8,041) $ 75,441
======= ======= ======= ======== ======== ========
</TABLE>
- --------
(1) Predecessor common stock and additional paid-in capital represent
subsidiary capital, and total stockholders' equity of the Predecessor
represents divisional equity.
See accompanying notes to consolidated financial statements.
28
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Predecessor
-------------------------------------
Eight Months Four Months
Ended Ended Year Ended Year Ended
December 31, April 30, December 31, December 31,
1998 1998 1997 1996
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)......... $ (8,041) $ 4,100 $ 15,449 $ 7,393
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating activities:
Loss (gain) on disposal
of property and
equipment............... 150 -- (126) 3,462
Depreciation and
amortization............ 5,089 1,363 4,361 3,317
Amortization of deferred
financing fees.......... 1,407 -- -- --
Deferred income taxes.... 4,516 375 (2,596) (9,253)
Changes in operating
assets and liabilities:
Receivables, net....... (4,095) (2,063) (1,027) (3,733)
Inventories............ 5,260 (512) 7,113 (8,406)
Prepaid expenses and
other current
assets................ (2,313) (7,457) (657) 1,011
Other assets........... (760) 3,948 1,571 636
Accounts payable and
accrued liabilities... 19,699 (7,144) (3,682) (976)
Income taxes payable
(receivable).......... (2,878) (247) 6,792 9,245
Other long-term
liabilities........... 80 (408) (481) 66
--------- -------- -------- --------
Net cash provided by
(used in) operating
activities.......... 18,114 (8,045) 26,717 2,762
--------- -------- -------- --------
Cash flows from investing
activities:
Purchase of Jafra
Business, net of cash
received of $2,339....... (187,226) -- -- --
Withholding taxes on
purchase price........... (12,929) -- -- --
Acquisition costs......... (7,542) -- -- --
Purchases of marketable
securities............... -- (97) -- --
Proceeds from sale of
property and equipment... -- 8,811 3,132 5,805
Purchases of property and
equipment................ (3,450) (6,124) (8,932) (10,313)
--------- -------- -------- --------
Net cash provided by
(used in) investing
activities.......... (211,147) 2,590 (5,800) (4,508)
--------- -------- -------- --------
Cash flows from financing
activities:
Net proceeds from bank
debt..................... -- -- 8,513 --
Capital contributions by
Gillette................. -- 5,013 1,926 2,646
Dividends paid to
Gillette................. -- -- (18,355) (37,970)
Transactions with Gillette
and other divisions...... -- (13,792) (11,075) 40,365
Proceeds from issuance of
subordinated debt........ 100,000 -- -- --
Net proceeds from
revolving credit
facility................. 16,500 -- -- --
Proceeds from term loan... 25,000 -- -- --
Contribution of equity.... 82,707 -- -- --
Deferred financing costs
......................... (12,471) -- -- --
--------- -------- -------- --------
Net cash provided by
(used in) financing
activities.......... 211,736 (8,779) (18,991) 5,041
--------- -------- -------- --------
Effect of exchange rate
changes on cash............ (573) (333) (357) (2,163)
Effect of accounting
calendar change on cash.... -- 6,276 -- --
--------- -------- -------- --------
Net increase (decrease) in
cash and cash equivalents.. 18,130 (8,291) 1,569 1,132
Cash and cash equivalents at
beginning of period........ 228 10,231 8,662 7,530
--------- -------- -------- --------
Cash and cash equivalents at
end of period.............. $ 18,358 $ 1,940 $ 10,231 $ 8,662
========= ======== ======== ========
</TABLE>
(Continued on next page)
See accompanying notes to consolidated financial statements.
29
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(In thousands)
<TABLE>
<CAPTION>
Predecessor
-------------------------------------
Eight Months Four Months
Ended Ended Year Ended Year Ended
December 31, April 30, December 31, December 31,
1998 1998 1997 1996
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Supplemental disclosure of
cash flow information:
Cash paid during the year
for:
Interest................. $8,301 $ 501 $2,811 $3,657
Income taxes............. 4,402 4,135 4,313 441
Supplemental schedule of
non-cash investing and
financing activities:
As described in Note 9, in
connection with the
Acquisition at April 30,
1998, certain
intercompany balances
between Gillette and the
Predecessor were
forgiven. Additionally,
in 1996, $3,580,000 of
debt due to an affiliate
of Gillette by Jafra
Brazil was forgiven.
These amounts were
accounted for as direct
contributions to
(reductions from) equity,
with the 1996 amount
being reflected net of a
$934,000 tax effect
(amounts in thousands):
Intercompany accounts
payable................. $ -- $ 26,722 $ -- $2,646
Intercompany accounts
receivable.............. -- (20,990) -- --
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation and Description of Business
Basis of Presentation
CDRJ Investments (Lux) S.A., a Luxembourg societe anonyme (the "Parent"),
CDRJ Acquisition Corporation (renamed 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." On April 30, 1998, pursuant to an acquisition
agreement (the "Acquisition Agreement") between the Parent, certain of its
subsidiaries and Gillette, (i) Jafra Cosmetics International Inc., a
California corporation merged with and into JCI, with JCI as the surviving
entity, (ii) Jafra S.A. acquired the stock of Grupo Jafra, S.A. de C.V., a
Mexican Company ("Grupo Jafra"), which merged with and into Jafra S.A.
following the consummation of the Acquisition, with Jafra S.A. as the
surviving entity, (iii) indirect subsidiaries of the Parent purchased the
stock of Gillette subsidiaries conducting the Jafra Business in Germany,
Italy, the Netherlands and Switzerland; and (iv) indirect subsidiaries of the
Parent acquired from various Gillette subsidiaries certain assets used in the
Jafra Business in Austria, Argentina, Colombia and Venezuela.
The accompanying consolidated financial statements as of and for the eight
months ended December 31, 1998 reflect the operations of the Parent and its
subsidiaries. The accompanying combined financial statements for the four
months ended April 30, 1998 and the years ended December 31, 1997 and 1996
reflect the operations of the Jafra Business prior to the Acquisition and are
referred to as the "Predecessor" operations.
The combined financial statements of Predecessor included the following
subsidiaries and divisions of Gillette: Jafra Cosmetics International, Inc., a
California corporation; Jafra Cosmetics GmbH, a German company; Jafra
Cosmetics International B.V., a Netherlands company; Jafra Cosmetics S.p.A.,
an Italian company; Jafra Cosmetics A.G., a Swiss company; Grupo Jafra S.A. de
C.V., a Mexican company, and its subsidiaries, together with certain operating
assets and the related operating profit of Gillette Braun used in the Jafra
business in Mexico (the "Braun Assets"); the divested operations of the
Predecessor, principally in Portugal, Spain, Brazil and the United Kingdom
(collectively the "Divested Markets"); the Jafra-related operations of
Gillette affiliates in Austria, Argentina, Colombia and Venezuela; and the
assets related to the Jafra intellectual property, formerly held by Gillette,
that are used in the Jafra Business. The Parent did not acquire the Divested
Markets as part of the Jafra Business.
Because of the debt financing incurred in connection with the Acquisition,
the exclusion of certain assets and liabilities not acquired, and the
adjustments made to allocate the excess of the aggregate purchase price over
the historical value of the net assets acquired, the accompanying consolidated
financial statements of the Parent and its subsidiaries are not directly
comparable to those of the Predecessor. All significant intercompany or
interdivisional accounts and transactions between Jafra entities have been
eliminated in consolidation and combination.
31
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The accompanying financial statements for the years ended December 31, 1997
and 1996 include the operating results of the Predecessor's foreign
subsidiaries for fiscal years ended November 30. In 1998, the Predecessor
changed the reporting period for the foreign operations from a fiscal year
ending November 30 to a calendar year ending December 31. The line item
denoted "Effect of accounting calendar change on cash" in the consolidated
statements of cash flows represents the change in the cash balance of the
Predecessor's foreign operations from November 30, 1997 to December 31, 1997.
The unaudited results of operations for the period December 1, through
December 31, 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
(Unaudited)
<S> <C>
Net sales...................................................... $9,619
Gross profit................................................... 7,201
Loss from operations........................................... 727
Income taxes................................................... 470
Net loss....................................................... 1,197
</TABLE>
The purchase price for the Jafra Business of approximately $210.0 million
(excluding $16.5 million of financing fees and expenses) includes $202.5
million in cash, (including the purchase price adjustment discussed below) and
$7.5 million of direct costs. The $202.5 million cash purchase price includes
$187.2 million paid by the Company directly to Gillette in cash at the closing
date, (net of cash of $2.3 million received as part of the Acquisition), and
$12.9 million of withholding taxes paid by the Company on behalf of Gillette
subsequent to the closing date of the Acquisition. In addition, on November 3,
1998, the Company paid Gillette an additional $2.5 million (net of a
receivable from Gillette of $5.1 million) as a final adjustment of the
purchase price. The $7.5 million of direct costs have been accounted for as an
increase to goodwill, and are reflected in the purchase price allocation
below. The Acquisition has been accounted for under the purchase method of
accounting. Accordingly, the purchase price has been allocated to the assets
and liabilities acquired based upon their respective fair values at the date
of acquisition based on valuations and other studies. The following sets forth
the purchase price allocation (amounts in millions):
<TABLE>
<S> <C>
Net tangible assets acquired (net of liabilities assumed of
$38,177)......................................................... $ 69.0
Allocation of excess purchase price:
Property and equipment.......................................... 18.4
Accrued income taxes............................................ 0.9
Deferred income tax liability................................... (1.2)
Accrual of restructuring/rationalization costs (Note 10)........ (4.0)
Inventories..................................................... (2.4)
Trademarks...................................................... 53.8
Goodwill........................................................ 75.5
------
Total......................................................... $210.0
======
</TABLE>
The following unaudited pro forma financial information for the Company
gives effect to certain adjustments including depreciation expense,
amortization of goodwill, trademarks and deferred financing costs, CD&R
management fees, executive compensation, insurance expense, interest expense
on acquisition debt, and the related income tax effect of the foregoing
adjustments as if the transaction had occurred at the beginning of the periods
presented (in thousands):
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Net sales........................................ $248,301 $229,524
Net loss......................................... $ (8,541) $ (2,551)
</TABLE>
32
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The pro forma results have been prepared for comparative purposes only and
do not purport to represent what the Company's actual results of operations
would have been had the transaction occurred as of the beginning of the
periods presented and are not intended to be a projection of future results or
trends.
Description of Business
The Company is a manufacturer and marketer of premium skin and body care
products, color cosmetics, fragrances, nutritional supplements and other
personal care products. The Company markets its products through a
personalized direct selling, multilevel distribution system comprised of self-
employed salespersons (known as "sales representatives").
(2) Summary of Significant Accounting Policies
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents. Cash and cash equivalents include cash, time
deposits and all highly liquid debt instruments purchased with a maturity of
three months or less.
Inventories. Inventories are stated at the lower of cost, as determined by
the first-in, first-out basis, or market.
Property and Equipment. Property and equipment are stated at cost.
Depreciation of property and equipment is provided for over the estimated
useful lives of the respective assets using the straight-line method.
Estimated useful lives are 40 years for building and improvements and 5 to 10
years for machinery and equipment. Maintenance and repairs, including cost of
minor replacements, are charged to operations as incurred. Costs of additions
and betterments are added to property and equipment accounts provided that
such expenditures increase the useful life or the value of the asset.
Intangible Assets. Intangible assets principally consist of goodwill and
trademarks, which are amortized on the straight-line method. Goodwill and
trademarks resulting from the Company's acquisition of the Jafra Business from
Gillette are amortized over a period of 40 years, while the Predecessor's
goodwill was amortized generally over a period of 37.5 years. Accumulated
amortization of goodwill and trademarks at December 31, 1998 was $1,161,000
and $929,000, respectively. Accumulated amortization of goodwill at December
31, 1997 was $1,956,000.
Deferred Financing Costs. In connection with the acquisition of the Jafra
Business, the Company incurred approximately $16.5 million of costs related to
the Senior Subordinated Notes, the Revolving Credit Facility and the Term Loan
Facility (see Note 6). Such costs are being amortized on a basis that
approximates the interest method over the expected term of the related debt.
Accumulated amortization at December 31, 1998 was $1,407,000.
Impairment of Long-Lived Assets: Long-lived assets are reviewed for
impairment, based on undiscounted cash flows, whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable.
33
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Financial Instruments. The carrying amounts of cash and cash equivalents,
accounts receivable, and accounts payable approximate fair value because of
the short-term maturities of these instruments. The fair value of Subordinated
Notes is $88 million, based upon information provided by a broker-dealer that
makes a market in the Company's senior subordinated notes. The fair value of
the Revolving Credit Facility and The Term Loan ($2.5 million of which is
classified as current) is $41.5 million based on discussions with one of its
lending banks.
Research and Development. Research and development costs are expensed as
incurred. Total research and development expense aggregated $1,902,000,
$1,185,000, $2,911,000, and $3,319,000 for the eight months ended December 31,
1998, the four months ended April 30, 1998, and the years ended December 31,
1997 and 1996, respectively.
Income Taxes. The Company accounts for income taxes under an asset and
liability approach that requires the recognition of deferred income tax assets
and liabilities for the expected future consequences of events that have been
recognized in the Company's financial statements or income tax returns.
Management provides a valuation allowance for deferred income tax assets when
it is more likely than not that a portion of such deferred income tax assets
will not be realized.
Foreign Currency Translation. The functional currency for most foreign
subsidiaries is the local currency. Assets and liabilities of such foreign
subsidiaries and divisions 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. Financial results
of foreign subsidiaries in countries with highly inflationary economies are
translated using a combination of current and historical exchange rates and
any translation adjustments are included in net earnings, along with all
transaction gains and losses for the period.
The U.S. dollar has been used as the functional currency for the Company's
operations in Mexico, as Mexico was considered to be a hyperinflationary
economy for the period from December 1, 1996 to December 31, 1998. The Company
will adopt the peso as the functional currency of its operations in Mexico
effective January 1, 1999. The change in the functional currency of Mexico is
not expected to materially affect the Company's operations or financial
statements, except that Jafra S.A. had $55 million of U.S. dollar denominated
third-party debt as of December 31, 1998. It is anticipated that gains and
losses of remeasuring such debt to the U.S. dollar from the peso will be
included in income beginning January 1, 1999.
New Accounting Standards. In March 1998, the AICPA's Accounting Standards
Executive Committee ("AcSEC") issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed for Internal Use."
SOP 98-1 provides guidance on the capitalization of software for internal use.
Effective as of January 1, 1998, the Company adopted the SOP, which had no
material impact on the Company's financial statements.
In April 1998, AcSEC issued SOP 98-5, "Reporting on the Cost of Start-Up
Activities." SOP 98-5 requires that all the costs of start-up activities,
including organizational costs, be expensed as incurred. The Company adopted
SOP 98-5 effective as of May 1, 1998. The effect of adopting this SOP was not
material to the Company's financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities and will be effective
January 1, 2000. The Company has not yet analyzed the impact of adopting the
statement.
Reclassifications. Certain previously reported amounts have been
reclassified to conform to the current period presentation.
34
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Inventories
Inventories consist of the following at December 31, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Raw materials and supplies................................ $ 7,553 $ 8,439
Work in process........................................... -- 198
Finished goods............................................ 25,642 29,391
------- -------
Total inventories......................................... $33,195 $38,028
======= =======
</TABLE>
(4) Property and Equipment
Property and equipment consist of the following at December 31, 1998 and 1997
(in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Land...................................................... $20,126 $ 6,072
Buildings................................................. 16,608 17,150
Machinery and equipment................................... 22,256 40,173
------- -------
58,990 63,395
Less accumulated depreciation............................. 2,752 26,528
------- -------
56,238 36,867
Land held for sale........................................ -- 6,815
------- -------
Property and equipment, net............................... $56,238 $43,682
======= =======
</TABLE>
(5) Accrued Liabilities
Accrued liabilities consist of the following at December 31, 1998 and 1997
(in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Sales promotion.......................................... $12,509 $12,608
Accrued restructuring/rationalization costs (Note 10).... 3,162 290
Accrued interest......................................... 2,429 --
Payroll and payroll taxes................................ 2,186 2,427
State and local sales taxes.............................. 1,197 1,455
Accrued acquisition costs................................ 3,385 --
Other.................................................... 9,315 5,916
------- -------
$34,183 $22,696
======= =======
</TABLE>
35
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Debt
Debt consists of the following at December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- ------
<S> <C> <C>
Subordinated Notes, unsecured, interest payable semi-
annually at 11.75%, due in 2008............................ $100,000 $ --
Term Loan, principal and interest due in quarterly
installments through April 30, 2004, interest rate of 7.8%
at December 31, 1998....................................... 25,000 --
Revolving Loan, due April 30, 2004, weighted average
interest rate of 8.4% at December 31, 1998................. 16,500 --
Notes payable to foreign banks, in foreign currencies,
interest rates of 2.9%-3.2%, repaid during 1998............ -- 8,513
-------- ------
Total debt.................................................. 141,500 8,513
Less current maturities..................................... 2,500 8,513
-------- ------
Long-term debt.............................................. $139,000 $ --
======== ======
</TABLE>
The Company's long-term debt matures as follows (in thousands): $2,500 in
1999, $3,500 in 2000, $4,500 in 2001, $5,500 in 2002, $6,500 in 2003 and
$119,000 thereafter.
On April 30, 1998, JCI and Jafra S.A. borrowed $125 million by issuing $100
million aggregate principal amount of 11.75% Subordinated Notes due 2008 (the
"Notes") pursuant to an Indenture dated April 30, 1998 (the "Indenture") and
$25 million under a Senior Credit Agreement.
The Notes represent the several obligations of JCI and Jafra S.A. in the
amount of $60 million and $40 million, respectively, with each participating
on a pro rata basis upon redemption. The Notes mature in 2008 and bear a fixed
interest rate of 11.75% payable semi-annually.
Each of JCI and Jafra S.A. is an indirect, wholly owned subsidiary of the
Parent and has fully and unconditionally guaranteed the obligations under the
Notes of the other on a senior subordinated basis, subject to a 30-day
standstill period prior to enforcement of such guarantees. In addition, the
Parent has fully and unconditionally guaranteed the Notes on a senior
subordinated basis. JCI currently has no U.S. subsidiaries. Each acquired or
organized U.S. subsidiary of JCI will fully and unconditionally guarantee the
Notes jointly and severally, on a senior subordinated basis. Each existing
subsidiary of Jafra S.A. fully and unconditionally guarantees the Notes
jointly and severally, on a senior subordinated basis, and each subsequently
acquired or organized subsidiary of Jafra S.A. will fully and unconditionally
guarantee the Notes jointly and severally, on a senior subordinated basis. The
nonguarantor entities are the Parent's indirect European subsidiaries in
Germany, Netherlands, Switzerland, Italy and Austria and its indirect South
American subsidiaries in Colombia, Argentina and Venezuela. All guarantor and
nonguarantor entities are either direct or indirect wholly owned subsidiaries
of the Parent.
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. The Notes
were registered in a registered exchange offer, effective as of January 25,
1999, under the Securities Act of 1933, as amended.
In addition, JCI and Jafra S.A. entered into a Senior Credit Agreement that
provides for senior secured credit facilities in an aggregate principal amount
of $90 million, consisting of a multicurrency Revolving Credit Facility
36
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and a Term Loan Facility of $25 million. Borrowings under the Term Loan
Facility are payable in quarterly installments of principal and interest over
6 years. Borrowings under the Revolving Credit Facility mature on April 30,
2004. Borrowings under the Senior Credit Agreement bear interest at an annual
rate of LIBOR plus a margin not to exceed 2.625% or an alternate base rate
(the higher of the prime rate or federal funds rate plus 1%, plus an
applicable margin not to exceed 1.625%). The interest rates in effect at
December 31, 1998 ranged from approximately 7.8% to approximately 8.3% for the
LIBOR-based borrowings.
Both the Indenture and the Senior Credit Agreement contain certain covenants
which limit the Company's ability to incur additional indebtedness, pay cash
dividends and make certain other payments. These debt agreements 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.
(7) Income Taxes
The Company's income (loss) before income taxes consists of the following
(amounts in thousands):
<TABLE>
<CAPTION>
Predecessor
-------------------------------------
Eight months Four months
Ended Ended Year Ended Year Ended
December 31, April 30, December 31, December 31,
1998 1998 1997 1996
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Income (loss) before
income taxes:
United States......... $(5,764) $ (451) $ 6,129 $ (875)
Foreign .............. (517) 7,450 14,136 10,888
------- ------ ------- -------
$(6,281) $6,999 $20,265 $10,013
======= ====== ======= =======
</TABLE>
Actual income tax expense differs from the "expected" tax expense (computed
by applying the U.S. federal corporate rate of 35% to income before income
taxes) as a result of the following:
<TABLE>
<CAPTION>
Predecessor
-------------------------------------
Eight months Four months
Ended Ended Year Ended Year Ended
December 31, April 30, December 31, December 31,
1998 1998 1997 1996
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Computed "expected" tax
expense................ $(2,198) $2,450 $ 7,093 $ 3,505
Effect of foreign
operations............. 36 (136) (2,310) (1,091)
Valuation allowance--
domestic............... 2,017 160 (507) (210)
Valuation allowance--
foreign................ 2,075 252 -- --
Other................... (170) 173 540 416
------- ------ ------- -------
Income tax expense...... $ 1,760 $2,899 $ 4,816 $ 2,620
======= ====== ======= =======
</TABLE>
37
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Predecessor's income was included in Gillette's consolidated U.S. income
tax return. For financial reporting purposes, the Predecessor has provided for
income taxes on a separate-company basis. The components of the provision for
income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
Predecessor
-------------------------------------
Eight months Four months
Ended Ended Year Ended Year Ended
December 31, April 30, December 31, December 31,
1998 1998 1997 1996
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Current:
Federal................ $ -- $ -- $ 222 $(1,095)
Foreign:
Mexico............... (2,511) 2,524 4,717 3,391
Europe............... (245) 1,938 1,954
Other................ -- 854 127
------- ------ ------- -------
(2,756) 2,524 7,509 5,472
State.................. -- (170) (380)
------- ------ ------- -------
Total current...... (2,756) 2,524 7,561 3,997
Deferred--foreign........ 4,516 375 (2,745) (443)
------- ------ ------- -------
$ 1,760 $2,899 $ 4,816 $ 3,554
======= ====== ======= =======
</TABLE>
The above tables include the impact of $934,000 of income tax expense
recorded in 1996 resulting from the capital contribution by Gillette to the
Company related to the closure of the Brazil market (see Note 9).
The components of deferred income tax assets and deferred income tax
liabilities at December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Deferred income tax assets:
Accounts receivable....................................... $ 416 $ 584
Net operating loss carryforward........................... 7,056 --
Inventories............................................... -- 1,833
Sales promotion........................................... 2,904 1,946
Other accrued liabilities................................. 422 1,118
Property and equipment.................................... -- 1,274
Other..................................................... 906 1,319
-------- -------
Total deferred income tax assets........................ 11,704 8,074
Less valuation allowance.................................. (4,344) (965)
-------- -------
Net deferred income tax assets.......................... 7,360 7,109
Deferred income tax liabilities:
Transaction and deferred financing costs.................. (1,500)
Property and equipment.................................... (1,824)
Trademark................................................. (8,131)
Goodwill amortization..................................... (305) 0
Depreciation.............................................. -- (1,841)
Inventories............................................... (4,755) (5,979)
-------- -------
Total deferred income tax liabilities................... (16,515) (7,820)
-------- -------
Net deferred income tax liabilities..................... $ 9,155 $ (711)
======== =======
</TABLE>
38
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company records a valuation allowance on deferred income tax assets to
reduce the total to an amount that management believes will ultimately be
realized. The valuation allowances at December 31, 1998 and 1997 are based
upon the Company's estimates of the future realization of deferred income tax
assets. The Predessor had established a valuation allowance prior to 1995 as a
result of taxable losses incurred by the Predessor's domestic operations and a
determination by management that the deferred income tax assets could not be
fully utilized. In 1997, due to improvements in the Predessor's domestic
operations, the valuation allowance was reduced by 37% to an amount
representing 12% of the deferred income tax assets. Valuation allowances at
December 31, 1998 were provided to offset net operating loss carry-forwards of
the Company's U.S. and European operations.
(8) Benefit Plans
Predecessor Plans
Prior to the Company's acquisition of the Jafra Business, the Predecessor
participated in The Gillette Company Retirement Plan (the "Plan") which was a
defined benefit pension plan covering substantially all of Gillette's domestic
employees. Benefits were based on age, years of service and the level of
compensation during the final years of employment. Gillette's funding policy
was to contribute annually to the Plan the amount necessary to meet the
minimum funding standards established by the Employee Retirement Income
Security Act.
The components of Gillette's net pension expense for the Plan for the years
ended December 31, 1997 and 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Service cost........................................... $ 29,892 $ 28,828
Interest cost on projected benefit obligation.......... 60,245 55,731
Actual return on Plan assets........................... (184,649) (118,046)
Net amortization and deferral.......................... 116,569 64,129
--------- ---------
Pension expense...................................... $ 22,057 $ 30,642
========= =========
</TABLE>
The Predecessor's share of the above pension expense was $261,000 for the
four months ended April 30, 1998, $970,000 in 1997, and $1,223,000 in 1996.
The Predecessor's share of pension expense was based on the Predecessor's
payroll covered by the Plan as a percentage of total payroll covered by the
Plan.
The funded status of the Plan at December 31, 1997 and 1996 was as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Vested benefits........................................ $693,835 $629,252
Nonvested benefits..................................... 94,981 89,185
-------- --------
Accumulated benefit obligation....................... 788,816 718,437
Benefit obligation related to future compensation
levels................................................ 170,642 160,792
-------- --------
Projected benefit obligation......................... 959,458 879,229
Fair value of Plan assets, invested primarily in
equities and debt securities.......................... 990,026 815,737
-------- --------
Projected benefit obligation in excess of Plan
assets.............................................. 30,568 (63,492)
Unrecognized transition obligation..................... 1,648 1,097
Unrecognized prior service cost........................ 11,478 7,750
Unrecognized net loss.................................. 9,178 97,173
Minimum liability adjustment........................... (25,459) (25,828)
-------- --------
Gillette's prepaid pension cost........................ $ 27,413 $ 16,700
======== ========
</TABLE>
39
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The primary assumptions used in determining obligations of the Plan were as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Discount rate.................................................... 7.00% 7.00%
Increase in compensation levels.................................. 5.00% 5.00%
Long-term rate of return on assets............................... 9.00% 9.00%
==== ====
</TABLE>
The Predecessor also participated in Gillette's plans which provided certain
health care and life insurance benefits to retired employees. Substantially
all of the Predecessor's employees became eligible for these benefits upon
retirement. At the time of retirement, employees who elect to participate are
required to pay some portion of such medical costs if hired before July 1,
1990, or all of such costs if hired after that date. Gillette's employee stock
ownership plan (ESOP) was established to assist employees who retire after
January 1, 1992 to finance their retiree medical costs.
The Predecessor recognized the cost of postretirement benefits other than
pensions during employees' active working lives. The components of Gillette's
net other postretirement benefit expense for the years ended December 31, 1997
and 1996 follow (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Interest cost.............................................. $17,008 $19,181
Service cost............................................... 4,758 1,652
Actual return on assets.................................... (6,010) (3,543)
Net amortization expense................................... (3,631) (906)
------- -------
Other postretirement benefit expense..................... $12,125 $16,384
======= =======
</TABLE>
The Predecessor's share of the above other postretirement benefit expense
was $37,000 for the four months ended April 30, 1998, $128,000 in 1997 and
$205,000 in 1996. The status of Gillette's plans and the amounts recognized in
Gillette's balance sheets follow (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Retirees.................................................. $162,739 $171,854
Fully eligible active employees........................... 18,356 25,341
Other active employees.................................... 66,735 69,126
-------- --------
Accumulated postretirement benefit obligation........... 247,830 266,321
Fair value of plan assets................................. (33,249) (24,000)
Unrecognized net gain..................................... 86,947 67,636
-------- --------
Gillette's accrued postretirement liability............... $301,528 $309,957
======== ========
</TABLE>
The accumulated postretirement benefit obligation was determined using an
assumed discount rate of 7.00% in 1997 and 1996. The assumed health care cost
trend rate was 9% in 1997 and 10% in 1996, decreasing to 5% by the year 2001.
A one percentage point increase in the trend rate would have increased
Gillette's accumulated postretirement benefit obligation by 12% and interest
and service cost by 14% in 1997.
ESOP shares allocated to participants reduce Gillette obligations over the
period of allocation. The account balance is assumed to have an annual yield
of 12%. In addition, Gillette established a retiree health benefits account
within its pension plan that will be used to partially fund health care
benefits for future retirees.
40
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company Plans
Certain of the Company's German employees participate in the Germany Plan,
which is a defined benefit pension plan covering key employees. Benefits are
based on age, years of service and the level of compensation during the final
years of employment. The Company's funding policy is to contribute annually to
the Germany Plan the amount necessary to meet the minimum funding standards.
The total pension expense was $11,000 for the eight months ended December 31,
1998, $129,000 for the four months ended April 30, 1998, $140,000 for the year
ended December 31,1997 and $245,000 for the year ended December 31, 1996.
Under Mexican labor laws, employees of Jafra S.A. and its subsidiaries are
entitled to a payment when they leave the Company if they have fifteen or more
years of service. In addition, the Company makes government mandated employee
profit sharing distributions equal to ten percent of the taxable income of the
company in which they work.
The Company's U.S. subsidiary has an employee savings plan which permits
participants to make voluntary contributions by salary reductions pursuant to
section 401(k) of the Internal Revenue Code. Employees may defer up to 15% of
their total compensation, subject to statutory limitations. Employee
contributions of up to 10% of compensation are matched by the Company at the
rate of 50 cents per dollar. Employees do not vest in the Company contribution
until they have reached two years of service, at which time they become fully
vested. The Company's expense under this program was $420,000 for the eight
months ended December 31, 1998.
The Company's U.S. subsidiary also has a supplemental excess benefit savings
plan which permits participants to make voluntary contributions of up to 15%
of their total compensation. Employee contributions are matched on the same
basis as under the employee savings plan, and the vesting provisions are the
same. The Company's expense under this program was $17,000 for the eight
months ended December 31, 1998.
(9) Related Party Transactions
CD&R received a fee of $2.7 million, which was recorded as a direct
acquisition cost, for providing services related to the structuring,
implementation and consummation of the Acquisition, in addition to the
reimbursement of out-of-pocket expenses. Pursuant to a consulting agreement
entered into following the Acquisition, until the 10th anniversary of the
Acquisition or the date on which CD&R Fund V no longer has an investment in
the Company, CD&R will receive an annual fee of $500,000 (and reimbursement of
out-of-pocket expenses) for providing advisory, management consulting and
monitoring services to the Company. The pro-rated portion of the CD&R fee
recognized in the eight months ended December 31, 1998 was $333,000. In
addition, certain officers and directors of CD&R or its affiliates serve as
directors of the Company. Certain directors and other persons purchased an
aggregate of 21,000 shares of common stock in connection with the Acquisition
as of September 30, 1998.
Members of management financed a portion of the cash purchase price of the
shares of Company common stock they acquired through loans from the Chase
Manhattan Bank on market terms. To help members of management obtain such
terms for such financing, the Company fully and unconditionally guaranteed up
to 75% of the purchase price for the shares of Company common stock purchased
by each such member of management.
In April of 1998, the Predecessor sold land in Mexico to Gillette with a
book value of approximately $6 million for $12 million. The excess of the
sales price over the book value of the land, net of taxes, was recorded as a
contribution of capital from Gillette to the Predecessor. Prior to the closing
date of the Acquisition, intercompany accounts receivable and accounts payable
between Predecessor entities and Gillette were forgiven, and as such were
accounted for as direct reductions from (additions to) equity, respectively.
Certain expenses were charged by Gillette to the Predecessor prior to the
Acquisition. Management believes the amounts and methods of allocation were
reasonable and approximated actual services provided. The
41
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
allocations were based principally upon a formula using the percentage of
revenues of the Predecessor to the total consolidated revenues of Gillette.
Management performed regular reviews of the allocated costs and has determined
that the cost of these services to the Predecessor, as if it were a stand-
alone entity, would be comparable to the costs allocated to it by Gillette.
Such services included legal, trademark and patent support, internal audit,
and other administrative costs. Total related net charges were $748,000 for
the four months ended April 30, 1998, $2,045,000 for 1997, and $2,495,000 for
1996. Such charges are included in selling, general, and administrative
expenses in the accompanying consolidated statements of operations. Such
allocations ceased upon consummation of the Acquisition, and, as such, no
amounts are included for the eight months ended December 31, 1998.
Interest was charged and earned on intercompany receivables and payables
between Gillette and the Predecessor at the LIBOR rate prior to the
Acquisition. The total related interest was $152,000 for the four months ended
April 30, 1998, $592,000 for 1997, and $41,000 for 1996, and is included in
interest, net, in the accompanying consolidated statements of operations.
The Predecessor recognized profit on the sale of inventory to Gillette of
$157,000 for the four months ended April 30, 1998.
Gillette acted as a cash manager for the Predecessor prior to the
Acquisition. As such, balances due to/from Gillette and other divisions
consisted of amounts related to this and to the above transactions.
During 1997, Jafra Cosmetics International, Inc. wrote off approximately
$3,200,000 of payables due from its affiliate in Canada, as a result of the
decision to close the market in Canada. The division in Canada recorded this
as a credit to earnings. Accordingly, these transactions offset in
combination.
During 1996, $3,580,000 of debt due to an affiliate of Gillette by Jafra
Brazil was forgiven in connection with the divestiture of the Brazil market.
This amount, net of the $934,000 income tax effect, was recorded as a capital
contribution by Gillette to the Company. All other assets and liabilities were
liquidated with a nominal impact on the combined financial statements.
(10) Reorganization and Other Non-Recurring Charges and Related Accruals
Selling, general and administrative expenses for the years ended December
31, 1997 and 1996 included net non-recurring reorganization charges of $0.4
million and $6.1 million, respectively. In conjunction with the Acquisition in
1998, the Company recorded a $4.0 million accrual for restructuring and
rationalization costs which was accrued as an acquisition cost, and therefore
was not reflected as a charge against income from operations.
The net non-recurring charges in 1997 were comprised of reorganization costs
of $3.5 million, which were offset by recovery through litigation of $2.3
million of costs relating to an improper installation of certain proprietary
computer systems, and a gain of $0.8 million on the sale of a facility which
had previously been written off.
The net non-recurring charges in 1996 were comprised of reorganization costs
of $2.4 million and a loss of $5.4 million relating to improper installation
of certain proprietary computer systems, partially offset by a $1.7 million
gain on the sale of a building in Mexico. In 1996, the Company decided to
cease the development and installation of certain proprietary computer systems
due to the failure of the outside contractor to properly install and support
the system. It was determined that the Company would never gain any benefit
from these assets, and that the net book value of the assets (including
hardware, software, and related installation costs) was not recoverable. The
$5.4 million loss recorded by the Company represented the net book value of
the related assets at the time of management's decision.
42
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The $4.0 million restructuring and rationalization accrual recorded in the
purchase price allocation in connection with the Acquisition relates to the
planned realignment of all aspects of the Company subsequent to the
Acquisition. As of the consummation of the Acquisition, senior management
began formulating a plan to close certain distribution facilities and
involuntarily terminate certain employees. Certain programs were finalized
late in 1998, with the remainder expected to be finalized by April 30, 1999.
No adjustment has been made to the restructuring liability as of December 31,
1998, and management does not believe that the finalization of such plans will
result in an adjustment to the restructuring liability.
Approximately $1.1 million of costs are for closure and/or relocation of
certain distribution facilities and other exit costs, and approximately $2.9
million of costs are for severance. The restructuring and rationalization
activities are not expected to have a material effect on the Company's
operations. All such restructuring and rationalization activities are expected
to be substantially completed by June of 1999. In the eight months ended
December 31, 1998, approximately $0.7 million of severance costs and $0.1
million of facilities closure costs were charged against the restructuring
accrual.
The $3.5 million of reorganization costs in 1997 were comprised of $2.6
million of costs to realign operations in Italy and South American markets, as
well as $0.9 million of costs to close the Hungary and Canada markets. These
costs were principally for severance, closure (lease costs) and other exit
costs. These programs were adopted in early 1997 and the majority of payments
associated with these programs were made prior to the end of 1997.
The $2.4 million of reorganization costs incurred in 1996 related to
severance, legal and exit payments to exit the Brazilian market. This decision
was made in early 1996 and the majority of the payments were made prior to the
end of 1996. No impairment writedowns were necessary relating to the
operations which were closed in Hungary, Canada, and Brazil.
As discussed above, the components of the additions to the aforementioned
accruals include severance, lease and other exit costs, and are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
Predecessor
-------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Severance............................................... $2,900 $2,860 $1,480
Lease costs............................................. 1,100 520 690
Other................................................... 120 230
------ ------ ------
$4,000 $3,500 $2,400
====== ====== ======
</TABLE>
A rollforward of the activity of the restructuring accruals is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
Predecessor
Eight Months -------------------------
Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Opening balance....................... $ -- $ 380 $ 740
New additions......................... 4,000 3,500 2,400
Charges against reserves.............. (838) (3,590) (2,760)
------ ------- -------
Ending balance........................ $3,162 $ 290 $ 380
====== ======= =======
</TABLE>
43
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The remaining costs at each year end included in the restructuring accrual
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Predecessor
-------------------------
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Severance............................. $2,154 $140 $275
Lease costs........................... 1,008 150 75
Other................................. -- -- 30
------ ---- ----
$3,162 $290 $380
====== ==== ====
</TABLE>
The costs included in "Other" are principally legal costs associated with
establishing severance agreements in international markets. The remaining
balance at the end of 1997 was paid in the first quarter of 1998.
The principal component of the restructuring reserves is severance. A
summary of the severance activity is as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
Predecessor
Eight months ------------------------------------
ended December Year ended Year ended
31, 1998 December 31, 1997 December 31, 1996
---------------- ----------------- -----------------
# of # of # of
Employees Amount Employees Amount Employees Amount
--------- ------ --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Opening balance......... -- -- 10 $ 275 45 $ 620
Planned terminations.... 85 $2,900 145 2,860 80 1,480
Actual terminations..... (38) (886) (147) (2,995) (115) (1,825)
--- ------ ---- ------- ---- -------
Ending balance.......... 47 $2,014 8 $ 140 10 $ 275
=== ====== ==== ======= ==== =======
</TABLE>
The eight planned employee terminations as of December 31, 1997 occurred
during the four months ended April 30, 1998, at a total cost of $140,000.
The operations of the markets that were restructured or eliminated were not
material to the combined financial statements; accordingly, separate financial
information on these markets has not been provided.
(11) Financial Reporting for Business Segments
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" (SFAS
131). SFAS 131 requires disclosure of certain information regarding operating
segments, products and services, geographic areas of operations and major
customers.
The Company's business is comprised of one industry segment, direct selling,
with worldwide operations. Jafra has three reportable business segments: the
U.S. (JCI), Mexico (Jafra S.A.), 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. They are managed
separately because each geographic market has specific cultural and
demographic considerations that impact the sales and marketing of the
Company's products.
JCI and Jafra S.A. have each guaranteed the obligations under the Notes
which were issued in conjunction with the Acquisition on April 30, 1998. The
following consolidating financial statement data segregate between those
entities that guarantee the Notes ("Guarantor entities") and those entities
that do not guarantee the Notes ("Nonguarantor entities"); in addition,
European business segment information is separately disclosed in accordance
with SFAS 131. Prior to the Acquisition, JCI and Jafra S.A. were Jafra
Cosmetics International, Inc.,
44
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
a California corporation, and Grupo Jafra, respectively, as defined below. The
Nonguarantor entities are the Parent's indirect European subsidiaries in
Germany, the Netherlands, Switzerland, Italy and Austria and its indirect
South American subsidiaries in Colombia, Argentina and Venezuela.
The combined financial statements of the Predecessor for the four months
ended April 30, 1998, and the years ended December 31, 1997 and 1996 include
the accounts of the following subsidiaries of Gillette: Jafra Cosmetics
International, Inc., a California corporation (the Guarantor entity); Jafra
Cosmetics GmbH, a German company; Jafra Cosmetic International B.V., a
Netherlands company; Jafra Cosmetics S.p.A., an Italian company; Jafra
Cosmetics A.G., a Swiss company; the Jafra-related operations of a Gillette
affiliate in Austria; and the assets related to the Jafra intellectual
properties, held by Gillette, that are used in the Jafra Business
(collectively, the Nonguarantor entities). Additionally, the combined
financial statements of Grupo Jafra include the accounts of Grupo Jafra and
all of its subsidiaries together with certain operating assets and the related
operating profit of Gillette Braun used in the Jafra Business in Mexico and
the assets related to the Jafra intellectual properties held by Gillette.
Prior to the Acquisition, Jafra's operations in Argentina, Venezuela and
Colombia were not separate subsidiaries of the Company, but rather divisions
of Gillette subsidiaries that also conducted operations unrelated to the Jafra
Business. The accompanying financial statements include only the carved out
financial statements related to the Jafra Business of the South American
entities. As such, for the four months ended April 30, 1998 and the years
ended December 31, 1997 and 1996, the results of operations and cash flows of
the Jafra Business in these countries and the immaterial results of operations
and cash flows of certain markets divested by Jafra prior to the Acquisition
are presented in the column denoted "Other Regions."
45
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Consolidating condensed statement of operations data for the eight months
ended December 31, 1998, and combining condensed statement of operations data
for the four months ended April 30, 1998, and the years ended December 31,
1997 and 1996 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Eight months ended December 31, 1998
-------------------------------------------------------------------------
Nonguarantor
Guarantor Entities Entities
---------------------------- ----------------
JCI Jafra S.A. Total
(U.S.) (Mexico) Total Europe Other Eliminations Consolidated
------- ---------- -------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $50,695 $82,837 $133,532 $27,178 $10,309 $ -- $171,019
Cost of sales........... 14,157 25,603 39,760 7,715 2,706 602 50,783
------- ------- -------- ------- ------- ----- --------
Gross profit............ 36,538 57,234 93,772 19,463 7,603 (602) 120,236
Selling, general and
administrative
expenses............... 36,339 44,385 80,724 22,657 9,608 4 112,993
------- ------- -------- ------- ------- ----- --------
Income (loss) from
operations............. 199 12,849 13,048 (3,194) (2,005) (606) 7,243
Other expense (income).. 5,963 6,987 12,950 912 (339) 1 13,524
------- ------- -------- ------- ------- ----- --------
Income (loss) before
income taxes........... (5,764) 5,862 98 (4,106) (1,666) (607) (6,281)
Income taxes (benefit).. -- 1,948 1,948 (245) 57 -- 1,760
------- ------- -------- ------- ------- ----- --------
Net income (loss)....... $(5,764) $ 3,914 $ (1,850) $(3,861) $(1,723) $(607) $ (8,041)
======= ======= ======== ======= ======= ===== ========
</TABLE>
<TABLE>
<CAPTION>
Four months ended April 30, 1998
------------------------------------------------------------------------
Guarantor Entities
---------------------------- Nonguarantor
JCI Grupo Jafra Entities Other Total
(U.S.) (Mexico) Total (Europe) Regions Eliminations Combined
------- ----------- ------- ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $23,611 $35,722 $59,333 $13,047 $4,902 $ -- $77,282
Cost of sales........... 6,415 9,984 16,399 2,962 856 105 20,322
------- ------- ------- ------- ------ ----- -------
Gross profit............ 17,196 25,738 42,934 10,085 4,046 (105) 56,960
Selling, general and
administrative
expenses............... 16,783 20,201 36,984 10,743 3,792 -- 51,519
------- ------- ------- ------- ------ ----- -------
Income (loss) from
operations............. 413 5,537 5,950 (658) 254 (105) 5,441
Other expense (income).. 864 (2,791) (1,927) 353 16 -- (1,558)
------- ------- ------- ------- ------ ----- -------
Income (loss) before
income taxes........... (451) 8,328 7,877 (1,011) 238 (105) 6,999
Income taxes (benefit).. 1 2,524 2,525 374 -- -- 2,899
------- ------- ------- ------- ------ ----- -------
Net income (loss)....... $ (452) $ 5,804 $ 5,352 $(1,385) $ 238 $(105) $ 4,100
======= ======= ======= ======= ====== ===== =======
</TABLE>
46
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year ended December 31, 1997
------------------------------------------------------------------------
Guarantor Entities
---------------------------- Nonguarantor
JCI Grupo Jafra Entities Other Total
(U.S.) (Mexico) Total (Europe) Regions Eliminations Combined
------- ----------- -------- ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $70,637 $97,577 $168,214 $46,806 $14,504 $ -- $229,524
Cost of sales........... 18,519 27,124 45,643 9,638 3,848 -- 59,129
------- ------- -------- ------- ------- ------- --------
Gross profit............ 52,118 70,453 122,571 37,168 10,656 -- 170,395
Selling, general and
administrative
expenses............... 44,892 54,090 98,982 36,451 13,314 1,587 150,334
------- ------- -------- ------- ------- ------- --------
Income (loss) from
operations............. 7,226 16,363 23,589 717 (2,658) (1,587) 20,061
Other expense (income).. 1,097 591 1,688 170 (3,237) 1,175 (204)
------- ------- -------- ------- ------- ------- --------
Income (loss) before
income taxes........... 6,129 15,772 21,901 547 579 (2,762) 20,265
Income taxes (benefit).. 52 1,972 2,024 1,938 854 -- 4,816
------- ------- -------- ------- ------- ------- --------
Net income (loss)....... $ 6,077 $13,800 $ 19,877 $(1,391) $ (275) $(2,762) $ 15,449
======= ======= ======== ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1996
--------------------------------------------------------------------------
Guarantor Entities
----------------------------- Nonguarantor
JCI Grupo Jafra Entities Other Total
(U.S.) (Mexico) Total (Europe) Regions Eliminations Combined
------- ----------- -------- ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $72,594 $79,548 $152,142 $60,202 $12,200 $ -- $224,544
Cost of sales........... 17,872 24,696 42,568 12,296 3,352 -- 58,216
------- ------- -------- ------- ------- ------- --------
Gross profit............ 54,722 54,852 109,574 47,906 8,848 -- 166,328
Selling, general and
administrative
expenses............... 54,401 43,280 97,681 47,219 10,253 1,447 156,600
------- ------- -------- ------- ------- ------- --------
Income (loss) from
operations............. 321 11,572 11,893 687 (1,405) (1,447) 9,728
Other expense (income).. 1,196 (2,014) (818) 269 (935) 1,199 (285)
------- ------- -------- ------- ------- ------- --------
Income (loss) before
income taxes........... (875) 13,586 12,711 418 (470) (2,646) 10,013
Income taxes (benefit).. (1,475) 2,948 1,473 1,954 (807) -- 2,620
------- ------- -------- ------- ------- ------- --------
Net income (loss)....... $ 600 $10,638 $ 11,238 $(1,536) $ 337 $(2,646) $ 7,393
======= ======= ======== ======= ======= ======= ========
</TABLE>
47
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Consolidating condensed balance sheet data as of December 31, 1998 and
combining condensed balance sheet data as of December 31, 1997 is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
As of December 31, 1998
-------------------------------------------------------------------------------
Nonguarantor
Guarantor Entities Entities
------------------------------------- ---------------
JCI Jafra S.A. Total
(U.S.) (Mexico) Parent Total Europe Other Eliminations Consolidated
-------- ---------- ------- -------- ------- ------- ------------ ------------
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Receivables........... $ 6,601 $ 12,654 $ -- $ 19,255 $ 3,620 $ 1,574 $ -- $ 24,449
Inventories........... 12,323 12,684 -- 25,007 5,350 3,440 (602) 33,195
Other current assets.. 24,778 21,130 14 45,922 4,919 6,727 (27,727) 29,841
-------- -------- ------- -------- ------- ------- --------- --------
Total current
assets.............. 43,702 46,468 14 90,184 13,889 11,741 (28,329) 87,485
Property and
equipment............ 25,075 28,380 -- 53,455 2,640 143 -- 56,238
Other assets:
Goodwill, net........ 33,190 31,971 -- 65,161 8,869 865 -- 74,895
Trademarks........... 20,650 26,550 197 47,397 5,587 250 -- 53,234
Other................ 15,000 6,006 75,678 96,684 1,311 84 (81,297) 16,782
-------- -------- ------- -------- ------- ------- --------- --------
Total................ $137,617 $139,375 $75,889 $352,881 $32,296 $13,083 $(109,626) $288,634
======== ======== ======= ======== ======= ======= ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued expenses..... $ 21,472 $ 27,931 $ (255) $ 49,148 $ 7,918 $ 3,992 $ (970) $ 60,088
Other current
liabilities.......... 1,500 11,273 101 12,874 17,151 1,202 (26,757) 4,470
-------- -------- ------- -------- ------- ------- --------- --------
Total current
liabilities......... 22,972 39,204 (154) 62,022 25,069 5,194 (27,727) 64,558
Total long term debt.... 85,000 54,000 -- 139,000 -- -- -- 139,000
Other liabilities....... -- 8,073 -- 8,073 1,562 -- -- 9,635
-------- -------- ------- -------- ------- ------- --------- --------
Total liabilities....... 107,972 101,277 (154) 209,095 26,631 5,194 (27,727) 213,193
Stockholders' equity.... 29,645 38,098 76,043 143,786 5,665 7,889 (81,899) 75,441
-------- -------- ------- -------- ------- ------- --------- --------
Total................ $137,617 $139,375 $75,889 $352,881 $32,296 $13,083 $(109,626) $288,634
======== ======== ======= ======== ======= ======= ========= ========
</TABLE>
48
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
As of December 31, 1997
----------------------------------------------------------------
Nonguarantor
Guarantor Entities Entities
------------------------- ----------------
Grupo
JCI Jafra Total
(U.S.) (Mexico) Total Europe Other Eliminations Combined
------- ------- -------- ------- ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Receivables............ $ 4,090 $14,323 $ 18,413 $ 6,225 $ 2,660 $ -- $ 27,298
Inventories............ 17,452 10,329 27,781 8,635 3,031 (1,419) 38,028
Due from parent
company............... 14,192 14,270 28,462 17,457 8,583 (14,617) 39,885
Other current assets... 2,057 8,310 10,367 2,445 236 380 13,428
------- ------- -------- ------- ------- -------- --------
Total current
assets.............. 37,791 47,232 85,023 34,762 14,510 (15,656) 118,639
Property and
equipment............. 17,369 23,980 41,349 1,497 836 -- 43,682
Other assets........... 350 11,820 12,170 1,018 822 (1,081) 12,929
------- ------- -------- ------- ------- -------- --------
Total................ $55,510 $83,032 $138,542 $37,277 $16,168 $(16,737) $175,250
======= ======= ======== ======= ======= ======== ========
LIABILITIES AND
DIVISIONAL EQUITY
Current liabilities:
Accounts payable and
accrued expenses...... $11,011 $15,461 $ 26,472 $ 6,471 $ 3,028 $ (587) $ 35,384
Due to parent.......... 14,621 13,347 27,968 21,418 12,155 (16,101) 45,440
Other current
liabilities........... 2,364 2,852 5,216 10,625 -- (639) 15,202
------- ------- -------- ------- ------- -------- --------
Total current
liabilities......... 27,996 31,660 59,656 38,514 15,183 (17,327) 96,026
Other liabilities....... -- -- -- 1,900 20 -- 1,920
------- ------- -------- ------- ------- -------- --------
Total liabilities....... 27,996 31,660 59,656 40,414 15,203 (17,327) 97,946
Divisional equity....... 27,514 51,372 78,886 (3,137) 965 590 77,304
------- ------- -------- ------- ------- -------- --------
Total................ $55,510 $83,032 $138,542 $37,277 $16,168 $(16,737) $175,250
======= ======= ======== ======= ======= ======== ========
</TABLE>
Consolidating condensed statement of cash flows data for the eight months
ended December 31, 1998, and combining condensed statement of cash flows for
the four months ended April 30, 1998 and the years ended December 31, 1997 and
1996 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Eight months ended December 31, 1998
-----------------------------------------------------------------------------------
Nonguarantor
Guarantor Entities Entities
------------------------------------- -----------------
Jafra
JCI S.A. Total
(U.S.) (Mexico) Parent Total Europe Other Eliminations Consolidated
-------- -------- ------ --------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in)
Operating activities... $ (6,192) $ 23,601 $(178) $ 17,231 $ 2,517 $(1,634) $ -- $ 18,114
Investing activities... (90,366) (95,814) -- (186,180) (19,324) (5,643) -- (211,147)
Financing activities... 96,911 84,258 188 181,357 21,130 9,249 -- 211,736
Effect of exchange rate
changes on cash........ -- -- -- -- (575) 2 -- (573)
Cash at beginning of
period................. -- -- -- -- 176 52 -- 228
-------- -------- ----- --------- -------- ------- ---- ---------
Cash at end of period... $ 353 $ 12,045 $ 10 $ 12,408 $ 3,924 $ 2,026 $ -- $ 18,358
======== ======== ===== ========= ======== ======= ==== =========
</TABLE>
49
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Four months ended April 30, 1998
-----------------------------------------------------------------------
Guarantor Entities
--------------------------
Grupo Nonguarantor
JCI Jafra Entities Other Total
(U.S.) (Mexico) Total (Europe) Regions Eliminations Combined
------- -------- ------- ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in)
Operating activities... $ 1,361 $(7,425) $(6,064) $(7,860) $ 5,879 $ -- $(8,045)
Investing activities... (528) 546 18 (242) 2,814 -- 2,590
Financing activities... (1,138) (6,232) (7,370) 7,276 (8,685) -- (8,779)
Effect of exchange rate
changes on cash........ -- (181) (181) 364 (516) -- (333)
Effect of Accounting
Calendar change on cash
(Note 1)............... 6,358 6,358 (82) -- -- 6,276
Cash at beginning of
period................. 759 7,458 8,217 1,370 644 -- 10,231
------- ------- ------- ------- ------- ---- -------
Cash at end of period... $ 454 $ 524 $ 978 $ 826 $ 136 $ -- $ 1,940
======= ======= ======= ======= ======= ==== =======
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1997
-------------------------------------------------------------------------
Guarantor Entities
----------------------------
Grupo Nonguarantor
JCI Jafra Entities Other Total
(U.S.) (Mexico) Total (Europe) Regions Eliminations Combined
-------- -------- -------- ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in)
Operating activities... $ 13,467 $ 11,534 $ 25,001 $(4,031) $ 5,747 $ -- $ 26,717
Investing activities... (2,130) 4,162 2,032 (437) (7,395) -- (5,800)
Financing activities... (11,228) (13,220) (24,448) 4,347 1,110 -- (18,991)
Effect of exchange rate
changes on cash........ 158 (200) (42) (587) 272 -- (357)
Cash at beginning of
period................. 492 5,182 5,674 2,021 967 -- 8,662
-------- -------- -------- ------- ------- ---- --------
Cash at end of period... $ 759 $ 7,458 $ 8,217 $ 1,313 $ 701 $ -- $ 10,231
======== ======== ======== ======= ======= ==== ========
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1996
-------------------------------------------------------------------------
Guarantor Entities
---------------------------
Grupo Nonguarantor
JCI Jafra Entities Other Total
(U.S.) (Mexico) Total (Europe) Regions Eliminations Combined
------- -------- -------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in)
Operating activities... $ 5,286 $ 9,174 $ 14,460 $(4,107) $ (7,591) $ -- $ 2,762
Investing activities... (3,787) 24,133 20,346 (309) (24,545) -- (4,508)
Financing activities... (1,007) (30,000) (31,007) 2,246 33,802 -- 5,041
Effect of exchange rate
changes on cash........ -- (90) (90) (488) (1,585) -- (2,163)
Cash at beginning of
period................. -- 1,965 1,965 4,679 886 -- 7,530
------- -------- -------- ------- -------- ---- -------
Cash at end of period... $ 492 $ 5,182 $ 5,674 $ 2,021 $ 967 $ -- $ 8,662
======= ======== ======== ======= ======== ==== =======
</TABLE>
50
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Additional business segment information is as follows:
<TABLE>
<CAPTION>
United Total
States Mexico Europe Other Eliminations Consolidated
------ ------ ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Eight months ended
December 31, 1998:
Depreciation and
amortization........... $2,556 $1,810 $672 $ 51 $ -- $5,089
Amortization of deferred
financing fees......... 731 676 -- -- -- 1,407
Capital expenditures.... 890 2,052 333 175 -- 3,450
Four months ended April
30, 1998:
Depreciation and
amortization........... 740 275 236 112 -- 1,363
Capital expenditures.... 528 5,354 242 -- -- 6,124
Year ended December 31,
1997:
Depreciation and
amortization........... 2,030 1,719 612 -- -- 4,361
Capital expenditures.... 2,718 5,019 788 407 -- 8,932
Year ended December 31,
1996:
Depreciation and
amortization........... 1,721 1,431 68 97 -- 3,317
Capital expenditures.... 2,086 6,872 882 473 -- 10,313
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- --------------------------
Sales by Percentage Sales by Percentage Sales by Percentage
Product Line of total Product Line of total Product Line of total
($ in millions) sales ($ in millions) sales ($ in millions) sales
--------------- ---------- --------------- ---------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Color Cosmetics......... $ 70.9 28.6% $ 66.9 29.1% $ 63.3 28.2%
Skin Care............... 58.4 23.5 57.8 25.2 60.6 27.0
Body Care & Daily Use... 46.5 18.7 34.9 15.2 32.4 14.4
Fragrances.............. 47.3 19.0 40.8 17.8 36.2 16.1
Other (1)............... 25.2 10.2 29.1 12.7 32.0 14.3
------ ----- ------ ----- ------ -----
Total................. $248.3 100.0% $229.5 100.0% $224.5 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
- --------
(1) Includes sales aids (party hostess gifts, demonstration products, etc.) and
promotional materials.
(12) Commitments and Contingencies
The Company leases office and warehouse facilities as well as manufacturing,
transportation and data processing equipment under operating leases which
expire at various dates through March 2004. Future minimum lease payments under
noncancelable operating leases as of December 31, 1998 are (in thousands):
<TABLE>
<S> <C>
1999.............................................................. $1,815
2000.............................................................. 1,564
2001.............................................................. 1,437
2002.............................................................. 885
2003.............................................................. 863
Thereafter........................................................ 102
------
$6,666
======
</TABLE>
Rental expense amounted to $1,973,000, $951,000, $1,500,000, and $1,800,000
for the eight months ended December 31, 1998, the four months ended April 30,
1998, and the years ended December 31, 1997 and 1996, respectively.
51
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company is involved from time to time in routine legal matters
incidental to its business. The Company believes that the resolution of such
matters will not have a material adverse effect on the Company's business,
financial condition or results of operations.
(13) Management Incentive Arrangements
Company Plan
Effective as of the closing of the Acquisition, the Company adopted a stock
incentive plan (the "Stock Incentive Plan"), which provides for the sale to
members of senior management of up to 52,141 shares of common stock of the
Parent and the issuance of options to purchase up to 104,282 additional shares
of common stock. The Company has reserved 156,423 shares for issuance under
the Stock Incentive Plan. As of December 31, 1998, 39,340 shares have been
sold subject to the Stock Incentive Plan. The purchase price of such shares
was $100 per share, which represents the fair market value of each share based
on the aggregate equity value of Parent upon consummation of the Acquisition.
Under certain circumstances, the management stockholders can require the
Company to repurchase their shares in amounts not to exceed fair value.
In connection with the purchase of common stock of the Parent, on September
30, 1998, certain members of senior management were granted options to
purchase two additional shares of common stock for each share purchased at an
exercise price of $100, which represented the fair market value at the date of
grant. A total of 78,680 options were granted during 1998. As of December 31,
1998, no options have vested, been exercised or canceled, and as such all
options granted are currently outstanding and none are currently exercisable.
As of December 31, 1998, there were 25,602 additional options available for
grant.
A total of 39,340 options granted are expected to vest in three equal
installments on each of the first three anniversaries of the date of grant,
subject to the continuous employment of the grantee ("Option Type 1"). An
additional 39,340 options become vested as follows, subject to the continuous
employment of the grantee: (a) up to one-third of the options become vested as
of each of the first three anniversaries of the date of grant if the Company
achieves at least 85% of its EBITDA target for the immediately preceding
fiscal year, (b) if less than one-third of the total number of options shall
have become vested as provided in clause (a) above, the portion that has not
become so vested shall become vested as of the first day of the fiscal year
following the fiscal year, if any, that the Company achieves its cumulative
EBITDA target, and (c) any options that do not become vested as provided above
will become vested on the ninth anniversary of the date of grant ("Option
Type 2"). The options have a life of ten years from the date of grant, and the
remaining life as of December 31, 1998 is 9.75 years.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for these options. As the options were granted with exercise prices
equal to the fair market value at the date of grant, no compensation cost was
recognized by the Company. The fair value of each option granted by the
Company was estimated using the Black Scholes option pricing model as follows,
with the following assumptions used for grants in 1998:
<TABLE>
<CAPTION>
Option Option
Type 1 Type 2
------ ------
<S> <C> <C>
Risk-free interest rate ....................................... 4.2% 4.2%
Expected option life (in years)................................ 5.0 9.0
Expected volatility............................................ 0.0% 0.0%
Expected dividend yield........................................ 0.0% 0.0%
</TABLE>
The weighted average fair value of options granted during 1998 was $18.88
and $31.39 for Option Type 1 and Option Type 2, respectively.
52
<PAGE>
CDRJ INVESTMENTS (LUX) S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Predecessor Plan
In 1997 and 1996, certain key employees of the Predecessor were granted
options to purchase stock of The Gillette Company. There were no options
granted during the four months ended April 30, 1998. The Predecessor applied
APB Opinion No. 25 and related Interpretations in accounting for these
options. As the options were granted with exercise prices equal to or greater
than the fair market value at the date of grant, no compensation cost was
allocated to the Predecessor. The fair value of each option granted by
Gillette was estimated using the Black Scholes option pricing model, with the
following assumptions used for grants in 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Risk-free interest rate.......................................... 6.6% 6.5%
Expected option life (in years).................................. 4.6 4.6
Expected volatility.............................................. 19.2% 22.0%
Expected dividend yield.......................................... 0.9% 1.2%
</TABLE>
A summary of the activity of the Gillette Company options held by employees
of the Predecessor is as follows (thousands of shares):
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
Weighted Ave. Weighted Ave.
Exercise Exercise
Shares Price Shares Price
------ ------------- ------ -------------
<S> <C> <C> <C> <C>
Outstanding at beginning of
year............................ 612 $37.00 586 $32.00
Granted.......................... 98 93.00 108 61.00
Exercised........................ (128) 30.00 (76) 26.00
Canceled......................... (2) 66.00 (6) 38.00
---- ------ --- ------
Outstanding at year-end.......... 580 54.00 612 37.00
Options exerciseable at year-
end............................. 464 428
Weighted average fair value of
options granted during
the year........................ $25.00 $17.00
</TABLE>
Pro Forma Compensation Cost
Had the Company and the Predecessor recorded compensation cost based on the
fair value of options granted at the grant date, as prescribed by FASB
Statement 123, pro forma net income would have been as follows (in thousands):
<TABLE>
<CAPTION>
Predecessor
Eight months -------------------------
ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net income, as reported............... $(8,041) $15,449 $7,393
Pro forma compensation cost........... 148 2,800 1,800
------- ------- ------
Pro forma net income.................. $(8,189) $12,649 $5,593
======= ======= ======
</TABLE>
Employment Agreements
Certain senior executive officers have employment agreements which provide
for annual bonuses if the Company achieves the performance goals established
under its annual incentive plan for executives.
53
<PAGE>
JAFRA COSMETICS INTERNATIONAL (PREDECESSOR)
Schedule II--Valuation and Qualifying Accounts
For the Four Month period ended April 30, 1998
and the Years ended December 31, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Additions
-------------------
Balance charged to charged Balance
at beginning costs and to other Deductions- at end
Description of period expenses accounts recoveries of period
- ----------- ------------ ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Accounts Receivable:
January 1-April 30,
1998 2,057 1,982 1,902 2,137
1997 1,919 158 20 2,057
1996 1,749 260 90 1,919
Inventories:
January 1-April 30,
1998 1,628 733 220 2,141
1997 2,314 240 926 1,628
1996 2,280 34 -- 2,314
</TABLE>
CDRJ INVESTMENTS (LUX) S.A.
Schedule II--Valuation and Qualifying Accounts
For the Eight Month period ended December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Additions
-------------------
Balance charged to charged Balance
at beginning costs and to other Deductions- at end
Description of period expenses accounts recoveries of period
- ----------- ------------ ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Accounts Receivable:
May 1-December 31, 1998 2,137 3,951 3,804 2,284
Inventories:
May 1-December 31, 1998 7,089(1) 922 3,111 4,900
</TABLE>
- --------
(1) Increase in inventory reserves of $4,948 over Predecessor's balance at
April 30, 1998 represents certain purchase accounting entries recorded in
connection with the Acquisition.
54
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The names, ages and positions of the executive officers and directors of the
Company as of March 15, 1999 are set forth below.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Ronald B. Clark......... 63 Chairman and Chief Executive Officer; Director
Gonzalo R. Rubio........ 55 President and Chief Operating Officer; Director
Ralph S. Mason, III..... 47 Vice Chairman, Executive Vice President and General Counsel
James Brill............. 47 Chief Financial Officer
Michael DiGregorio...... 44 President of United States Operations
Eugenio Lopez Barrios... 57 President of Mexican Operations
Jose Luis Peco.......... 53 President of Europe Operations
Jaime Lopez Guirao...... 51 President of Global Operations
Alan Fearnley........... 48 Senior Vice President of Global Marketing
Donald J. Gogel......... 49 Director
Steven D. Goldstein..... 47 Director
Thomas E. Ireland....... 49 Director
David A. Novak.......... 30 Director
Paul Orfalea............ 51 Director
Ann Reese............... 45 Director
Edward H. Rensi......... 54 Director
Kenneth D. Taylor....... 64 Director
</TABLE>
Ronald B. Clark currently serves as a director and the Chairman and Chief
Executive Officer of the Company. Mr. Clark served from 1996 to 1997 as
President, Richmont Europe (Mary Kay Holding Company). From 1992 to 1995, he
was President of Mary Kay Europe. Prior to that, he served as Executive Vice
President of Primerica Corp., President of Jafra Cosmetics International,
Inc., and Vice President of Avon Products, Inc. Mr. Clark's employment
agreement provides that he shall be a director of Parent during the term of
his employment.
Gonzalo R. Rubio currently serves as a director and the President and Chief
Operating Officer of the Company. Mr. Rubio served from 1992 to 1997 as Area
Vice President and later President of the European operations of Mary Kay Inc.
and was employed by Avon Products Inc. from 1970 to 1992, serving alternately
as Area Director for Europe, International Operations Director and Area
Director for Latin America. Mr. Rubio's employment agreement provides that he
shall be a director of Parent during the term of his employment.
Ralph S. Mason, III currently serves as the Vice Chairman, Executive Vice
President and General Counsel of the Company. For more than the prior five
years, Mr. Mason was the senior and founding partner at Mason, Taylor &
Colicchio, a law firm in Princeton, New Jersey.
James Brill serves as Chief Financial Officer of the Company. From 1996 to
1998, Mr. Brill served as Vice President, Finance and Administration and Chief
Financial Officer of Vertel Corporation. From 1988 to 1996, Mr. Brill was
employed by Merisel, Inc., serving as Senior Vice President, Finance, Chief
Financial Officer, and a Director.
55
<PAGE>
Michael DiGregorio currently serves as President of United States Operations
of the Company. From 1995 to 1998, Mr. DiGregorio served as Financial Director
and General Manager of Jafra Mexico. From 1993 to 1995, Mr. DiGregorio served
as Vice President, Treasurer and Chief Financial Officer of Atlantis Plastics,
Inc.
Eugenio Lopez Barrios currently serves as President of Mexican Operations of
the Company. From 1993 to 1998, Mr. Barrios was President of Mary Kay Mexico.
Prior to that, Mr. Barrios was employed by Avon Products, Inc. for over 30
years, where he oversaw Operations in Mexico, South America and Central
America.
Jose Luis Peco currently serves as President of European Operations of the
Company. From 1994 to 1998, Mr. Peco served as Vice President of Europe
Operations for Mary Kay Cosmetics and President of Mary Kay Cosmetics--Iberia.
Prior to that, Mr. Peco served as Controller and Financial Director for
various European Operations for Avon Products, Inc. for over 20 years.
Jaime Lopez Guirao serves as President, Global Operations. For more than the
prior five years, Mr. Guirao was employed by Avon Products, Inc., holding
several operational, management and Country President positions in Europe and
the Americas.
Alan Fearnley currently serves as Senior Vice President of Global Marketing
of the Company. From 1997 to 1998, Mr. Fearnley served as Vice President of
Marketing for Dermatologica. Prior to that, Mr. Fearnley took a year's
sabbatical to attend the Sloan Fellowship Masters Program at the London
Business School. During this sabbatical, Mr. Fearnley also served as
consultant to various companies. From 1987 to 1995, Mr. Fearnley served as
Senior Vice President of Global Marketing of Jafra.
Donald J. Gogel has been a director of the Company since January 1998. Mr.
Gogel has served as President and a director of CD&R since 1995 and, since
1989, has been a principal of CD&R. Mr. Gogel is also a limited partner of
CD&R Associates V Limited Partnership ("Associates V"), the general partner of
CD&R Fund V, and President and a director of CD&R Investment Associates II,
Inc. ("Investment Associates II"), a Cayman Islands exempted company that is
the managing general partner of Associates V. Mr. Gogel is a director of
Kinko's, Inc., a corporation in which Fund V has an investment, Alliant
Foodservice, Inc., and its parent, CDRF Holding, Inc., and APS Holding
Corporation, corporations in which an investment fund managed by CD&R has an
investment, Global Decisions Group, LLC, a limited liability company in which
an investment fund managed by CD&R has an investment, and Turbochef, Inc.
Steven D. Goldstein has been a director of the Company since July 1998 and
is the Chairman and Chief Executive Officer of Invenet, LLC. Prior to joining
Invenet, LLC, Mr. Goldstein was employed as President, Credit of Sears,
Roebuck & Co. From 1982 to 1996, Mr. Goldstein was employed by American
Express Co., serving as the Chairman and Chief Executive Officer of American
Express Bank.
Thomas E. Ireland has been a director of the Company since March 1998 and is
a principal of CD&R, a limited partner of Associates V and a shareholder of
Investment Associates II. From 1993 until joining CD&R in 1997, Mr. Ireland
served as a senior managing director of Alvarez & Marsal, Inc. Mr. Ireland
also serves on the board of directors of the Maine Coast Heritage Trust.
David A. Novak has been a director of the Company since January 1998, and is
a professional employee of CD&R and a limited partner of Associates V. Prior
to joining CD&R in 1997, Mr. Novak worked in the Merchant Banking and
Investment Banking Divisions of Morgan Stanley & Co. Incorporated and for the
Central European Development Corporation.
Paul Orfalea has been a director of the Company since July 1998 and is the
founder of Kinko's, Inc. For more than the prior five years, Mr. Orfalea has
been employed by Kinko's, Inc., serving as its Chairperson. Mr. Orfalea is
also a director of DataProse, Inc., Espresso Caffe Corp., Glendale Federal
Bank and Kinko's, Inc.
Ann Reese has been a director of the Company since July 1998. From 1992
until March 1998, Ms. Reese was employed by ITT Corporation, serving most
recently as Chief Financial Officer.
56
<PAGE>
Edward H. Rensi has been a director of the Company since July 1998. For more
than the prior five years, Mr. Rensi has been employed by McDonalds USA,
serving most recently as President and Chief Executive Officer. Mr. Rensi also
serves as a director of Snap-On Inc. and I.S.C. Corporation, and serves as a
member of the compensation committee of the board of directors of Snap-On Inc.
Kenneth D. Taylor has been a director of the Company since July 1998 and has
been the Chairman of Global Public Affairs, Inc. since October 1994. From 1991
to 1994, Mr. Taylor served as the Chairman of Taylor & Ryan, Inc.
At present, all directors will hold office until their successors are
elected and qualified, or until their earlier removal or resignation.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Of Executive Officers
The following table summarizes the annual and long-term compensation of the
Company's Chief Executive Officer and the four additional most highly
compensated executive officers of the Company (collectively, the "Named
Executive Officers") for the year ended December 31, 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation(3)
--------------------------------------- ---------------
Other Annual Securities All Other
Name and Principal Compensation Underlying Compensation
Position Year Salary($)(1) Bonus($)(2) ($) Options (#) ($)(4)
------------------ ---- ------------ ----------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Ronald B. Clark........ 1998 406,154(5) 360,000 -- 18,328 15,692
Chairman and Chief
Executive Officer
Gonzalo R. Rubio....... 1998 326,923(5) 300,000 -- 18,328 1,344
President and Chief
Operating Officer
Ralph S. Mason, III.... 1998 304,616(5) 270,000 263,082(6) 14,536 --
Vice Chairman,
Executive
Vice President and
General
Counsel
Jaime Lopez Guirao..... 1998 253,846(7) 870,000(8) -- 6,000 2,269
President of Global
Operations
Eugenio Lopez Barrios.. 1998 212,413(7) 240,000 -- 6,952 --
President of Mexican
Operations
</TABLE>
- --------
(1) Amounts represent cash compensation earned and received by executive
officers.
(2) Amounts represent cash bonuses which were accrued during the year shown.
With the exception of (8) described below, all bonuses were paid
subsequent to the end of such year.
(3) The Company has not granted any stock appreciation rights or restricted
stock awards and does not have any Long-Term Incentive Plans as that term
is defined in regulations promulgated by the SEC.
(4) Amounts shown in this column constitute contributions by the Company under
the Company's 401(k) and Supplemental Savings Plans.
(5) Messrs. Clark, Rubio, and Mason joined the Company on May 1, 1998.
57
<PAGE>
(6) Amount includes reimbursement for expenses of $258,347 incurred by Mr.
Mason in order to relocate to Company headquarters.
(7) Messrs. Guirao and Barrios joined the Company on June 1, 1998.
(8) Amount includes a $600,000 incentive bonus accrued in connection with the
hiring of Mr. Guirao, $300,000 of which was received during the year
shown. The remaining amount of Mr. Guirao's bonus was paid subsequent to
the end of such year.
Option Grants in 1998
The following table sets forth, for the Named Executive Officers,
information concerning stock options granted during the year ended December
31, 1998.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------
Potential
Realizable
Value at Assumed
Annual Rates of
Number of Percentage of Stock Price
Securities Total Options Exercise Appreciation for
Underlying Granted to or Base Option Term(1)
Options Employees in Price Expiration -------------------
Name Granted Fiscal Year ($/Sh) Date 5% 10%
- ---- ---------- ------------- -------- -------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ronald B. Clark......... 9,164(2) 11.5% $100 April 30, 2008 $576,319 $1,460,506
9,164(3) 11.5% 100 April 30, 2008 576,319 1,460,506
Gonzalo R. Rubio........ 9,164(2) 11.5% 100 April 30, 2008 576,319 1,460,506
9,164(3) 11.5% 100 April 30, 2008 576,319 1,460,506
Ralph S. Mason, III..... 7,268(2) 9.0% 100 April 30, 2008 457,081 1,158,332
7,268(3) 9.0% 100 April 30, 2008 457,081 1,158,332
Jaime Lopez Guirao...... 3,000(2) 4.0% 100 April 30, 2008 188,668 478,123
3,000(3) 4.0% 100 April 30, 2008 188,668 478,123
Eugenio Lopez Barrios... 3,476(2) 4.5% 100 April 30, 2008 218,604 553,985
3,476(3) 4.5% 100 April 30, 2008 218,604 553,985
</TABLE>
- --------
(1) Potential realizable value is based on an assumption that the price of the
Common Stock appreciates at the annual rate shown (compounded annually)
from the date of the grant until the end of the ten (10) year option term.
Potential realizable value is shown net of exercise price. These amounts
are calculated based on the regulations promulgated by the SEC and do not
reflect the Company's estimate of future stock price growth. The actual
future gains, if any, of the stock options will depend upon the future
appreciation of the market price of the Common Stock. This table should
not be viewed in any way as a forecast of the future performance of
Parent's stock, which will be determined by future events and unknown
factors.
(2) Subject to the continuous employment of the Named Executive Officer, the
options become vested in three equal annual installments on each of the
first three anniversaries of the date of grant, September 30, 1998.
(3) Subject to the continuous employment of the Named Executive Officer, the
options become vested as follows: (a) up to one-third of the options
become vested as of each of the first three anniversaries of the date of
grant, September 30, 1998, if the Company achieves at least 85% of its
EBITDA target for the immediately preceding fiscal year, (b) if less than
one-third of the total number of options shall have become vested as
provided in clause (a) above, the portion that has not become so vested
shall become vested as of the first day of the fiscal year following the
fiscal year, if any, that the Company achieves its cumulative EBITDA
target, and (c) any options that do not become vested as provided above
will become vested on September 30, 2007.
58
<PAGE>
Fiscal Year-End Option Value Table
The following table sets forth information for each Named Executive Officer
with regard to the aggregate value of options held at December 31, 1998. No
options were exercised by such executive officers during the year ended
December 31, 1998.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs at In-the-Money Options at
December 31, 1998 (#)(1) December 31, 1998 ($)(2)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ronald B. Clark....... -- 18,328 $ -- $ --
Gonzalo R. Rubio...... -- 18,328 -- --
Ralph S. Mason, III... -- 14,536 -- --
Jaime Lopez Guirao.... -- 6,000 -- --
Eugenio Lopez
Barrios.............. -- 6,952 -- --
</TABLE>
- --------
(1) The Company has not granted any stock appreciation rights and its stock
plan does not provide for the granting of such rights.
(2) Calculated based on a per share price of Parent Common Stock of $100, the
estimated fair market value as of December 31, 1998, less the per share
exercise price of $100.
Compensation Of Directors
During 1998, each outside director of the Company received $20,000 for
serving on the Board of Directors of the Company and was reimbursed for his or
her out-of-pocket expenses incurred in connection with attending board
meetings. The Company pays no additional remuneration to officers of the
Company or the principals or employees of CD&R for serving as directors.
Employment Agreements
The Company has employment agreements with each of the Named Executive
Officers. The employment agreements of Messrs. Clark, Rubio and Mason have an
initial term of three years that becomes a continuous "rolling" two year term
as of the first anniversary of the closing of the Acquisition (the "Closing").
The employment agreements of Messrs. Guirao and Barrios have a continuous
"rolling" term of two years, commencing as of the Closing. Pursuant to their
respective agreements, Messrs. Clark, Rubio, Mason, Guirao and Barrios receive
annual base salaries of $600,000, $500,000, $450,000, $450,000 and $400,000,
respectively. In addition, each of Messrs. Clark, Rubio, Mason, Guirao and
Barrios is eligible for a target annual bonus equal to 60% of such Named
Executive Officer's annual base salary if the Company achieves the performance
goals established under its annual incentive plan for executives and may
receive a larger bonus if such goals are exceeded. The employment agreements
further provide that, in the event of a termination of any such Named
Executive Officer's employment by the Company without "cause" (as defined in
the employment agreement) or by such executive for "good reason" (as so
defined), such Named Executive Officer will be entitled to continued payments
of his base salary for the remaining term of his employment agreement and to
payment of a pro rata annual bonus for the year of termination provided that
the Company achieves the performance objectives applicable for such year and
each year thereafter. Each of the employment agreements also contains
covenants regarding nondisclosure of confidential information, noncompetition
and nonsolicitation.
Compensation Committee Interlocks And Insider Participation
The Board of Directors of the Company established a Compensation Committee
to review all compensation arrangements for executive officers of the Company.
The individuals serving on the Compensation Committee during 1998 were Mr.
Taylor, Chairperson, Christopher Sinclair, who resigned as a director in
January 1999,
59
<PAGE>
Mr. Orfalea and Mr. Gogel. Mr. Gogel is President and a director of CD&R and a
limited partner of CD&R Associates V Limited Partnership ("Associates V"), the
general partner of CD&R Fund V. CD&R received a fee of $2.7 million for
providing services related to the structuring, implementation and consummation
of the Acquisition. CD&R receives an annual fee of $500,000 (plus
reimbursement of out-of-pocket expenses) for advisory, management consulting
and monitoring services to the Company. Parent has also agreed to indemnify
the members of the Board employed by CD&R and CD&R against liabilities
incurred under securities laws with respect to their services to the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Parent owns, indirectly, all of the outstanding capital stock of JCI and
Jafra S.A. The table below sets forth the owners of 5% or more of the Parent
Common Stock and the ownership of Parent Common Stock by the directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
Number
of Percent
Name Shares of Class
---- ------- --------
<S> <C> <C>
Clayton, Dubilier & Rice Fund V Limited Partnership(1).... 769,600 92.73
Donald J. Gogel(2)........................................ -- --
Steven D. Goldstein....................................... 2,000 *
Thomas E. Ireland(2)...................................... -- --
David A. Novak(2)......................................... -- --
Paul Orfalea.............................................. 2,500 *
Ann Reese................................................. 2,500 *
Edward H. Rensi........................................... 2,500 *
Kenneth D. Taylor......................................... 500 *
Ronald B. Clark........................................... 9,164 1.10
Gonzalo R. Rubio.......................................... 9,164 1.10
Ralph S. Mason, III....................................... 7,268 *
Jaime Lopez Guirao........................................ 3,000 *
Eugenio Lopez Barrios..................................... 3,476 *
All directors and executive officers as a group (14
persons)(3).............................................. 50,550 5.85
</TABLE>
- --------
The symbol "*" denotes less than 1 percent.
(1) Associates V is the general partner of CD&R Fund V and has the power to
direct CD&R Fund V as to the voting and disposition of shares held by CD&R
Fund V. CD&R Investment Associates II, Inc. ("Investment Associates II")
is the managing general partner of Associates V and has the power to
direct Associates V as to its direction of CD&R Fund V's voting and
disposition of the shares held by CD&R Fund V. No person controls the
voting and dispositive power of Investment Associates II with respect to
the shares owned by CD&R Fund V. Each of Associates V and Investment
Associates II expressly disclaims beneficial ownership of the shares owned
by CD&R Fund V. The business address for each of CD&R Fund V, Associates V
and Investment Associates II is c/o Investment Associates II, 1403 Foulk
Road, Suite 106, Wilmington, Delaware 19803.
(2) Does not include shares owned by CD&R Fund V.
(3) Messrs. Clark, Rubio and Mason purchased shares of Parent Common Stock at
the Closing. On September 30, 1998, certain members of management, certain
directors and other persons purchased an aggregate of 40,437 shares of
Parent Common Stock in a transaction exempt from the registration
requirements of the Securities Act. Shares owned by CD&R Fund V are not
included herein. Mr. Gogel is an officer, director and shareholder of
Investment Associates II and Mr. Ireland is a shareholder of Investment
Associates II.
60
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CD&R Fund V, which is Parent's largest stockholder, is a private investment
fund managed by CD&R. Amounts contributed to CD&R Fund V by its limited
partners are invested at the discretion of the general partner in equity or
equity-related securities of entities formed to effect leveraged buy-out
transactions and in the equity of corporations where the infusion of capital,
coupled with the provision of managerial assistance by CD&R, can be expected
to generate returns on investments comparable to returns historically achieved
in leveraged buyout transactions. The general partner of CD&R Fund V is
Associates V, and the general partners of Associates V are Investment
Associates II, CD&R Investment Associates, Inc. and CD&R Cayman Investment
Associates, Inc., a Cayman Islands exempted company. Each of Mr. Gogel, who is
President and a director of CD&R, President and a director of Investment
Associates II and a limited partner of Associates V, Mr. Ireland, who is a
principal of CD&R, a limited partner of Associates V and a shareholder of
Investment Associates II, and Mr. Novak, who is a professional employee of
CD&R and a limited partner of Associates V, are directors of Parent. See
"Directors and Executive Officers of the Company."
CD&R is a private investment firm that is organized as a Delaware
corporation. CD&R is the manager of a series of investment funds, including
CD&R Fund V. CD&R generally assists in structuring, arranging financing for
and negotiating the transactions in which the funds it manages invest. After
the consummation of such transactions, CD&R generally provides advisory,
management consulting and monitoring services to the companies in which its
investment funds have invested during the period of such fund's investment.
CD&R received at Closing an initial transaction fee of $2.7 million for
providing services related to the structuring, implementation and consummation
of the Acquisition, in addition to the reimbursement of out-of-pocket
expenses. Pursuant to a consulting agreement entered into at the Closing,
until the tenth anniversary of the Acquisition or the date on which CD&R Fund
V no longer has an investment in the Company, CD&R will receive an annual fee
of $500,000 (and reimbursement of out-of-pocket expenses) for providing
advisory, management consulting and monitoring services to the Company. Such
services include, among others, helping the Company to establish effective
banking, legal and other business relationships and assisting management in
developing and implementing strategies for improving the operational,
marketing and financial performance of the Company. As required by the terms
of the Company's lending arrangements, such fees were determined by arm's-
length negotiation and are believed by the Company to be reasonable.
CD&R, CD&R Fund V and Parent entered into an indemnification agreement,
pursuant to which Parent has agreed to indemnify the members of its board of
directors, as well as CD&R, CD&R Fund V, Associates V, Investment Associates
II and certain of their members, partners, associates and affiliates (the
"Indemnitees") to the fullest extent allowable under applicable law and to
indemnify the Indemnitees against any suits, claims, damages or expenses which
may be made against or incurred by them under applicable securities laws in
connection with offerings of securities of the Company, liabilities to third
parties arising out of any action or failure to act by the Company, and,
except in cases of gross negligence or intentional misconduct, the provision
by CD&R of advisory, management consulting and monitoring services.
Ralph S. Mason, III, who became Vice Chairman, Executive Vice President and
General Counsel of Parent as of the Closing, was a partner in the law firm of
Mason, Taylor & Colicchio. Prior to Closing, Mr. Mason and the law firm of
Mason, Taylor & Colicchio acted as legal counsel for the new management team,
including Messrs. Clark, Rubio and Mason, in connection with the Acquisition.
The Company has entered into employment agreements with 11 members of
management, including the Named Executive Officers. See "Executive
Compensation--Employment Agreements." The employment agreements of Messrs.
Clark and Rubio provide that each will be a director of Parent during the term
of his employment.
In September 1998, certain directors, members of management (including the
Named Executive Officers) and other persons purchased 40,437 shares of Parent
Common Stock at a purchase price of $100.00 per share.
61
<PAGE>
Under certain circumstances, such stockholders can require the Company to
purchase their shares of Parent Common Stock. Such management stock purchases
included purchases of 9,164, 9,164, 7,268, 3,000 and 3,476 shares by Messrs.
Clark, Rubio, Mason, Guirao, and Barrios, respectively. Members of management
were also granted options to purchase an aggregate of 78,680 shares of Parent
Common Stock. See "Executive Compensation Option Grants in 1998." Members of
management financed a portion of the cash purchase price of the shares of
Parent Common Stock they acquired through loans from the Chase Manhattan Bank
on market terms. To help members of management obtain such terms for such
financing, the Company fully and unconditionally guaranteed up to 75% of the
purchase price for the shares of Parent Common Stock purchased by each such
member of management. The Company guaranteed loans for $687,300, $687,300,
$545,100, $225,000 and $260,700 extended to Messrs. Clark, Rubio, Mason,
Guirao and Barrios, respectively.
62
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. Reference is made to the Index to Financial
Statements and Schedules of the Company on page 23 of this Annual Report on
Form 10-K.
(a)(2) Financial Statement Schedules. Reference is made to the Index to
Financial Statements and Schedules of the Company on page 23 of this Annual
Report on Form 10-K.
(a)(3) Exhibits. The following documents are exhibits to this Annual Report
on Form 10-K.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
3.1 Articles of Association (Statuts Coordonnes) of CDRJ Investments
(Lux) S.A., as restated on September 30, 1998; previously filed
as Exhibit 3.1 to Amendment 2 to Registration Statement No. 333-
62989 under the Securities Act of 1933, as amended, filed
December 23, 1998, and incorporated herein by reference.
3.2 Certificate of Incorporation of CDRJ Acquisition Corporation,
dated March 31, 1998; previously filed as Exhibit 3.2 to
Registration Statement No. 333-62989 under the Securities Act of
1933, as amended, filed September 4, 1998, and incorporated
herein by reference.
3.3 Certificate of Merger of Jafra Cosmetics International, Inc. into
CDRJ Acquisition Corporation, dated April 30, 1998; previously
filed as Exhibit 3.3 to Registration Statement No. 333-62989
under the Securities Act of 1933, as amended, filed September 4,
1998, and incorporated herein by reference.
3.4 Amended and Restated By-laws of Jafra Cosmetics International,
Inc. (formerly CDRJ Acquisition Corporation), as adopted on July
21, 1998; previously filed as Exhibit 3.4 to Registration
Statement No. 333-62989 under the Securities Act of 1933, as
amended, filed September 4, 1998, and incorporated herein by
reference.
3.5 Deed of Incorporation (acta constitutiva), including all
amendments thereto, and current by-laws (estatutos sociales) of
Jafra Cosmetics International, S.A. de C.V., together with a
unofficial summary thereof in English; previously filed as
Exhibit 3.5 to Registration Statement No. 333-62989 under the
Securities Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
3.6 Deed of Incorporation (acta constitutiva), including all
amendments thereto, and current by-laws (estatutos sociales) of
Consultoria Jafra, S.A. de C.V., together with a unofficial
summary thereof in English; previously filed as Exhibit 3.6 to
Amendment No. 1 to Registration Statement No. 333-62989 under
the Securities Act of 1933, as amended, filed October 27, 1998,
and incorporated herein by reference.
3.7 Deed of Incorporation (acta constitutiva), including all
amendments thereto, and current by-laws (estatutos sociales) of
Dirsamex, S.A. de C.V., together with a unofficial summary
thereof in English; previously filed as Exhibit 3.7 to Amendment
No. 1 to Registration Statement No. 333-62989 under the
Securities Act of 1933, as amended, filed October 27, 1998, and
incorporated herein by reference.
3.8 Deed of Incorporation (acta constitutiva), including all
amendments thereto, and current by-laws (estatutos sociales) of
Distribuidora Venus, S.A. de C.V., together with a unofficial
summary thereof in English; previously filed as Exhibit 3.8 to
Amendment No. 1 to Registration Statement No. 333-62989 under
the Securities Act of 1933, as amended, filed October 27, 1998,
and incorporated herein by reference.
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
3.9 Deed of Incorporation (acta constitutiva), including all
amendments thereto, and current by-laws (estatutos sociales) of
Jafra Cosmetics S. de R.L. de C.V., together with a unofficial
summary thereof in English; previously filed as Exhibit 3.9 to
Amendment No. 1 to Registration Statement No. 333-62989 under
the Securities Act of 1933, as amended, filed October 27, 1998,
and incorporated herein by reference.
3.10 Deed of Incorporation (acta constitutiva), including all
amendments thereto, and current by-laws (estatutos sociales) of
Qualifax, S.A. de C.V., together with a unofficial summary
thereof in English; previously filed as Exhibit 3.10 to
Amendment No. 1 to Registration Statement No. 333-62989 under
the Securities Act of 1933, as amended, filed October 27, 1998,
and incorporated herein by reference.
3.11 Deed of Incorporation (acta constitutiva), including all
amendments thereto, and current by-laws (estatutos sociales) of
Reday, S.A. de C.V., together with a unofficial summary thereof
in English; previously filed as Exhibit 3.11 to Amendment No. 1
to Registration Statement No. 333-62989 under the Securities Act
of 1933, as amended, filed October 27, 1998, and incorporated
herein by reference.
4.1 Indenture, dated April 30, 1998, among CDRJ Acquisition
Corporation, Jafra Cosmetics International, S.A. de C.V., CDRJ
Investments (Lux) S.A., and State Street Bank and Trust Company;
previously filed as Exhibit 4.1 to Registration Statement No.
33-62989 under the Securities Act of 1933, as amended, filed
September 4, 1998, and incorporated herein by reference.
4.2 First Supplemental Indenture, dated April 30, 1998, among
Consultoria Jafra, S.A. de C.V., Distribuidora Venus, S.A. de
C.V., Dirsamex, S.A. de C.V., Reday, S.A. de C.V., Qualifax S.A.
de C.V., and Jafra Cosmetics S.R.L., CDRJ Acquisition
Corporation and Jafra Cosmetics International, S.A. de C.V. and
State Street Bank and Trust Company; previously filed as Exhibit
4.2 to Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
4.3 Purchase Agreement, dated April 28, 1998, between Credit Suisse
First Boston Corporation, Chase Securities Inc., CDRJ
Acquisition Corporation, Jafra Cosmetics International, S.A. de
C.V., and CDRJ Investments (Lux) S.A; previously filed as
Exhibit 4.3 to Registration Statement No. 333-62989 under the
Securities Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
4.4 Purchase Agreement Amendment, dated April 30, 1998, executed on
behalf of each of Reday, S.A. de C.V., Distribuidora Venus, S.A.
de C.V., Dirsamex, S.A. de C.V., Qualifax, S.A. de C.V., Jafra
Cosmetics, S.R.L., Consultoria Jafra, S.A. de C.V., Credit
Suisse First Boston Corporation, and Chase Securities Inc.;
previously filed as Exhibit 4.4 to Registration Statement No.
333-62989 under the Securities Act of 1933, as amended, filed
September 4, 1998, and incorporated herein by reference.
4.5 Registration Rights Agreement, dated April 30, 1998, among CDRJ
Acquisition Corporation, Jafra Cosmetics International, Inc.,
Jafra Cosmetics International, S.A. de C.V., CDRJ Investments
(Lux) S.A., Reday, S.A. de C.V., Distribuidora, S.A. de C.V.,
Dirsamex, S.A. de C.V., Qualifax, S.A. de C.V., Jafra Cosmetics,
S.A. de C.V., Consultoria Jafra, S.A. de C.V., and Credit Suisse
First Boston Corporation; previously filed as Exhibit 4.5 to
Registration Statement No. 333-62989 under the Securities Act of
1933, as amended, filed September 4, 1998, and incorporated
herein by reference.
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
4.6 Credit Agreement, dated April 30, 1998, among CDRJ Acquisition
Corporation, Jafra Cosmetics International, S.A. de C.V., CDRJ
Investments (Lux) S.A., as Guarantor and Parent of the
Borrowers, the Lenders named therein and Credit Suisse First
Boston, as Administrative Agent; previously filed as Exhibit 4.6
to Registration Statement No. 333-62989 under the Securities Act
of 1933, as amended, filed September 4, 1998, and incorporated
herein by reference.
4.7 Amendment No. 1 to the Credit Agreement, dated August 26, 1998;
previously filed as Exhibit 4.7 to Registration Statement No.
333-62989 under the Securities Act of 1933, as amended, filed
September 4, 1998, and incorporated herein by reference.
4.8 Indemnity, Subrogation and Contribution Agreement, dated April
30, 1998, among Jafra Cosmetics International, S.A. de C.V.
("JCISA"), each Subsidiary of JCSI listed on Schedule I thereto
and Credit Suisse First Boston; previously filed as Exhibit 4.8
to Registration Statement No. 333-62989 under the Securities Act
of 1933, as amended, filed September 4, 1998, and incorporated
herein by reference.
4.9 JCI Guarantee Agreement, dated April 30, 1998, between CDRJ
Acquisition Corporation and Credit Suisse First Boston;
previously filed as Exhibit 4.9 to Registration Statement No.
333-62989 under the Securities Act of 1933, as amended, filed
September 4, 1998, and incorporated herein by reference.
4.10 JCISA Guarantee Agreement, dated April 30, 1998, between Jafra
Cosmetics International, S.A. de C.V. and Credit Suisse First
Boston; previously filed as Exhibit 4.10 to Registration
Statement No. 333-62989 under the Securities Act of 1933, as
amended, filed September 4, 1998, and incorporated herein by
reference.
4.11 JCISA Subsidiary Guarantee Agreement, dated April 30, 1998, among
each of the subsidiaries of Jafra Cosmetics International, S.A
de C.V. listed on Schedule I thereto, and Credit Suisse First
Boston; previously filed as Exhibit 4.11 to Registration
Statement No. 333-62989 under the Securities Act of 1933, as
amended, filed September 4, 1998, and incorporated herein by
reference.
4.12 Parent Guarantee Agreement, dated April 30, 1998, between CDRJ
Investments (Lux) S.A. and Credit Suisse First Boston;
previously filed as Exhibit 4.12 to Registration Statement No.
333-62989 under the Securities Act of 1933, as amended, filed
September 4, 1998, and incorporated herein by reference.
4.13 Pledge Agreement, dated April 30, 1998 among CDRJ Investments
(Lux) S.A., CDRJ North Atlantic Sarl, CDRJ Latin America Holding
Company B.V., Latin Cosmetics Holdings B.V., Regional Cosmetics
Holding B.V., Southern Cosmetics Holdings B.V., and CDRJ Mexico
Holding Company B.V., CDRJ Acquisition Corporation, Jafra
Cosmetics International, S.A. de C.V. and Credit Suisse First
Boston; previously filed as Exhibit 4.13 to Registration
Statement No. 333-62989 under the Securities Act of 1933, as
amended, filed September 4, 1998, and incorporated herein by
reference.
4.14 Security Agreement, dated April 30, 1998, among CDRJ Acquisition
Corporation ("JCI"), each subsidiary of JCI listed on Schedule I
thereto and Credit Suisse First Boston; previously filed as
Exhibit 4.14 to Registration Statement No. 333-62989 under the
Securities Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
4.15 Deed of Trust, with Assignment of Leases and Rents, Fixture
Filing and Security Agreement, dated April 30, 1998, by Jafra
Cosmetics International, Inc. to TitleServ Agency of New York
City, Inc., as trustee for the Benefit of Credit Suisse First
Boston; previously filed as Exhibit 4.15 to Registration
Statement No. 333-62989 under the Securities Act of 1933, as
amended, filed September 4, 1998, and incorporated herein by
reference.
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
4.16 Acknowledgment of Obligations and Mortgage, dated April 30, 1998,
granted by Reday, S.A. de C.V. in favor of Credit Suisse First
Boston, together with an unofficial English translation thereof;
previously filed as Exhibit 4.16 to Registration Statement
No. 33-62989 under the Securities Act of 1933, as amended, filed
September 4, 1998, and incorporated herein by reference.
4.17 Notarial Deed of Pledge, dated April 30, 1998, with respect to
the pledge to Credit Suisse First Boston of (i) 24 ordinary
shares of the capital stock of CDRJ Europe Holding Company B.V.
by Jafra Cosmetics International, Inc., and (ii) 40 ordinary
shares of the capital stock of CDRJ Latin America Holding B.V.
by CDRJ North Atlantic (Lux) Sarl; previously filed as Exhibit
4.17 to Registration Statement No. 333-62989 under the
Securities Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
10.1 Indemnification Agreement, dated April 30, 1998, among CDRJ
Investments (Lux) S.A., CDRJ Acquisition Corporation, Jafra
Cosmetics International, S.A. de C.V., Clayton, Dubilier & Rice,
Inc., Clayton, Dubilier & Rice Fund V Limited Partnership;
previously filed as Exhibit 10.1 to Registration Statement No.
333-62989 under the Securities Act of 1933, as amended, filed
September 4, 1998, and incorporated herein by reference.
10.2 Consulting Agreement, dated April 30, 1998, by and among CDRJ
Investments (Lux) S.A., Jafra Cosmetics International, Inc. and
Jafra Cosmetics, S.A. de C.V., and Clayton, Dubilier & Rice,
Inc.; previously filed as Exhibit 10.2 to Registration Statement
No. 333-62989 under the Securities Act of 1933, as amended,
filed September 4, 1998, and incorporated herein by reference.
10.3 Form of Employment Agreement for Messrs. Clark, Rubio, Mason,
Guirao and Barrios; previously filed as Exhibit 10.3 to
Registration Statement No. 333-62989 under the Securities Act of
1933, as amended, filed September 4, 1998, and incorporated
herein by reference.
10.4 Amended and Restated Jafra Cosmetics International, Inc. Stock
Incentive Plan, as adopted September 3, 1998; previously filed
as Exhibit 10.4 to Amendment No. 1 to Registration Statement No.
333-62989 under the Securities Act of 1933, as amended, filed
October 27, 1998, and incorporated herein by reference.
10.5 CDRJ Investments (Lux) S.A. Form of Management Stock Option
Agreement; previously filed as Exhibit 10.5 to Amendment No. 1
to Registration Statement No. 333-62989 under the Securities Act
of 1933, as amended, filed October 27, 1998, and incorporated
herein by reference.
10.6 Amended and Restated Stock Purchase Warrant, dated September 30,
1998, by and between CDRJ Investments (Lux) S.A. and Jafra
Cosmetics International, Inc.; previously filed as Exhibit 10.6
to Amendment No. 1 to Registration Statement No. 333-62989 under
the Securities Act of 1933, as amended, filed October 27, 1998,
and incorporated herein by reference.
10.7 Registration and Participation Agreement, dated April 30, 1998,
among CDRJ Investments (Lux) S.A. and Clayton, Dubilier & Rice
Fund V Limited Partnership and the other parties thereto;
previously filed as Exhibit 10.7 to Registration Statement
No. 333-62989 under the Securities Act of 1933, as amended,
filed September 4, 1998, and incorporated herein by reference.
10.8 CDRJ Investments (Lux) S.A. Form of Management Stock Subscription
Agreement; previously filed as Exhibit 10.8 to Amendment No. 1
to Registration Statement No. 333-62989 under the Securities Act
of 1933, as amended, filed October 27, 1998, and incorporated
herein by reference.
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.9 CDRJ Investments (Lux) S.A. Form of Individual Investor Stock
Subscription Agreement; previously filed as Exhibit 10.9 to
Amendment No. 1 to Registration Statement No. 333-62989 under
the Securities Act of 1933, as amended, filed October 27,
1998, and incorporated herein by reference.
21.1 Subsidiaries of the registrant.
27.1 Financial Data Schedule.
</TABLE>
67
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ Ronald B. Clark
By: _________________________________
Name: Ronald B. Clark
Title: Chief Executive Officer of
the Advisory Committee and
Director
Date: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Ronald B. Clark Chief Executive Officer of March 30, 1999
____________________________________ the Advisory Committee and
Ronald B. Clark Director (Principal
executive officer)
/s/ James Brill Chief Financial Officer of March 30, 1999
____________________________________ the Advisory Committee
James Brill (Principal financial
officer, Principal
accounting officer)
/s/ Ralph S. Mason, III Secretary and Executive Vice March 30, 1999
____________________________________ President of the Advisory
Ralph S. Mason, III Committee (Representative
in the U.S.)
/s/ Donald J. Gogel Director March 30, 1999
____________________________________
Donald J. Gogel
/s/ Steven D. Goldstein Director March 30, 1999
____________________________________
Steven D. Goldstein
/s/ Thomas E. Ireland Director March 30, 1999
____________________________________
Thomas E. Ireland
/s/ David A. Novak Director March 30, 1999
____________________________________
David A. Novak
/s/ Paul Orfalea Director March 30, 1999
____________________________________
Paul Orfalea
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Ann Reese Director March 30, 1999
____________________________________
Ann Reese
/s/ Edward H. Rensi Director March 30, 1999
____________________________________
Edward H. Rensi
/s/ Gonzalo Rubio Director March 30, 1999
____________________________________
Gonzalo Rubio
/s/ Kenneth D. Taylor Director March 30, 1999
____________________________________
Kenneth D. Taylor
</TABLE>
Supplemental Information to be Furnished with Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Securities
Pursuant to Section 12 of the Act.
No annual report or proxy material has been sent to security holders.
69
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
3.1 Articles of Association (Statuts Coordonnes) of CDRJ Investments (Lux)
S.A., as restated on September 30, 1998; previously filed as Exhibit
3.1 to Amendment 2 to Registration Statement No. 333-62989 under the
Securities Act of 1933, as amended, filed December 23, 1998, and
incorporated herein by reference.
3.2 Certificate of Incorporation of CDRJ Acquisition Corporation, dated
March 31, 1998; previously filed as Exhibit 3.2 to Registration
Statement No. 333-62989 under the Securities Act of 1933, as amended,
filed September 4, 1998, and incorporated herein by reference.
3.3 Certificate of Merger of Jafra Cosmetics International, Inc. into CDRJ
Acquisition Corporation, dated April 30, 1998; previously filed as
Exhibit 3.3 to Registration Statement No. 333-62989 under the
Securities Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
3.4 Amended and Restated By-laws of Jafra Cosmetics International, Inc.
(formerly CDRJ Acquisition Corporation), as adopted on July 21, 1998;
previously filed as Exhibit 3.4 to Registration Statement No. 333-
62989 under the Securities Act of 1933, as amended, filed September
4, 1998, and incorporated herein by reference.
3.5 Deed of Incorporation (acta constitutiva), including all amendments
thereto, and current by-laws (estatutos sociales) of Jafra Cosmetics
International, S.A. de C.V., together with a unofficial summary
thereof in English; previously filed as Exhibit 3.5 to Registration
Statement No. 333-62989 under the Securities Act of 1933, as amended,
filed September 4, 1998, and incorporated herein by reference.
3.6 Deed of Incorporation (acta constitutiva), including all amendments
thereto, and current by-laws (estatutos sociales) of Consultoria
Jafra, S.A. de C.V., together with a unofficial summary thereof in
English; previously filed as Exhibit 3.6 to Amendment No. 1 to
Registration Statement No. 333-62989 under the Securities Act of
1933, as amended, filed October 27, 1998, and incorporated herein by
reference.
3.7 Deed of Incorporation (acta constitutiva), including all amendments
thereto, and current by-laws (estatutos sociales) of Dirsamex, S.A.
de C.V., together with a unofficial summary thereof in English;
previously filed as Exhibit 3.7 to Amendment No. 1 to Registration
Statement No. 333-62989 under the Securities Act of 1933, as amended,
filed October 27, 1998, and incorporated herein by reference.
3.8 Deed of Incorporation (acta constitutiva), including all amendments
thereto, and current by-laws (estatutos sociales) of Distribuidora
Venus, S.A. de C.V., together with a unofficial summary thereof in
English; previously filed as Exhibit 3.8 to Amendment No. 1 to
Registration Statement No. 333-62989 under the Securities Act of
1933, as amended, filed October 27, 1998, and incorporated herein by
reference.
3.9 Deed of Incorporation (acta constitutiva), including all amendments
thereto, and current by-laws (estatutos sociales) of Jafra Cosmetics
S. de R.L. de C.V., together with a unofficial summary thereof in
English; previously filed as Exhibit 3.9 to Amendment No. 1 to
Registration Statement No. 333-62989 under the Securities Act of
1933, as amended, filed October 27, 1998, and incorporated herein by
reference.
3.10 Deed of Incorporation (acta constitutiva), including all amendments
thereto, and current by-laws (estatutos sociales) of Qualifax, S.A.
de C.V., together with a unofficial summary thereof in English;
previously filed as Exhibit 3.10 to Amendment No. 1 to Registration
Statement No. 333-62989 under the Securities Act of 1933, as amended,
filed October 27, 1998, and incorporated herein by reference.
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
3.11 Deed of Incorporation (acta constitutiva), including all amendments
thereto, and current by-laws (estatutos sociales) of Reday, S.A. de
C.V., together with a unofficial summary thereof in English;
previously filed as Exhibit 3.11 to Amendment No. 1 to Registration
Statement No. 333-62989 under the Securities Act of 1933, as amended,
filed October 27, 1998, and incorporated herein by reference.
4.1 Indenture, dated April 30, 1998, among CDRJ Acquisition Corporation,
Jafra Cosmetics International, S.A. de C.V., CDRJ Investments (Lux)
S.A., and State Street Bank and Trust Company; previously filed as
Exhibit 4.1 to Registration Statement No. 333-62989 under the
Securities Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
4.2 First Supplemental Indenture, dated April 30, 1998, among Consultoria
Jafra, S.A. de C.V., Distribuidora Venus, S.A. de C.V., Dirsamex,
S.A. de C.V., Reday, S.A. de C.V., Qualifax S.A. de C.V., and Jafra
Cosmetics S.R.L., CDRJ Acquisition Corporation and Jafra Cosmetics
International, S.A. de C.V. and State Street Bank and Trust Company;
previously filed as Exhibit 4.2 to Registration Statement No. 333-
62989 under the Securities Act of 1933, as amended, filed September
4, 1998, and incorporated herein by reference.
4.3 Purchase Agreement, dated April 28, 1998, between Credit Suisse First
Boston Corporation, Chase Securities Inc., CDRJ Acquisition
Corporation, Jafra Cosmetics International, S.A. de C.V., and CDRJ
Investments (Lux) S.A; previously filed as Exhibit 4.3 to
Registration Statement No. 333-62989 under the Securities Act of
1933, as amended, filed September 4, 1998, and incorporated herein by
reference.
4.4 Purchase Agreement Amendment, dated April 30, 1998, executed on behalf
of each of Reday, S.A. de C.V., Distribuidora Venus, S.A. de C.V.,
Dirsamex, S.A. de C.V., Qualifax, S.A. de C.V., Jafra Cosmetics,
S.R.L., Consultoria Jafra, S.A. de C.V., Credit Suisse First Boston
Corporation, and Chase Securities Inc.; previously filed as Exhibit
4.4 to Registration Statement No. 333-62989 under the Securities Act
of 1933, as amended, filed September 4, 1998, and incorporated herein
by reference.
4.5 Registration Rights Agreement, dated April 30, 1998, among CDRJ
Acquisition Corporation, Jafra Cosmetics International, Inc., Jafra
Cosmetics International, S.A. de C.V., CDRJ Investments (Lux) S.A.,
Reday, S.A. de C.V., Distribuidora, S.A. de C.V., Dirsamex, S.A. de
C.V., Qualifax, S.A. de C.V., Jafra Cosmetics, S.A. de C.V.,
Consultoria Jafra, S.A. de C.V., and Credit Suisse First Boston
Corporation; previously filed as Exhibit 4.5 to Registration
Statement No. 333-62989 under the Securities Act of 1933, as amended,
filed September 4, 1998, and incorporated herein by reference.
4.6 Credit Agreement, dated April 30, 1998, among CDRJ Acquisition
Corporation, Jafra Cosmetics International, S.A. de C.V., CDRJ
Investments (Lux) S.A., as Guarantor and Parent of the Borrowers, the
Lenders named therein and Credit Suisse First Boston, as
Administrative Agent; previously filed as Exhibit 4.6 to Registration
Statement No. 333-62989 under the Securities Act of 1933, as amended,
filed September 4, 1998, and incorporated herein by reference.
4.7 Amendment No. 1 to the Credit Agreement, dated August 26, 1998;
previously filed as Exhibit 4.7 to Registration Statement No. 333-
62989 under the Securities Act of 1933, as amended, filed September
4, 1998, and incorporated herein by reference.
4.8 Indemnity, Subrogation and Contribution Agreement, dated April 30,
1998, among Jafra Cosmetics International, S.A. de C.V. ("JCISA"),
each Subsidiary of JCSI listed on Schedule I thereto and Credit
Suisse First Boston; previously filed as Exhibit 4.8 to Registration
Statement No. 333-62989 under the Securities Act of 1933, as amended,
filed September 4, 1998, and incorporated herein by reference.
4.9 JCI Guarantee Agreement, dated April 30, 1998, between CDRJ
Acquisition Corporation and Credit Suisse First Boston; previously
filed as Exhibit 4.9 to Registration Statement No. 333-62989 under
the Securities Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
4.10 JCISA Guarantee Agreement, dated April 30, 1998, between Jafra
Cosmetics International, S.A. de C.V. and Credit Suisse First Boston;
previously filed as Exhibit 4.10 to Registration Statement No. 333-
62989 under the Securities Act of 1933, as amended, filed September
4, 1998, and incorporated herein by reference.
4.11 JCISA Subsidiary Guarantee Agreement, dated April 30, 1998, among each
of the subsidiaries of Jafra Cosmetics International, S.A de C.V.
listed on Schedule I thereto, and Credit Suisse First Boston;
previously filed as Exhibit 4.11 to Registration Statement No. 333-
62989 under the Securities Act of 1933, as amended, filed September
4, 1998, and incorporated herein by reference.
4.12 Parent Guarantee Agreement, dated April 30, 1998, between CDRJ
Investments (Lux) S.A. and Credit Suisse First Boston; previously
filed as Exhibit 4.12 to Registration Statement No. 333-62989 under
the Securities Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
4.13 Pledge Agreement, dated April 30, 1998 among CDRJ Investments (Lux)
S.A., CDRJ North Atlantic Sarl, CDRJ Latin America Holding Company
B.V., Latin Cosmetics Holdings B.V., Regional Cosmetics Holding B.V.,
Southern Cosmetics Holdings B.V., and CDRJ Mexico Holding Company
B.V., CDRJ Acquisition Corporation, Jafra Cosmetics International,
S.A. de C.V. and Credit Suisse First Boston; previously filed as
Exhibit 4.13 to Registration Statement No. 333-62989 under the
Securities Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
4.14 Security Agreement, dated April 30, 1998, among CDRJ Acquisition
Corporation ("JCI"), each subsidiary of JCI listed on Schedule I
thereto and Credit Suisse First Boston; previously filed as Exhibit
4.14 to Registration Statement No. 333-62989 under the Securities Act
of 1933, as amended, filed September 4, 1998, and incorporated herein
by reference.
4.15 Deed of Trust, with Assignment of Leases and Rents, Fixture Filing and
Security Agreement, dated April 30, 1998, by Jafra Cosmetics
International, Inc. to TitleServ Agency of New York City, Inc., as
trustee for the Benefit of Credit Suisse First Boston; previously
filed as Exhibit 4.15 to Registration Statement No. 333-62989 under
the Securities Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
4.16 Acknowledgment of Obligations and Mortgage, dated April 30, 1998,
granted by Reday, S.A. de C.V. in favor of Credit Suisse First
Boston, together with an unofficial English translation thereof;
previously filed as Exhibit 4.16 to Registration Statement No. 333-
62989 under the Securities Act of 1933, as amended, filed September
4, 1998, and incorporated herein by reference.
4.17 Notarial Deed of Pledge, dated April 30, 1998, with respect to the
pledge to Credit Suisse First Boston of (i) 24 ordinary shares of the
capital stock of CDRJ Europe Holding Company B.V. by Jafra Cosmetics
International, Inc., and (ii) 40 ordinary shares of the capital stock
of CDRJ Latin America Holding B.V. by CDRJ North Atlantic (Lux) Sarl;
previously filed as Exhibit 4.17 to Registration Statement No. 333-
62989 under the Securities Act of 1933, as amended, filed September
4, 1998, and incorporated herein by reference.
10.1 Indemnification Agreement, dated April 30, 1998, among CDRJ
Investments (Lux) S.A., CDRJ Acquisition Corporation, Jafra Cosmetics
International, S.A. de C.V., Clayton, Dubilier & Rice, Inc., Clayton,
Dubilier & Rice Fund V Limited Partnership; previously filed as
Exhibit 10.1 to Registration Statement No. 333-62989 under the
Securities Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
10.2 Consulting Agreement, dated April 30, 1998, by and among CDRJ
Investments (Lux) S.A., Jafra Cosmetics International, Inc. and Jafra
Cosmetics, S.A. de C.V., and Clayton, Dubilier & Rice, Inc.;
previously filed as Exhibit 10.2 to Registration Statement No. 333-
62989 under the Securities Act of 1933, as amended, filed September
4, 1998, and incorporated herein by reference.
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.3 Form of Employment Agreement for Messrs. Clark, Rubio, Mason, Guirao
and Barrios; previously filed as Exhibit 10.3 to Registration
Statement No. 333-62989 under the Securities Act of 1933, as amended,
filed September 4, 1998, and incorporated herein by reference.
10.4 Amended and Restated Jafra Cosmetics International, Inc. Stock
Incentive Plan, as adopted September 3, 1998; previously filed as
Exhibit 10.4 to Amendment No. 1 to Registration Statement No. 333-
62989 under the Securities Act of 1933, as amended, filed October 27,
1998, and incorporated herein by reference.
10.5 CDRJ Investments (Lux) S.A. Form of Management Stock Option Agreement;
previously filed as Exhibit 10.5 to Amendment No. 1 to Registration
Statement No. 333-62989 under the Securities Act of 1933, as amended,
filed October 27, 1998, and incorporated herein by reference.
10.6 Amended and Restated Stock Purchase Warrant, dated September 30, 1998,
by and between CDRJ Investments (Lux) S.A. and Jafra Cosmetics
International, Inc.; previously filed as Exhibit 10.6 to Amendment
No. 1 to Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed October 27, 1998, and incorporated
herein by reference.
10.7 Registration and Participation Agreement, dated April 30, 1998, among
CDRJ Investments (Lux) S.A. and Clayton, Dubilier & Rice Fund V
Limited Partnership and the other parties thereto; previously filed
as Exhibit 10.7 to Registration Statement No. 333-62989 under the
Securities Act of 1933, as amended, filed September 4, 1998, and
incorporated herein by reference.
10.8 CDRJ Investments (Lux) S.A. Form of Management Stock Subscription
Agreement; previously filed as Exhibit 10.8 to Amendment No. 1 to
Registration Statement No. 333-62989 under the Securities Act of
1933, as amended, filed October 27, 1998, and incorporated herein by
reference.
10.9 CDRJ Investments (Lux) S.A. Form of Individual Investor Stock
Subscription Agreement; previously filed as Exhibit 10.9 to Amendment
No. 1 to Registration Statement No. 333-62989 under the Securities
Act of 1933, as amended, filed October 27, 1998, and incorporated
herein by reference.
21.1 Subsidiaries of the registrant.
27.1 Financial Data Schedule.
</TABLE>
73
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF CDRJ INVESTMENTS (LUX) S.A.
1.CDRJ North Atlantic (Lux) S.a.r.L. (Luxembourg)
2.Jafra Cosmetics International, Inc. (Delaware)
3.Jafra Cosmetics Handelsgesellschaft mbH (Austria)
4.Jafra Cosmetics A.G. (Switzerland)
5.Jafra Cosmetics International B.V. (The Netherlands)
6.Jafra Cosmetics S.p.A. (Italy)
7.CDRJ German Holding Company GmbH (Germany)
8.Jafra Cosmetics GmbH & Co. KG (Germany)
9.Jafra Cosmetics S.R.L. (Argentina)
10.Jafra Cosmetics Venezuela, S.A. (Venezuela)
11.Jafra Cosmetics International, S.A. de C.V. (Mexico)
12.Jafra Poland Sp. z o.o. (Poland)
13.Jafra Cosmetics Colombia, S.A. (Colombia)
14.Consultoria Jafra, S.A. de C.V. (Mexico)
15.Distribuidora Venus, S.A. de C.V. (Mexico)
16.Dirsamex, S.A. de C.V. (Mexico)
17.Reday, S.A. de C.V. (Mexico)
18.Qualifax, S.A. de C.V. (Mexico)
19.Jafra Cosmetics, S. de R.L. de C.V. (Mexico)
20.Jafra Cosmetics do Brasil Ltda. (Brazil)
21.CDRJ Latin America Holding Company B.V. (The Netherlands)
22.Latin Cosmetics Holdings B.V. (The Netherlands)
23.Regional Cosmetics Holding B.V. (The Netherlands)
24.Southern Cosmetics Holdings B.V. (The Netherlands)
25.CDRJ Mexico Holding Company B.V. (The Netherlands)
26.CDRJ Europe Holding Company B.V. (The Netherlands)
27.CDRJ Worldwide (Lux) S.a.r.L. (Luxembourg)
28.CDRJ Europe Holding Company GmbH (Germany)
29.CDRJ Latin America Holding Company GmbH (Germany)
30.Cosmeticos y Fragancias, S.A. de C.V.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<NAME> CDRJ INVESTMENTS(LUX)S.A
<CIK> 0001068906
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 2-MOS 4-MOS YEAR 8-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1997 DEC-31-1998
<PERIOD-START> MAY-01-1998 JAN-01-1998 JAN-01-1997 MAY-01-1998
<PERIOD-END> JUN-30-1998 APR-30-1998 DEC-31-1997 DEC-31-1998
<CASH> 18,371 0 10,231 18,358
<SECURITIES> 0 0 0 0
<RECEIVABLES> 20,975 0 29,355 24,449
<ALLOWANCES> 2,013 0 2,057 2,284
<INVENTORY> 38,637 0 38,028 33,195
<CURRENT-ASSETS> 88,676 0 118,639 87,485
<PP&E> 56,978 0 70,210 58,990
<DEPRECIATION> 799 0 26,528 2,752
<TOTAL-ASSETS> 277,287 0 175,250 288,634
<CURRENT-LIABILITIES> 54,371 0 96,026 64,558
<BONDS> 0 0 0 139,000
0 0 0 0
0 0 0 0
<COMMON> 1,579 0 49,567 1,660
<OTHER-SE> 76,614 0 27,737 73,234
<TOTAL-LIABILITY-AND-EQUITY> 277,287 0 175,250 288,634
<SALES> 41,008 77,282 229,524 171,019
<TOTAL-REVENUES> 41,008 77,282 229,524 171,019
<CGS> 11,792 20,322 59,129 50,783
<TOTAL-COSTS> 37,385 71,841 208,559 50,783
<OTHER-EXPENSES> 1,140 (1,480) (1,006) 2,093
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 2,707 (78) (306) 11,431
<INCOME-PRETAX> (224) 6,999 20,265 (6,281)
<INCOME-TAX> 357 2,899 4,816 1,760
<INCOME-CONTINUING> (582) 4,100 15,449 (8,041)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (582) 4,100 15,449 (8,041)
<EPS-PRIMARY> 0 0 0 0
<EPS-DILUTED> 0 0 0 0
</TABLE>
